BD Law Blog - by Georgia Securities Lawyer Joel Beck

Is Your Fidelity Bond Ready for New FINRA Rule 4360?

FINRA Rule 4360 becomes effective January 1, 2012, and replaces NASD Rule 3020 dealing with Fidelity Bonds for broker-dealers.  The Rule change may significantly increase the amount of coverage required for smaller broker-dealers.  Firms should check their bond, as well as the coverage amount required under the new rule, and take necessary steps to increase coverage, if needed, to be in place on January 1st.  

FINRA Cautions Firms On Senior Designations

FINRA recently issued Regulatory Notice 11-52 reminding firms about their supervisory obligations with respect to representatives' use of certifications and designations.  The Notice discussed survey results of broker-dealers relating to how they approve and review the use of designations and certifications, and the notice discusses "sound practices" that FINRA identified being used by some firms in connection with supervision of this area.

Importantly, the Notice does not set forth a new rule or policy, nor does it seek to adopt a new rule. Rather, the Notice simply reminds firms of their obligations and may give some CCOs and other managers some policy and supervision ideas to consider.  And, while there are no new rules at play here, given that FINRA is issuing this type of Regulatory Notice should put alert firms that this is an issue on the regulator's radar.  To that end, expect that this issue may be addressed during both routine and cause examinations.

 

The Hunter Becomes the Prey: SEC Sanctions FINRA

The SEC announced today that it has sanctioned FINRA (the Financial Industry Regulatory Authority) by ordering it to hire an independent consultant and to take other measures to improve its polices and procedures relating to producing documents during SEC inspections.  The SEC action found that FINRA failed to furnish complete and accurate records to the SEC in violation of Section 17(a)(1) of the Exchange Act and Exchange Act Rule 17a-1.  The SEC's Order can be found here.  

According to the Order, FINRA employees "[h]ave produced altered or misleading documents to Commission inspection staff on three separate occasions over the past eight years."  The tipping point that resulted in this action seems to be an August 2008 SEC request to FINRA's Kansas City office that resulted in the then director of the office "(causing) the alteration of three records of staff meeting minutes just hours before producing them to the Commission inspection staff, making them inaccurate and incomplete."  Although the SEC found improvement in the SRO's internal controls, it found that FINRA failed to ensure the integrity of documents provided to the Commission, and found that it therefore violated the Exchange Act.  The SEC did not fine FINRA, nor did it pursue action against any responsible individual (at least nothing has been noted yet). (The then-director of that office resigned from FINRA last year during the SRO's internal review of the matter).  Rather, the action will require FINRA to provide additional training to current and new employees and to engage an independent consultant to review its policies and procedures and training that are related to document integrity, and to recommend improvements, if any, in that area, with consultant reports provided to FINRA's Board and to the SEC.  

I think that the sanctions imposed on FINRA are much more lenient than sanctions that would be imposed on an individual registered representative or a broker-dealer if they had been found to have provided misleading and inaccurate documents to FINRA - and especially if they had done it repeatedly.  

Felonies and Florida Registration

Last month I had a good conversation with my friend Marc Dobin, who is also a securities lawyer.  Marc practices down in South Florida, and also publishes a blog on his website.  Anyway, Marc told me about some recent changes to Florida laws regarding registration of brokers and the state's ability to deny registration based on past offenses, even when the broker (or potential broker) would not be otherwise disqualified under FINRA or SEC rules.  I told Marc he ought to do a blog post about it.  Well, he did, and today I finally got around to checking that out.  Find Marc's post about that here and give it a quick read for more information and details.   

Are you a broker thinking of changing firms?

Looking at industry news today, I see many stories of brokers, or teams of brokers, changing firms.  This team left this wirehouse to move to that wirehouse, or this individual registered rep. moved from here to there,from one broker-dealer to another broker-dealer, or from a broker-dealer to a registered investment advisor firm, etc.  Changes like this happen often, whether they are newsworthy or not.  For various reasons, brokers want to check and see if the grass really is greener on the other side.  

