FINRA Regulatory Notice 22-23

It’s likely you have heard me talking about our concerns with financial institution comp plans, incentive plans, and sunset (retirement) plans specific to licensed advisors and bankers.

For the most part, FINRA / SEC has not been paying that much attention to bank and credit union compensation.  Super Regionals (above $30B in assets) that self-clear generally have enough internal resources available to avoid any potential compliance issues relating to comp plans.  For community banks and credit unions with third-party broker-dealers, most of them do a pretty good job of reviewing their financial institution’s comp plans to ensure compliance – most, not all.  And therein lies the issue.  Nearly two-thirds of the financial institution comp plans Compass reviews have compliance issues.  Almost all are what we think FINRA would consider to be minor issues but still too many.

The reason the aforementioned fraction is so high is because it’s rare to see financial institutions’ comp plans audited.  But, as I have been saying for a while now, this is changing.

This week, FINRA issued Regulatory Notice 22-23 which provides guidance on succession planning.  To read the notice, click here.  I have read the entire Notice – below are a few takeaways…

• It’s a Notice, not Rule. FINRA “Notices” are meant to provide guidance, where “Rules” are enforceable rules that govern the actions of licensed individuals and broker-dealers. FINRA Notices are not exempt from being used in enforcement actions, however.
• The Notice almost entirely applies to self-clearing firms and Broker-Dealers. For institutions with third-party broker-dealer relationships, very little of this Notice applies to you.
• The Notice does touch on retiring advisors. This is where we have concern as many community banks and credit unions have or are developing Sunset Plans and/or Succession Programs.
• As with many things relating to compliance, it’s the supporting documentation that gets the most scrutiny. It’s no different here.  If you have a retirement plan for your advisors, there is quite a bit of supporting documents that need to be managed.

FINRA will be issuing more Notices and Rules specific to compensation plans. And in the foreseeable future, financial institutions’ comp plans will be audited.  Best to be prepared now.  One of the first things we do for a new client is review their policies, procedures, and comp plans.  We also ask that our clients’ third-party broker-dealer review and provide a written approval of their compensation plans annually.

If you are not a client of Compass, and your wealth platform is managed through a third-party BD, your compliance department should have your comp plans reviewed and approved by your BD in writing beginning every calendar or fiscal year.  If you would like to use the form we have developed, we are happy to share it.

Ensuring comp plans inside financial institutions are compliant is a material part of Compass Consulting’s work product.  Reach out to me directly or contact anyone on the Compass team if you would like to learn more about our review process or anything else we do for community banks and credit unions.

-Eric Armstrong

To learn more about Compass Consulting’s services, visit our website www.compassconsulting.com or call 760-477-1299.