Broker-dealers must ensure they put their clients’ interests first, FINRA warned in its address to the industry for the year ahead.

Broker-dealers must ensure they put their clients’ interests first, FINRA said in its tenth annual address to the industry for the year ahead.

"In the decade since publishing the first exam priorities letter, there has been tremendous change in broker-dealer operations, the markets and the regulatory landscape," said Richard Ketchum, FINRA's chairman and chief executive. "While we have seen some firms make great progress in keeping up with these changes, more attention needs to be paid to addressing specific challenges we’ve pinpointed."

In its 2015 Regulatory and Examination Priorities letter, FINRA identified aspects of the industry with the biggest potential of risk to the detriment of investors and market integrity.

Most notably, the regulator said, is the failure of some firms to not put clients’ interests first, which could have long-lasting and serious consequences to the investor, especially when concerned with wealth events such as inheritance or retirement.

“Irrespective of whether a firm must meet a suitability or fiduciary standard, FINRA believes that firms best serve their customers - and reduce regulatory risk - by putting customers’ interest first. This requires the firm to align its interests with those of its customers,” it said in the letter.

The letter is a reminder of the ongoing debate taking place in the US over whether a universal fiduciary standard should be adopted by broker-dealers as well as RIAs.

Similarly, FINRA advised that firms instigate change within their culture, from incentives given to staff to removing “bad actors” that can disrupt the status quo.

Other areas for concern that FINRA identified was the selling and supervision of certain interest rate-sensitive and complex products - particularly with regards to client suitability and disclosure of risk in investments. These include alternative mutual funds, REITs and exchange-traded products.

It also warned about the importance of having governance structures and processes in place with regards to cybersecurity risk management.

Firms must ensure they have strong supervision and risk management systems in place to help maintain the right culture and preventing harm to clients, as well as defending against “deliberate acts of malfeasance”, the letter said. Data analytics can be used by firms to help identify problematic behavior, it added.

Staff training and transparent marketing are also integral to help combat misleading product and service offerings. Firms should undertake rigorous new product reviews and suitability tests to make sure investment is in a client’s best interests.

Continuing on the theme of client interests, FINRA added: “We continue to focus on fee and compensation structures that lie at the heart of many conflicts which can at times compromise the objectivity registered representatives provide to customers. FINRA underscores the importance of firms moving to identify and mitigate conflicts of interest.”