Before you make the move, be sure that you've fully considered everything, including forgivable loans or promissory notes, covenants not to compete, non-solicitation issues, product mix and availability, commissions and other compensation payouts, registered rep. agreements and contracts, etc.  Odds are good that you'll likely need a lawyer to help you navigate the change, understand your responsibilities, and help make the transition go as smoothly as possible, and the earlier you get counsel involved in that process, the better.  For more info. on things to consider, take a look at these earlier posts:

* A Primer for Brokers Considering  Changing Firms

* Broker Go-Round.  Be Careful When You Get Off.

* Promises, Promises.  

 

 

Review of October 2011 U4-Related Cases

A post looking at U4-related enforcement cases reported by FINRA for October 2011 is now online at U4review.com.  We continue to see these types of cases by the regulator because they are easy to investigate and prove.  The regulator also continues to be aggressive when it comes to imposing sanctions, as well as the imposition of findings of willfulness, which invokes a statutory disqualification (learn more about the SD and willfulness issue here at BDLawBlog and at U4review.com.  

FINRA Fines Collection Efforts Hampered: What It Means to You.

This past week, there has been some musings and grumblings about a recent court decision that rebuffed FINRA's efforts to collect disciplinary fines imposed against folks through lawsuits and collections efforts.  The court decision involving John Fiero, formerly of Fiero Brothers, Inc., may now bring to a close a long saga of FINRA's (formerly NASD Regulation and NASD) efforts to collect a $1 Million fine that was imposed against Fiero after a disciplinary case brought by NASD.  In a nutshell, the Second Circuit Court of Appeals ruled that FINRA did not have the power to bring suit against folks to collect fines.  Finding that no rules or federal laws provided this avenue for collection of fines, the Court found in Fiero's favor.  You can read more about the story in this Investment News article.  

So what does this mean for the average registered rep.?  Not much.  If you are working in the industry and are fined through the disciplinary process, you will either pay the fine or likely lose your ability to work in the industry.  Nothing has changed there.  If you remain registered, and don't pay the fine, FINRA will seek to revoke your registration and if they do, you'll wind up out of the industry for failing to pay.  If you are out of the industry at the time a fine is handed down, the odds are that the fine would not be due and payable unless and until you seek to re-enter the industry.  If that's the case, then you don't have to pay and FINRA doesn't come after you seeking payment, until you attempt to be associated or registered with a broker-dealer.  

This court decision does not address the issue of FINRA orders to pay restitution to customers.  It seems that much of the analysis for this issue is the same as the fine issue, but the court did not address this. Should FINRA pursue collection of restitution orders via a lawsuit, we'll find out the answer to that question.  

Review of September U4-Related Cases

New blog post reviewing FINRA's September 2011 disciplinary cases involving U4 issues is online now over at www.u4review.com.  The link to that specific post is here.  

Momentum Gaining on RIA SRO?

Earlier this week, Investment news reported that support for a self-regulatory organization for registered investment advisers is apparently gaining momentum.  The article highlights many trade groups that have thrown their support behind FINRA as a possible SRO for advisers though some state regulators object to an SRO.  On Monday, Rick Ketchum, CEO of FINRA, testified before a House subcommittee (the Subcommittee on Capital Markets and Government Sponsored Enterprises Committee on Financial Services).  The text of his testimony can be found online here.  As you would expect, Ketchum was in favor a a SRO for RIAs, and for FINRA being an SRO in that arena.  With what appears to be some bipartisan support for an adviser SRO, it's coming, I think.  Just a matter of when.  

Do You Need to Update Outside Business Activity Disclosure Forms?

As Fall temperatures start to come this way, many firms will be gearing up for annual compliance meetings with their brokers as 2011 begins to draw to a close.  At these annual meetings, firms often have brokers complete their annual compliance questionnaires, as well as to make sure that brokers have provided disclosure of outside business activities, U4 amendments, etc.  

Compliance folks putting these forms together should remember that last December, FINRA Rule 3270 took effect, replacing former NASD Rule 3030 relating to outside business activities.  The new rule is more expansive, and it imposes some supervisory obligations on the broker-dealer as well.  For more info. on the new rule, see this post on implications for brokers, and this one for implications for firms.   In light of this rule change, firms will likely wish to update their disclosure forms to capture the expanded scope of the rule.