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.
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.
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.
According to a recent report of the Eversheds Sutherland firm, 2016 was a banner year for FINRA-assessed fines. FINRA collected a record $176 million in 2016. So what gives?
The increase in fines was attributable to two things. First, a significant number of fines in the $1 million plus range. Second, of those fines, a fair number were in excess of $5 million.
Of particular note, the report shows that FINRA is seeking and obtaining very large fines even when there is limited or no measurable client harm. Historically, the lack of client harm was the siren call of a firm defending itself. In other words, no fine if there is no client harm.
So what does this all mean? For one, FINRA is pressing hard on enforcement even in the absence of client harm. It also reflects that FINRA is willing to go the distance so to speak to recoup the maximum fines possible.
I do not think that firms should anticipate FINRA taking 2017 off by any means. Now is as good a time as any to ensure that you have your compliance and supervision house in order. If not, break out the big checkbook. This one is going to hurt.
Like it has in the past, FINRA is sharply focused on examining brokers with a disciplinary past, including the identification and examination of such brokers being placed at the top of its 2017 exam priorities. Does this mean that firms cannot hire brokers with a past?
The short answer is no, but the longer is a bit more involved. A FINRA examination team is going to be conducting a quantitative analysis to review the broker’s test scores, number of prior employers and disciplinary history.
When FINRA finds such brokers, it will contact the employing firm’s compliance department to ensure that they know of this history. FINRA will also inquire about the type of supervision being used for the individuals. So what does this mean?
For one, you can hire individuals with a past, but you must do so with caution. That caution would necessarily entail placing such a broker on some form of heightened supervision for at least a period of time. At the end of that time, you can then consider removing or downgrading that supervision, assuming that the broker does not have any additional issues.
The key to remember is that FINRA’s goal is to protect the markets and the consumers who hire brokers who may have a past. Hiring brokers with a history and protecting consumers are not mutually exclusive. However, make sure you take special care in the decision to hire and then supervise such individuals because FINRA is watching.
In its never-ending effort to thwart senior investor fraud, FINRA recently proposed a new rule to the SEC. This proposal would require member firms to obtain the name of a trusted contact person for the customer’s account. The new rule would also allow firms to place temporary holds on the disbursement of funds or securities when there is a reasonable belief of exploitation, and notify the trusted contact of such a hold.
This proposed rule is consistent with the advice I have been giving clients over the years as senior issues became more and more prevalent. So what does the potential formalized rule mean for the business?
It should come as a relief to firms to have this type of safeguard. It is a difficult situation to say the least when a firm is uneasy with what a family member may be doing with a senior client of the firm. This rule change will give you somewhat of an out.
The key for having this proposal work is for the right selection of the trusted contact person. Assuming such a person can be identified, I think that it is a good idea for that person to be designated as a fiduciary to the client on the account applications and the account coded so that this trusted person receives regular account statements regarding the senior account.
By doing this, you as a firm have a separate set of eyes on the account activity by someone who may know the family/personal dynamics better that you. Having that person designated as a fiduciary on the account documents also should lend you some protection in the event that the trusted person is not so trustworthy.
Either way, this new rule should be embraced a positive step to protect both firm and clients.
Consistent with the ongoing guidance/requirements from the SEC and FINRA, all firms must have and enforce data security policies and procedures. Even the best policies and procedures may, however, not protect the firm in every instance. So what do you do if there is a breach?
One of the most important things to determine is what law governs. In other words, if you have clients in all 50 states, it is possible that there are 50 different data breach laws that may be implicated. Fox Rothschild LLP has a free app, Data Breach 411, which provides an overview of state data breach laws.
Knowing what you need to know is imperative when assessing a data breach.
The SEC recently created a new position associated with cybersecurity; senior adviser to the chair for cybersecurity (Christopher R. Hetner). Mr. Hetner has an extensive background in information technology and, in particular, cybersecurity.
According to the SEC, Mr. Hetner will be responsible for (i) coordinating cybersecurity efforts across the SEC; (ii) engaging with external stakeholders; and (iii) enhancing SEC mechanisms for assessing broad-based market risk. This appointment could have a wide-ranging on the industry.
As we know, the SEC has made cybersecurity an exam priority over the last few years. The SEC is also actively conducting cybersecurity investigations and undertaking enforcement actions where appropriate. According to Chairperson White, the SEC is looking to bolster its risk-based approach. So what does this mean on a day-to-day basis?
Understand that the SEC has just upped the stakes. By retaining an industry expert who is solely focused on data-security related issues, the industry must be prepared for the SEC and FINRA to come after firms regardless if the firm sustains a breach or clients suffer harm as a result. Firms with weak or no data-security programs will surely be targeted.
Are you prepared to handle this even more focused mission of the SEC? If not, you need to more fully review you systems and procedures, both internally and externally facing. Are you testing your systems and procedures on a regular basis? If not, you better start.
The SEC is prepared; are you?
If you cannot answer this question, you may have an issue when you have your next FINRA exam. After all, firm culture is a FINRA exam priority. Does your firm have a culture of compliance?
This question only leads to another; what is a culture of compliance. For one, this is something that has to resonate from the top down. If senior management ascribes to uphold firm compliance, that should promote the “culture of compliance.”
For example, does senior leadership enforce the firm’s written supervisory processes and procedures? In doing so, does senior management hold everyone accountable the same way, or are exceptions made for the “big producers”. If exceptions are made, you are not promoting a culture of compliance.
Does senior management ensure that there is adequate training of all personnel? There should be a robust and mandatory training program to account for changes to the rules and to make your personnel aware of risks and how to avoid them; one of the biggest being data security.
These are only two of many considerations for assessing whether there is a culture of compliance. The key in it all is leadership from the top. After all, people cannot follow a leader who does not lead. Be a leader.
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?
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.