December 7 Deadline to Comment on New Expungement Proposal

With only 4% of customer complaints being expunged, FINRA is bowing to pressure, presumably from the customer attorneys' bar, to again make it more difficult to remove false claims from a broker's public record.

FINRA's recent proposed amendment seeks to make expungement an even more extraordinary remedy by preventing anyone found liable in a customer complaint case from even seeking it. The proposal would also require that customers who have submitted complaints or other professionals be invited to any hearing on expungement proposals; and it would prohibit the arbitration panels charged with granting or rejecting expungement requests from giving any "evidentiary weight" to a customer's failure to appear at a hearing.

https://www.financial-planning.com/news/brokers-comment-period-on-finra-expungement-proposal

FINRA Reopens Hearing Locations

Beginning July 5, 2021, FINRA will reopen all of its hearing locations for in-person arbitration and mediation proceedings except for the following: Augusta, Boca Raton, Buffalo, Detroit, Philadelphia, Providence and Wilmington. FINRA DRS has postponed all in-person proceedings in these seven locations through July 30, 2021.

FINRA Proposes Additional Financial Requirements on Small Firms

While FINRA keeps adding rules on member firms to prevent the hiring of brokers with a misconduct history, it also harms brokers and firms who do not have a significant history of misconduct.

This time around FINRA is hitting firms that it deems to be hiring disciplined brokers financially, by requiring those firms to make deposits to be used to pay arbitration awards to customers. Unfortunately, FINRA has not set forth the criteria for making the determination of which firms will be hit with this burdensome requirement, nor has it said how much of a deposit will be required.

It seems to me that this rule is arbitrary, and designed to financially punish firms that it deems to be bad actors, without defining what constitutes being a bad actor. In addition, this proposed rule sets up an end run of the federal and state bankruptcy laws, essentially preventing firms who are in financial trouble from declaring bankruptcy, since withdrawals from the deposit cannot be made without FINRA approval.

Adopting a rule that gives its own Staff the ability to decide who has to make the deposit, and the amount of that deposit, removes capital from those firms, harms their ability to continue to operate, and in the long run, harms the owners and brokers who are employed at those firms.

FINRA admits that this rule will create a financial hardship on small firms, and states in the rule proposal "FINRA believes that the direct financial impact of a restricted deposit is most likely to change such member firms’ behavior—and therefore protect investors." While protecting investors is obviously an important goal, making it financially impossible for firms to operate, using vague rules and criteria does not protect investors, it harms brokers.

While misconduct by firms or brokers should certainly be addressed this Minority Report type of regulation is an unnecessary burden on small firms. The reality is that FINRA has enormous tools at its disposal to prevent the harm to investors, through its examination and enforcement proceedings and it admits in its rule proposal that it has already taken steps to address potential violations by firms, including

• Published Regulatory Notice 18-15, which rearticulates the obligation of member firms to implement heightened supervisory procedures tailored to the associated persons with a history of misconduct; 
• Proposed rule amendments that would require a member firm to conduct with FINRA a materiality consultation before allowing persons with a history of misconduct to become owners, control persons, principals or registered persons of a member firm; authorize the imposition in a disciplinary proceeding of conditions and restrictions on the activities of a respondent member firm or respondent broker that are reasonably necessary for the purpose of preventing customer harm, and require a respondent broker’s member firm to adopt heightened supervisory procedures for such broker, when a disciplinary matter is appealed to the NAC or called for NAC review; require firms that apply to continue associating with a statutorily disqualified person to include in that application an interim plan of heightened supervision that would be effective throughout the application process; and allow the disclosure through FINRA BrokerCheck of the status of a member firm as a “taping firm” under FINRA Rule 3170 (Tape Recording of Registered Persons by Certain Firms);
• Published Regulatory Notice 18-17, which announced revisions to the FINRASanction Guidelines; 
• Raised fees for statutory disqualification applications; and
• Revised the qualification examination waiver guidelines to permit FINRA to more broadly consider past misconduct when considering examination waiver requests.

FINRA has also quadrupled the filing fees for making a request for expungement to over $3,000 for simply making the request.

All to the benefit of larger firms who will undoubtedly not be subjected to such onerous requirements.

Small firms who are subject to these new financial requirements will need to be prepared to negotiate with FINRA, and to file legal proceedings to address the new requirements, which undoubtedly violate due process.

The rule proposal is online.  

FINRA Postpones In-Person Arbitrations and Mediations

In response to the evolving coronavirus disease 2019 (COVID-19), FINRA has decided to administratively postpone all in-person arbitration and mediation proceedings scheduled through May 1, 2020. If you have an in-person hearing or mediation session that is postponed as a result of this decision, you will be contacted by FINRA staff to reschedule or discuss remote scheduling options.

Please note that this decision does not affect other case deadlines. All case deadlines will continue to apply and must be timely met unless the parties jointly agree otherwise.

We recognize that this decision may cause inconvenience and we do not make it lightly. We are taking this preventative action out of an abundance of caution, in the interest of public safety. The well-being of our FINRA employees, arbitrators, stakeholders and communities is of paramount importance.

https://www.finra.org/rules-guidance/key-topics/covid-19

Broker- Dealer Law Corner- The Disturbingly Cozy Relationship Between FINRA And PIABA

Excellent commentary from our colleague Alan Wolper regarding the curious relationship between FINRA and PIABA.

https://www.bdlawcorner.com/2019/01/the-disturbingly-cozy-relationship-between-finra-and-piaba/

FINRA Investigating Expense Reports

FINRA has started a new series of investigations, this time into broker expense reports. While one would think that an expense report item is a matter between the firm and its employee, FINRA believes it is a significant books and records violation, warranting an investigation, and attempting to bar brokers from the industry.

