In another matter, the broker was recommending the same product for almost all his clients. Compliance personnel can run reports assessing the type of products/securities a financial advisor was recommending for all his clients. Generally, an advisor will have different clients with different needs and risk tolerances. As such, the advisor's "book of business" would naturally be varied, with different portfolios for different clients who naturally fall into diverse categories. In this instance, the advisor had almost all his clients in the exact same product, regardless of age, objective and risk tolerance. That pattern should have been a red flag for the compliance department. However, it was neglected and they did nothing about it. The product in question resembled that of a Ponzi Scheme and all the clients ended up with considerable losses.
3130's other important tenet is the yearly process that certifies the firm's compliance with its WSPs. The certification has to be in writing and also requires that the firm's CEO do the actual certification. Therein, the CEO would affirm that policies and procedures are in place to ensure the firm will continue to comply with applicable regulations and laws. The next step would be a formal reporting to the board of directors and any applicable committees. Furthermore, the CEO' must verify that he or she has held a formal meeting with the CCO and has discussed compliance and supervisory procedures. There must be an in-person meeting, not just a bunch of memos.
The next set of Finra rules that are of the utmost importance in the field of supervision are Rules 2090 (Know Your Customer Rule) and 2111 (the Suitability Rule). To paraphrase 2090, all financial advisors/brokers must be diligent when it comes to opening and maintaining every client account. He or she must also know and understand the important facts of every client. 2090 essentially ties into 2111, the Suitability Rule. 2111 mandates that before an advisor/broker makes a recommendation he or she must have a reasonable basis that the recommendation is a suitable transaction or strategy. This includes not only a recommendation to buy or sell, but also to hold a security or maintain a strategy.