The CEO of FINRA recently announced that FINRA plans to provide firms with additional resources to deal with recidivist brokers. So what does this mean?

For years, FINRA’s exam priorities have focused on, among other things, brokers who are repeat violators of FINRA rules. FINRA has made this a priority as a way to weed out brokers who do not deserve to be in the industry because they are likely causing more harm than good.

FINRA is effectively asking the firms to do their part in cleansing the industry of bad brokers. What can a firm do in this regard?

First, firms must take more care in the hiring process. Your due diligence cannot begin and end by pulling the registered representative’s CRD. You should run a Google (or similar) style search on the broker. There are also services you can use to find out if there are judgments, liens or lawsuits against the broker. This way, you can find red flags that may not appear on CRD.

Second, once you hire the broker, you have to make sure he/she is coming under a robust supervisory and compliance overview. Be proactive if you sense there is a problem. By doing do, even if there is a problem, you may be able to cut it off before it gets worse.

There is no easy solution. From FINRA’s perspective, however, you are either part of the solution or part of the problem. The choice is yours.

Unfortunately, a bad broker does not take on the same attributes as a fine wine. Bad brokers do rarely improve with time.

At least this was the recent message of Robert Ketchum, head of FINRA. But should all brokers who have any pings on their record be foreclosed from the industry? Certainly not, but what should you do?Core Values

The question is tougher when the broker coming to you with some knocks on his record has been a historically high producer for his prior member firm. Surely, there must be more to the story.
In my experience, there usually is more to the story. Just because someone has some marks does not mean he/she is not worthy to be with your firm. But be careful.

Anyone coming to your firm with any pings on their U-4 should be brought on under heightened supervision. This way you can personally assess this person and test the reasons why this person has been pinged in the past. Maybe the registered representative was just the victim of circumstance in the past.

Either way, if you are going to bring someone on with a checkered past, you better be willing to take the time to watch over this person. After all, by bringing them to your firm, you have assumed responsibility for them. Take caution on the front end or be ready to pay the price later.

FINRA recently barred a registered representative and fined that person $52,270, which represented the commissions he received from the sale of debentures to 12 senior investors. So what was so bad about those transactions?

For one, the high commission investments were not suitable for these elder investors. Second, there were misleading statements made to seven of the 12.
In addition, all but one were retired at the time of purchase. Nine of the ten investors were over the age of 70 at the time of investment. pointing.jpg

This disciplinary action is significant because it enhances two points from FINRA’s 2016 exam priorities. You may recall, FINRA announced that it was going to focus on elder issues and, in particular, suitability of investments.

How should firms address these issues? As I have stated in other blogs, the easiest solution is to put elder clients (those over the age of 65) on something akin to heightened supervision. In other words, someone in a supervisory capacity must scrutinize each and every trade made by one of these investors to ensure investment suitability.This may seem a bit much to manage. There is, however, no denying that FINRA is razor focused on this issue and is not taking elder issues lightly.

So maybe heightened supervision is too much for your firm, but do something. Implement some policies and procedures to ensure that proper steps are undertaken to ensure only suitable investments are sold to your elder clients. Otherwise, expect a call from FINRA.

  • photo from

As of December 12, 2015, FINRA will release Form U-5s within three business days of a member firm’s submission, instead of the fifteen days currently provided for under Rule 8312. The current version of the rule was meant to provide the departing registered representative ample opportunity to comment on the disclosure either though a Form U-4 or submitting a comment directly to FINRA. So why shorten the time period?money and calculator

BrokerCheck, FINRA’s on-line resource, makes certain information on Forms U-5 available to the public. In its never-ending effort for more transparency in the financial markets, FINRA wants this information available to the public faster than in the past, but at the same time providing the departing representative the opportunity to comment on the disclosure event.

Ideally, the representative left voluntarily to seek another opportunity such that the expedited comment period will make no difference. For those who are leaving a firm under less than ideal situations, they will have to move much faster to get “their side” of the story to FINRA.

In this day and age, more and more of the consuming public is using BrokerCheck. If you leave a firm, don’t dawdle responding to the Form U-5. Seek assistance where necessary to make sure your side of the events are accurately portrayed; otherwise, your “good name” may be forever impacted without you having a meaningful opportunity to comment.

One area of focus for FINRA has been on recidivist registered representatives. A recidivist is an associated person who has repeated rule violations or customer complaints of a specific nature.

FINRA has used a risk-based approach in order to be proactive to identify the bad behavior that these undesirable registered representatives tend to display. In doing so, FINRA has developed systematic way to review data for repeated patterns of certain bad conduct.pointing.jpg

Once FINRA identifies these individuals, FINRA will focus on them and their supervisors. There is a particular focus on branch offices for those individuals who act in a manner inconsistent with firm practices.

FINRA then undertakes to remove the repeat offenders from the industry. If you follow FINRA disciplinary matters, it is apparent that FINRA is seeing this process through and removing repeat offenders from the industry.

Why should you care? For one, it should give you the impetus to review your own ranks. Is there someone who has had repeat issues? If so, what are you doing about it; nothing, heightened supervision, termination, etc.

Firms have a choice. They can help flush out bad seeds in their firms, or have FINRA do it for them. If you take the later course, you are likely to be the focus of FINRA as well. Be proactive; remove recidivists from your ranks.

