FINRA Issues Guidance on Heightened Supervision

Via Regulatory Notice 18-15, FINRA issued guidance to broker-dealers at the end of April 2018, on what they call effective heightened supervision of financial advisors with a “history of past misconduct.”We’ve known for some time that the regulator had a focus on bad brokers, those with a history of problems, and this guidance to firms reinforces that attitude.FINRA is effectively telling broker-dealers here that they better watch out and pay attention to how they are supervising a financial advisor (registered representative) and other associated persons who have marks on their background, including their Form U4.

The guidance essentially reminds firms that if they hire a person who has, for example, “a recent history of customer complaints, disciplinary actions involving sales practice abuse or other customer harm, or adverse arbitration decisions”, then they need to determine whether that person needs to be on heightened supervision, and if so, what that heightened supervision should look like.Further, they articulate that they need to monitor their employees for events that happen during employment at that firm, to determine whether heightened supervision may need to be imposed as a result of events occurring at the firm.From there, the FINRA staff explain that the firm should develop and enforce a reasonable heightened supervision plan on those who need it, being sure to tailor it to the situation at hand and to periodically assess its effectiveness.

The guidance in Regulatory Notice 18-15 is aimed at firms, but there are some things that financial advisors should understand. The big takeaway is that the smart financial advisor is going to work hard to guard his or her reputation and seek to keep his or her Form U4 and CRD record as clean as possible.I believe that those financial advisors with dirty U4s are finding it increasingly more difficult to avoid extra scrutiny at firms, and to have the freedom that they might like to transition to other firms.In other words, a dirty Form U4 limits an advisor’s career opportunities.So, it makes sense to take appropriate steps to seek to avoid customer complaints, arbitrations, enforcement actions, and other negative disclosures on the Form U4.And, if you do get a mark, you’ll look to clean it up where possible.

If you are a financial advisor interested in learning more about steps you might can take to clean up your Form U4, then this post is designed especially for you.