FINRA, Notice 19-10, and Toothless the Dragon

According to Dragonpedia (yeah, I didn’t know there was such a thing either) Toothless the dragon, from the How to Train Your Dragon movie was described as this: “Once thought of as the “unholy offspring of lightning and death itself”, Toothless (20 in dragon years) has proven to be much more of a giant, winged pussycat than the stuff of nightmares.” You are undoubtedly wondering where this is going, with a legal blog opening on a discussion of a fictional dragon, so let me cut to the chase. Reviewing FINRA’s Regulatory Notice 19-10 that was just recently released left me viewing the communication as a toothless and playful dragon, or in other words, a communication that has no teeth, isn’t really scary, and doesn’t really offer much guidance, either.

FINRA begins 19-10 by announcing that it has “[c]onsistently sought to ensure that customers can make a timely and informed choice about where to maintain their assets when their registered representative (i.e. a person registered with the member who has direct contact with customers in the conduct of the member’s securities sales) leaves a member firm.” That sounds pretty neat, but I can’t seem to recall a time in the decade I worked there (when known as NASD Regulation and then NASD), or in the 12 years since, that this was a major focus or concern of the regulator that was expressed to member firms and the public. And, to that end, I can’t really recall any publicized focus groups, requests for comments, or other initiatives that were specifically targeted on this issue, especially in the year or so leading up to the publication of this Notice. Granted, as my family would quickly tell you, my memory is not as good as it once was, and I’m happy to be corrected if I missed something.

But let me get more to the point here. After reciting their supposed historical concern on this issue, FINRA then announces that it “expects” that a firm “should” provide clients with timely and complete answers when a client asks questions about a departing (or departed) registered rep. Going further, FINRA later asserts that a firm “should” communicate clearly and without obfuscation when asked questions about a departed rep. by a client, and states that, if the departed rep. has consented, the firm “may include” the rep.’s new contact information in responses to client questions, though FINRA clearly states that it would “not expect” a member firm to seek to obtain the departing rep’s forwarding contact information if it was not known at the time of the client’s question. If the firm “may” share the departed rep.’s contact information, the language suggests that the firm may choose not to do so as well. At the very least, this is weak and vague language that I don’t consider clear guidance for firms or reps.

I also wonder why FINRA only suggests that a firm “should” communicate clearly and without obfuscation? The precise language used throughout 19-10 leaves me wondering. Is it ever acceptable for a firm or associated person to outright lie to or deceive a client? Thinking aloud here, if FINRA really expects that firms clearly communicate and share this information without obfuscation, then why not make it a rule? Seasoned regulators, lawyers and compliance folks are well aware that a Regulatory Notice is not the equivalent of a rule.It has not gone through the rule making process, has not been formally approved by the FINRA Board and the SEC, and is does not have the weight or teeth of a rule that can be enforced when there is a clear violation (cue image of Toothless the dragon). Sure, FINRA could seek to legislate by enforcement and call conduct that runs contrary to a Notice a violation of Rule 2010, but with the language in this Notice, inasmuch as the regulator only suggests conduct by way of the words “should” and “may”, no actual, specific conduct or communication is required under this notice and therefore there seemingly isn’t any conduct to enforce one way or the other, at least us regulatory defense lawyers would argue.

In any event, as firms may wrestle with this “guidance” and determine how they will respond when a rep. leaves for another firm, I think that any representative making a transition to another firm would certainly want to clearly communicate to their former firm, in writing: where they are going, providing new contact information for them, and stating that the rep. consents to that information being shared with clients. I also think that it probably makes sense for the rep. to deliver that to the firm’s home office compliance and registration folks, and to the local branch office management.In terms of what firms will actually do in response to 19-10, well, that remains to be seen.

If you are a financial advisor considering a transition and need assistance, we invite you to contact us. Likewise, if your firm needs guidance with regulatory compliance matters, we welcome your call as well.

(Photo credit: Sarah Phillips via Unsplash)