* Photo from

FINRA has released for comment its proposed amendment to Rule 8312, otherwise known as the BrokerCheck Disclosure rule. As it currently stands, FINRA waits for 15 days before it releases information reported on Form U5. This delay was meant to give a registered representative adequate time to comment.

FINRA has proposed to change the waiting period to three business days. In those circumstances where a representative submits a Form U4 from a new firm before the expiration of the three business days, the Forms U5 and U4 will be released simultaneously under the amended rule. So what does this mean practically speaking?confusion.jpg

FINRA thinks that three days is more than enough time to comment to avoid potential customer harm that may arise if the registered representative files his Form U4 before the Form U5. In that situation, FINRA wants to avoid a customer only seeing the information on the U4, which may not accurately reflect the facts and circumstances of the departure.

Even if a registered representative could not submit comments within the proposed three day window, that person could still file a Form U4 through a new firm and state in it that he/she intends to respond more fully in an amended Form U4 to the information in the U5.

FINRA also noted that a registered representative could always sue his/her prior member firm if it releases inaccurate information on the Form U5. In my experience, even if that suit is successful, the best you will likely get is an amended U5. In other words, the bad stuff is still out there, just clarified or softened.

Considering that the underlying premise for this rule change is to avoid customer harm, it is safe to assume that this rule change will happen. When faced with the decision (whether yours or not) to leave one firm and go to another, try to reach an agreement on the Form U5 language. If not, use your three days wisely.

* Photo from

A 17-year veteran advisor recently agreed to a lifetime ban for falsifying the signatures of a client on 10 documents transferring money out of the client’s accounts over a period of two months. Part of this transfer also involved 17 unauthorized trades in the client’s non-discretionary accounts. So how could a phone call have saved this advisor’s career?

It turns out that the advisor was the subject of a phishing scam. Apparently, the client’s email account had been hacked and the hacker emailed the advisor asking for funds to be transferred. This type of scam is commonly called phishing; the hacker is probing a potential victim to get information or money.

The advisor could have avoided this entire problem if he would have simply picked up the phone and called the client to confirm the instruction to transfer funds; FINRA’s records are not clear whether such an attempt was made.27782265_s

Firms can avoid this headache a couple of way. First, firms should require all trades/redemptions to be requested via telephone, followed by proper documentation of that request. Second, firms should prohibit advisors from taking trade/redemption requests via email.

The hijacking of email accounts is one of the oldest and least sophisticated cyber-crimes out there. Yet, people continue to fall for the scam.

Protect yourself. Pick up the phone and call your client. You may save your career and get more business at the same time.


In a recent Acceptance, Waiver and Consent (“AWC”) a broker dealer was censured and fined for, among other things, the failure to conduct an adequate pre-hire investigation of a registered representative. The importance of this AWC is that it may signal FINRA’s mindset for what firms must do under Rule 3110(e).

Under Rule 3110(e), FINRA expects member firms to more of a background check than simply reviewing the new hire’s CRD, and requires firms to have written supervisory procedures specifically designed to verify the accuracy and completeness of the information on the applicant’s U-4. The AWC noted that the member firm only reviewed the new hire’s CRD, and did not conduct any more investigation of that information even though the CRD showed the following: reportable events, including criminal charges, a termination for cause and customer complaints of unauthorized trading.idea.jpg

Although the AWC pre-dates the “go-live” date for Rule 3110(e), it is instructive to member firms. The AWC echoes the fact that a firm will not be insulated if it limits its pre-hire review to the information that appears in the CRD of the potential new hire. Instead, the member firm must do more to get behind the information contained on the CRD for a more detailed understanding.

Rule 3110(e) becomes effective on July 1, 2015. Between now and then, firms should be reviewing their written supervisory procedures regarding pre-hire due diligence. Make sure you have procedures that go above and beyond the CRD, or be faced with possible consequences for the failure to do so.

* photo from

Over the years that I have defended financial advisors and their firms, I have frequently spoken and written about ways to avoid the risk of being sued. I prepared a guidebook a couple of years ago that detailed some common sense approaches to risk avoidance. I have updated that guidebook to take into account new issues that you face.  You can access this material by clicking on guidebook.

I hope that you find this of use in avoiding the risk of being sued.

Starting July 1, member firms are required to have written procedures to verify the accuracy and completeness of the information in a registered representative’s U-4 within 30 days of the U-4 being filed with FINRA.  The question that arises is whether the expense of this new type of “investigation” is worth it.pointing.jpg

In short, member firms will have to do more than a simple internet search of a potential hire, particularly if the firm finds something on the new hire.  For example, what do you do if the new hire was sued in the past?

Under this new requirement, it is fair to say that you will have to do more than just look at a docket.  Instead, it is likely that, in order to comply, you will have to review documents filed in the case to see if there were allegations against the new hire such as for fraud or other things that would present cause for concern.

This heightened analysis will certainly take time and money to complete.  If you are hiring a big producer, then the analysis is probably only a minor inconvenience, but what about if the new hire is not a big producer?  How much is enough?

Undoubtedly, firms will likely need to have bright line tests for when they will keep reviewing, as opposed to declining to hire a person with a complicated past.  There will certainly be a market for other firms to conduct this analysis for you.  Either way, member firms have to do more than a passing glance at a new hire’s U-4.

There is likely going to be a fair amount of question regarding how much is enough of a review.  Nevertheless, get your written procedures in place and have a game plan for how you will review the veracity of a new hire’s U-4.  Otherwise, you face the risk of suit for negligent hiring and the wrath of your regulator.

* Photo by