It can be helpful for financial advisors to get a reminder of what the regulators are taking action on, to remind themselves of certain rules, as well as to allow a spot check to make sure that an individual’s practice is compliant in certain key areas. In today’s post, we share our review of FINRA’s reported actions for June 2019. This really means that these are the cases that were resolved around April 2019, and reported in the June report. And, if a case was resolved in April, for many of them, it may mean that the regulatory examination leading to the action started over a year prior. Nevertheless, the report shows some of the current thoughts on violations and sanctions by the regulatory staff.
Our review focuses on actions against individuals – those persons registered or associated with a FINRA member broker-dealer, as most of our work involves providing counsel to individuals as opposed to firm. By our count, FINRA reported that it barred 19 people from association with a broker-dealer, and suspended another 22 people for some period of time. In addition, another 23 people were suspended under FINRA Rule 9552 based upon a failure to respond to Rule 8210 requests for information during a FINRA examination. If those persons do not timely respond and request a hearing on the matter, those suspensions will automatically convert to bars under the rules.
Of the cases in which FINRA barred people, 11 of the 19 included a violation of Rule 8210 (or that was the only charged violation). That’s pretty typical, and the sanction for most 8210 violations has historically been a bar from association with any FINRA member in any capacity. Beyond that, 3 persons were barred for conversion, and 2 for fraud-related charges such as a violation of Rule 10b-5. Other persons had U4 violations, selling away or a borrowing from/lending to clients violation.
FINRA also suspended 22 persons for various violations. The most common violation resulting in a suspension was selling away (participating in a private securities transaction), and that violation was seconded by cases involving forgery or falsification of documents/firm records. Other cases resulting in suspensions included failing to report information on the Form U4, borrowing from/lending to clients, improper use of email, improper use of discretion, FINOP-related issues, undisclosed outside business activities, and violation of the gifts and gratuities rule. In addition, two advisors were suspended for making unsuitable recommendations to clients.
Two cases caught my eye and both were settled cases through an AWC where the advisor agreed to be barred from association with a FINRA member firm. The first case charged the advisor with a Rule 8210 violation for failing to appear before the FINRA staff for on-the-record testimony and resulted in a bar. The notice reports that the advisor was being reviewed after allegations were made that she “engaged in an undisclosed outside business activity selling merchandise on eBay, some of which belonged to her supervisor and/or her member firm.” That’s interesting. Of course, I’m left wondering if she had permission to sell these items, or if she may have taken them without authorization to sell. I’m sure there’s a story in that story.
The other case that caught my eye also was an AWC to settle an allegation that another advisor failed to appear for testimony sought under Rule 8210. In this case, FINRA reported that they were investigating whether this advisor, “used company airline miles and received other benefits from travel providers without proper authorization.” Again, we’re left with questions about what happened, and I’m sure there’s an interesting story here as well.
So, what’s the takeaway for financial advisors who want to avoid regulatory problems? First, if you want to stay in the business, or try to, you have to respond to FINRA’s Rule 8210 requests (though, sometimes it really doesn’t make sense if the underlying issues are too bad – but that’s where you consult an experienced regulatory lawyer to determine if it makes sense to cooperate or not – and do that before you fail to respond). Second, beware of the items that don’t point to direct customer harm; here, most of the cases do not allege some nefarious conduct that directly harmed customers and cost them their savings. Rather, many of the violations are more technical, like ensuring your U4 is accurate and up to date, ensuring that all paperwork is in order, and ensuring that all company policies are followed concerning use of discretion, and participation in activities away from the firm. Finally, in my view, some of these cases were undoubtedly caused by the advisor trying to provide too much service to help the client, in the advisor’s view at least. Don’t fall into that trap. When a client misses a signature on a form or an initial on some disclosure, get the client to get it done right. When a client tells you to go ahead and make trades even if you can’t get ahold of him or her, make sure you have that authority in writing and have your firm approve the account as discretionary. If you’re working a part-time job on the side or have some other side hustle, make sure it has been disclosed to the firm in writing, and where needed, fully approved. Taking these steps will help avoid problems with your clients, your firm, and the regulators.