FINRA Turns Up the Heat on Registered Representatives and Broker-Dealers

On May 11, 2017, FINRA took the next step in its ongoing initiative to strengthen controls on Registered Representatives (“RRs”) with a history of significant past misconduct. FINRA is also taking steps to ensure that the firms employing high-risk brokers are held to a higher standard of accountability.

FINRA will soon publish a Regulatory Notice that solicits comments on proposals, which will implement the following measures:

• Stronger protections for investors;
• Additional BrokerCheck disclosure; and
• Heightened supervision of RRs appealing disciplinary action.

If enacted, the proposals will allow adjudicators to consider more severe sanctions in situations where an individual has a past history of misconduct. Depending upon the circumstances, hearing panels would be permitted to restrict the activities of individuals and firms while disciplinary decisions are on appeal.

FINRA also plans to publish a Regulatory Notice, which will reinforce and clarify firms’ existing supervisory obligations related to the high-risk RRs they employ. Firms will need to adopt stronger supervisory procedures for RRs while a statutory disqualification request is being reviewed by FINRA, or a broker is appealing a hearing panel decision.

In addition, FINRA’s proposals include a mandatory disclosure on BrokerCheck if firms are subject to existing requirements that they record all phone conversations with customers. This requirement is triggered if broker-dealers reach a specified percentage of RRs who were employed previously by disciplined firms.

FINRA has also tweaked its position on sanctions as part of the organization’s efforts to protect investors. In April 2017, FINRA released new Sanction Guidelines, which are available at

http://www.finra.org/sites/default/files/Sanctions_Guidelines.pdf. These guidelines are utilized by FINRA’s market regulation and enforcement divisions to help determine the level of sanctions to seek in litigated and settled cases.

The revised Sanction Guidelines include the following changes:

• Three new guidelines were added related to systemic supervisory failures, short interest reporting, and borrowing and lending arrangements with customers;
• Guidance was provided regarding the mitigating impact of sanctions imposed by other firms and regulators; and
• The exercise of undue influence over a customer should be considered when violations are adjudicated.

Sanctions will be harsher if an RR exploits a vulnerable individual or a customer with diminished capacity.

The revised guidelines do not impose fixed sanctions for specific violations. Ideally, they will help FINRA adjudicators impose appropriate sanctions that are consistent and fair.

The Sanction Guidelines are now in effect and can be found at https://www.finra.org/sites/default/files/Sanctions_Guidelines.pdf.

Les Abromovitz can be reached at NCS Regulatory Compliance by calling 561-570-1813 or by e-mailing him at labromovitz@ncsregcomp.com. Les is the author of THE INVESTMENT ADVISOR’S COMPLIANCE GUIDE, which was published by the National Underwriter Company, a division of ALM. The second edition was published in February, 2017, and is now available at https://www.nationalunderwriter.com/the-investment-advisor-s-compliance-guide-2nd-edition-epub-bundle.html.