Articles Posted in FINRA Regulation

FINRA wants a member firm to enforce its written supervisory procedures.  And FINRA wants a member firm to recommend securities that fit within the customer’s investment objectives.  And certainly FINRA wants a member firm to avoid falsification of business records.  So what happens when a member firm doesn’t quite live up to FINRA’s expectations?  Let’s play the over / under game and try to guess the size of the FINRA sanction when a member engages in the following misconduct:

  • Failure to enforce WSPs governing the sale of high-risk mutual funds subject to significant volatility
  • Failure to reallocate portfolios to reduce risk or otherwise update investment objectives to correspond with the assumption of additional risk

FINRA is on the look-out for violations of Rule 3280, which prohibits an FA from participating in a private securities transactions without giving written notice to the broker-dealer and receiving written approval.  A “private securities transaction” is any securities transaction outside the scope of the FA’s employment with the broker-dealer.  Private securities transactions remain a regulatory focus for FINRA.  As noted by FINRAs CEO, Robert Cook, in the 2019 Risk Monitoring and Examination Priorities Letter:  “we are particularly concerned about fundraising activities for entities that the associated persons control or in which they have an interest…”

Case In Point

In the Matter of Michael Jason Collins, FINRA Matter No. 2017056104801 (see the AWC itself)

When a registered representative leaves a broker-dealer, there are many different service and compliance issues that emerge. There are also competing interests between the firm and the representative, each of whom want to keep the customer’s business. At the same time, the customer wants to maintain steady and uninterrupted service. FINRA Regulatory Notice 19-10 sets forth obligations that members must follow when a registered representative departs a firm. Herskovits PLLC can assist firms and registered representatives that need assistance in understanding or implementing FINRA’s directives.

It is common in the industry for registered representatives to move between firms. FINRA expects that the firms and representatives continue to prioritize the customers’ interests when a registered representative leaves the firm. First and foremost, the firm must inform the customer how their account will continue to be serviced after the representatives moves from the firm. Then, the firm must provide its customers with full and complete answers when the firm is asked about the representative who is leaving.

Firms must ensure that the customers know that they have the option to keep their account at the firm and have the account serviced by a new representative. They must also provide the contact of the departing representative to the customer if the representative has given their consent to their contact information being distributed. In other words, customers must be able to make their own choice about what to do with their account.

FINRA has announced it will increase its scrutiny of the cryptocurrency market. As several regulatory bodies endeavor to establish their jurisdiction over the crypto space, FINRA will now boost its oversight of registered firms’ participation in its burgeoning market.

In a new regulatory notice, the self-regulatory organization asked its 3,700 member firms to notify it if they trade in cryptocurrency, accept cryptocurrency from clients, manage crypto funds, participate in the sale of digital tokens, or even offer advice relating to cryptocurrency.

FINRA will also monitor virtual currency mining and any other related use of blockchain technology.

As Merrill Lynch brokers appear to lag behind their competitors at Morgan Stanley, some FAs at the firm are probably not looking forward to seeing their paychecks this summer season.

Based on Merrill’s new compensation program, FAs who do not hit specific targets are going to endure punishment in the shape of a pay cut, compliments of the firm’s parent company, Bank of America.

There is much controversy about the management’s plans, mainly because it rewards practices like cross-selling. The fact that they are going to apply the new compensation program retroactively is not sitting well with brokers either. Actually, the FAs have referred to this particular element as a “clawback” tactic.

FINRA has fined Aegis Capital Corp. $550,000 for failing to implement required anti-money laundering (AML) and supervisory programs designed to prevent fraudulent activity.

The violations specifically affected low-priced securities transactions involving DVP (delivery versus payment) accounts. According to the outcome of FINRA’s investigation, the supervisory system Aegis used “was not reasonably designed to satisfy its obligation to monitor and investigate trading.”

There are certain aspects of DVP accounts that make them vulnerable to money laundering schemes if they are not appropriately supervised.

In conversation with Chip Jones, FINRA’s Senior Vice President of Member Relations and Education, Mike Rufino, Executive Vice President and Head of FINRA Member Regulation—Sales Practice expanded on Robert Cook’s 2018 Priorities Letter, which was released during the first days of the year.

Rufino explained how FINRA plans to examine brokers to determine whether they should be included in the High-Risk Registered Representatives Program, and made some key recommendations to firms for identifying high-risk brokers within their ranks.

In his 2018 Regulatory and Examination Priorities Letter, FINRA CEO Robert Cook signaled “identifying high-risk firms and individual brokers and mitigating the potential risks that they can pose to investors,” as a “top priority” for the self-regulatory organization in the New Year.

Based on research conducted by the National Center on Elder Abuse, 16% of elder abuse was caused by financial exploitation, which ranked third followed right after self-neglect and neglect by others. This percentage had increased from 12.3% since 2001; however, elder abuse is vastly under reported. According to one study, only 1 in 44 cases of financial abuse is ever reported. In many cases, cognitive impairment and the need for help with activities of daily living make elderly victims particularly vulnerable to financial abuse.

With baby boomers turning into senior citizens, financial exploitation of seniors has become an increasingly serious issue for securities industry regulators.

No financial product is per se unsuitable for senior investors; however, a senior’s investment time span and other factors may impact whether certain products or strategies are suitable.

In a move that could be categorized as ‘seismic,’ Morgan Stanley has decided to quit the Protocol for Broker Recruiting. Originated in 2004, the document created a methodology to engineer the departure of brokers from one firm to join another.

Since then, it has protected departing brokers from litigation and temporary restraining orders, and ensured they do not share client information with their new firm without the clients’ consent.

For nearly 13 years, we have observed brokers moving between firms, and clients following them, more often than not. Meanwhile, brokerages have tried to train new recruits who can hold on to the clients of more experienced advisers. Now, Morgan Stanley will no longer be restrained by the Protocol, and they will likely go after departing brokers (who have taken their clients with them) much more aggressively.

FINRA recently filed a complaint against a South Carolina-headquartered broker-dealer that allegedly charged exorbitant fees in connection with saltwater disposal well investments. The defendant, Sandlapper Securities, is a mid-size firm that employs about 60 brokers across its 13 locations.

According to FINRA, Sandlapper “participated in a fraudulent scheme and defrauded investors by selling investments in saltwater disposal wells at excessive, undisclosed markups through a middleman ‘development’ company owned and controlled by the firm, its CEO and a firm principal.” The fraudulent markups of as much as 270% “totaled over $8 million,” according to the complaint.

Starting in 2012, Sandlapper allegedly started using a development company as an intermediary between the fund and the saltwater well purchases, charging the fund substantial markups.

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