FINRA has rulemaking authority. Nevertheless, the trend would appear to be that FINRA is making its rules through the enforcement process. Read this blog for insightful thoughts on this issue.
The Supreme Court recently ruled that a five year statute of limitations applies to when the SEC seeks disgorgement. To learn more, read this alert.
FINRA is currently reviewing its rules regarding outside business activities and private securities transactions. From time to time, FINRA reviews its rules and application of those rules to see if anything needs to be tweaked. Is there any significance to FINRA looking at these particular rules?
From my experience, some bad brokers have used the outside business activity disclosure process as the tool to cover their tracks while engaging in activity that the firm would otherwise want to know about. In some case, the undisclosed outside business turned out to be a Ponzi scheme.
The purpose of requiring outside business disclosures is for a firm to make sure that it and its clients know about any conflicts of interest that their brokers may have. For example, the firm would want to know if the broker had a real estate broker’s license because that business may compete with the time the broker can give to her securities investing clients.
FINRA exploring this area should be a message to firms that they need to ask critical questions about what they are doing regarding outside business disclosures.
- Are you doing enough to make sure you receive honest and complete disclosures?
- What, if any, ramifications are there for incomplete or untimely disclosures?
- Are you asking enough follow-up questions to understand the proposed outside business activity?
- What follow-up, if any, do you make with brokers who make disclosures?
If you cannot answer these questions, you need to do more homework or be exposed to the bad broker who may be in your midst.
The recent cyberattacks across the globe have caused the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) to issue an alert and highlight certain best practices for firms to handle these ransomware attacks.
The OCIE staff based this guidance on its review of various firms, concluding that these firms should perform a cyber-risk assessment; conduct penetration and vulnerability tests; and ensure software maintenance such as updates and software patches if applicable. The OCIE staff found that many firms had deficiencies. Further, according to the OCIE staff, firms should develop contingency plans in the event a cyberattack were to be successful.
Finally, the securities industry is not immune from these cyberattacks, and firms need to take precautions. Essentially, this is no longer just a compliance issue, but an entire firm issue, and those executives need to take notice because the next time it happens your firm may not be so lucky.
So you really want to change firms. Do you have a restrictive covenant or a non-compete? If so, your transition may be a little more complicated. To learn what restrictions may apply to you, check out our 50-state survey on restrictive covenants.
One certainty in the brokerage world is that registered representatives often switch from one member firm to another. There is nothing wrong with the switch, but there is a word of caution to be shared.
Before you leave, make sure you only have in your possession, if anything, only those things that the firm you are leaving lets you keep. If you take something you are not allowed to have, you can rest assured that your former employer will come looking for you.
Similarly, you should determine whether the old or new firms are members of the broker-dealer protocol. If so, you should check the protocol for what you are allowed to take and what notice you have to give to your former employer about the information you are taking with you.
If one or neither firm is a member of the protocol, it still makes sense to follow the protocol. By doing so, you can demonstrate, if ever challenged, that you tried to do the right by following an objective standard that many in the industry have accepted.
Another thing you should verify is whether you are under contract with your old firm to delay your formal commencement with the new firm; otherwise known as a garden leave policy. If so, you had better follow it. If you opt not to follow it, you should expect a disgruntled former employer coming after you.
So change firms if you like. Just be certain you know what you are doing before you do it. A couple missteps here and there could get you in front of FINRA on an enforcement case.
The SEC recently announced that it charged a former broker with knowingly or recklessly trading unsuitable investment products for five customers and taking $170,000 for one of those customers. These charges follow a prior SEC Investor Alert warning about excessive trading and churning as well as another one focused on the risks associated with exchange-traded notes.
The broker must not have read those two alerts. According to the SEC, the broker enriched himself by systematically disregarding client investor profiles. He repeatedly traded in risky, unsuitable and volatile products like leveraged exchange-traded funds and exchange-traded notes.
This case provides a number of lessons that firms should take away. Specifically, the SEC publishes Investor Alerts for a reason. The SEC is doing your work for you by flagging an issue for investors, as well as firms.
The second thing that this case hammers home is that firms must be more diligent in their broker supervision. As part of the firm’s ordinary surveillance, it should have flagged the unsuitable sale of highly volatile products to relatively unsophisticated clients.
A valuable thumb rule to follow is that as the sophistication of the products increases so should the sophistication of the customer buying those products. Although this rule of thumb will not completely stop all bad brokers, it will go a long way toward flagging those brokers before they cause harm to your clients and liability for your firm.
We strongly encourage you to read the article profiling our firm and partners, Mark Silow (also our firm Chairman) and Joshua Horn, on Fox’s Cannabis Practice Group. See https://bol.bna.com/why-fox-rothschild-is-still-banking-on-its-cannabis-practice/. No, sorry, Fox does not offer free samples, but, if you are interested in this emerging area, Josh is available to discuss.
The SEC has recently issued an Investor Alert regarding commentary provided about investors from what appear to be independent sources. It turns out, many of those independent sources are not independent at all. Instead, they are paid shills.
The SEC has instituted enforcement actions against such companies for generating deceptive articles on investment websites. Among other things, these companies:
- Failed to disclose that they received payment even though companies had paid them directly or indirectly.
- Used different pseudonyms to publish multiple articles the promoted the same stock.
- Falsified their credentials; misrepresenting themselves as accountants or a fund manager, for example.
So where does that leave firms that rely upon commentaries for the sale of stock. For one, if you pay for it, you had better disclose that you paid for it. If you did no pay for it, do a little digging to make sure that the commenter is legitimate. If not, stay away lest the SEC pay a visit.
In Notice to Members 17-13, FINRA announced changes to its sanction guidelines. In other words, FINRA has listed its new top hits that it is pursuing. Two items bear particular attention.
First, FINRA has introduced a “new principal consideration that examines whether a respondent has exercised undue influence over a customer.” This guideline reinforces FINRA heightened focus on senior investors and those who may be otherwise vulnerable, such as those with diminished capacity.
Second, FINRA has introduced a “guideline related to borrowing and lending arrangements between representatives and customers.” This guideline is particularly alarming in as much as it suggests that associated persons are actively engaging in such transactions even though firms uniformly ban them.
Notice to Members 17-13 is a strong guidepost for your supervision and compliance teams. The guidelines highlight growing problems in FINRA’s eyes. This is a cue that you should be ever vigilant for the same conduct. Otherwise, you may be the focus of the new sanction guideline that addresses systemic supervisory failures.