FINRA Regulation

Merrill Lynch FAs Will Experience Pay Cuts Unless They Meet Certain Targets

June 15, 2018 | Herskovits, PLLC

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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 Imposes $550,000 Fines on Aegis Capital Over Anti-Money Laundering Violations

April 30, 2018 | Herskovits, PLLC

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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.

FINRA Plans to Crack Down on High-Risk Brokers, Are You at Risk?

January 11, 2018 | Herskovits, PLLC

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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.

FINRA Rules 2165 & 4512 – Elder Abuse in the Securities Industry

December 14, 2017 | Herskovits, PLLC

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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.

Morgan Stanley No Longer Bound by the Protocol for Broker Recruiting

November 30, 2017 | Herskovits, PLLC

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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.

Sandlapper Securities Named in FINRA Exorbitant Fees Complaint re: Saltwater Well Investments

November 13, 2017 | Herskovits, PLLC

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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.

Have FINRA’s “Poor Investments” Affected its Members?

October 31, 2017 | Herskovits, PLLC

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In a recent report, the Wall Street Journal said FINRA’s investments are underperforming. The self-regulatory organization boasts a $1 billion yearly budget, and it easily collects over $100 million per year through the imposition of fines.

According to WSJ journalists, throughout its existence, FINRA’s $1.6 billion investment portfolio has yielded $440 million less than what could have been obtained from a mix of balanced stocks and bonds.

After the industry’s recent questioning of how FINRA uses fine money, the new criticism appears as a new blow to its image at a time when it has been trying to show a willingness to reform in response to member feedback.

FINRA’s Competency Exam Updates Lower Barriers for Industry Newcomers

October 30, 2017 | Herskovits, PLLC

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Aspiring brokers will no longer need a firm to sponsor them in order to take FINRA’s competency exams. The Securities and Exchange Commission has just approved FINRA Regulatory Notice 17-30, which will make this and other changes effective within a year.

According to FINRA, the rule change aims to:

adopt consolidated FINRA registration rules;

FINRA VOWS TO LIMIT EXPUNGEMENTS – Rules and Realities

October 10, 2017 | Herskovits, PLLC

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“Arbitrators have a unique, distinct role in ensuring that customer dispute information is expunged from the CRD system only when it has no meaningful investor protection or regulatory value.” FINRA (September, 2017)

In a new push for closer scrutiny over expungements, FINRA has just updated its Notice to Arbitrators and Parties on Expanded Expungement Guidance. In the revised document, FINRA zeroes in on expungement-only cases, specifically addressing the issue of customers who may be unaware of the existence of expungement claims.

The regulator’s document states that,

FINRA CEO Cook Grilled by Congress on FINRA’s Financial Conduct

September 18, 2017 | Herskovits, PLLC

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During a recent Financial Services Subcommittee oversight hearing, both Democrat and Republican lawmakers raised concerns before FINRA CEO Robert Cook. Some of the issues discussed were the Regulatory Authority’s standing as a private entity and its handling of fine proceeds, which hit a record $173 million in 2016.

One of the main criticisms voiced by House Representatives referred to FINRA’s practice of keeping fine proceeds instead of giving them back to harmed investors. In this regard, California’s Democratic Representative Brad Sherman pleaded for increased transparency in the regulator’s activities.

Cook heard many hard questions during the hearing, from both sides of the aisle, and he attempted to reply in a satisfactory way. Whenever FINRA’s present reality seemed inadequate, he assured current problems would be addressed by upcoming changes in many aspects of the entity’s activities.