Given the apparent breathe and scope of this investigation, FINRA is committing significant resources to this issue, and brokers need to protect themselves. FINRA is sending out 8210 Requests, and seeking permanent bars.

Brokers are being barred from the industry over these expense reports issues. If you have an issue with your firm over an expense report, or the accuracy of any document submitted to the firm, call our office before responding to the firm. We may be able to get ahead of a FINRA Request by intervening at the firm level.

If you have received a document request from FINRA, call our office before responding. How you respond to that request can have a significant impact on how the investigation ends. We have significant experience, and success, in representing brokers and managers in FINRA books and records proceedings.

Call 212-509-6544 or email mja@sallahlaw.com

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Mark J. Astarita, Esq. has spent the last thirty years representing investors, financial professionals and firms in litigation, arbitration and regulatory matters across the country. He is a partner in the national securities law firm of Sallah Astarita & Cox, LLC and can be reached by email at mja@sallahlaw.com or by phone at 212-509-6544.

FINRA Close to Filing Fraud Rule for ‘Vulnerable’ Investors

FINRA plans to file its proposed Rule 4512 to help block elderly and "vulnerable" investors from financial exploitation, FINRA states that the rule change is not simply about protecting “senior” investors but all investors that fall into the “vulnerable” category—those with diminished capacity, disabilities, and even those in the military.

The FINRA plan would require member firms to “make reasonable efforts” to obtain the name of and contact information for a trusted contact person for a customer’s account by amending Rule 4512 (Customer Account Information).

The rule would also allow advisers/brokers to place a temporary hold on transactions that could be fraudulent by creating a new FINRA Rule 2160 (Financial Exploitation of Eligible Adults), and applies to investors aged 65 or older as well as investors 18 and older who have a mental or physical impairment that renders them unable to protect their own interests.

FINRA Close to Filing Fraud Rule for ‘Vulnerable’ Investors: "

FINRA Proposes Change to Arbitrator Chairperson Qualifications

FINRA's recent rule change, which effectively removed every attorney with any relevant securities experience from serving as a Chairperson might be negatively effecting the Chairperson roster.

As we discussed in a posting in March, Customer and Firm Attorneys are No Longer Public Arbitrators, since the Chairperson must be a public arbitrator, most securities attorneys were instantly disqualified from serving as a Chairperson. While FINRA's roster still contains many extremely qualified Chairpersons, the impact on the arbitrator pool has been significant, and placed additional burdens on the remaining qualified Chairpersons.

FINRA has finally filed a proposed rule change to amend  the Code of Arbitration Procedure for both Customer and Industry Disputes which it was discussing back in May of this year. It is proposing to change the rule  to provide that an attorney arbitrator would be eligible for the chairperson roster if he or she completes chairperson training and serves as an arbitrator through award on at least one arbitration, instead of two arbitrations, administered by a self-regulatory organization  in which hearings were held.

This is probably not going to make a significant difference in the Chairperson pool, but it is a start.


SR-FINRA-2016-033 | FINRA.org

FINRA's Broker Recruiting Rules Explained - By FINRA

It was a silly rule, designed to address a problem that did not exist and that was gutted before adoption.



It should have been canned entirely, and what is left is another meaningless regulation



Frequently Asked Questions Regarding FINRA Rule 2273 | FINRA.org:

A Look at FINRA's Years under Ketchum and What's Ahead

Interesting article at RIABiz regarding the retirement of Rick Ketchum, the fact that there are two outsiders replacing him, and the problems FINRA faces going forward.



What FINRA's CEO shuffle reveals about its waning viability as the self-funded fox guarding the investor henhouse | RIABiz:

FINRA Reports on Effective Practices for Digital Investment Advice

FINRA has issued a press release stating that financial services "firms' offerings of digital investment advice need sound governance and supervision, including effective means of overseeing suitability of recommendations, conflicts of interest, customer risk profiles and portfolio rebalancing."

The report also outlines lessons for investors and says training and education are crucial for financial professionals who use digital investment advice tools.

FINRA issued the report to share effective practices related to digital investment advice services and remind member firms of their obligations under FINRA rules. The report notes that global spending on digital wealth management services is expected to increase significantly."



FINRA Reports on Effective Practices for Digital Investment Advice 

The Ultimate Cheat Sheet On FINRA Firm Culture

FINRA will be looking for firms to focus on their culture and whether it is putting customers first and promoting risk management adaptable to a changing business environment.

The Ultimate Cheat Sheet On FINRA Firm Culture - great summary from Leon Morales

The Historical Basis of Securities Arbitration as an Investor Protection Mechanism by Jill Gross :: SSRN

Well researched essay on the history of arbitration by Professor Jill Gross of Pace Law School - the point of which is "[r]ather than depicting FINRA arbitration as an alternative dispute resolution process offering a level playing field, FINRA, as well as industry and investor advocates, should recall and reinforce the historical basis of securities arbitration as a mechanism to protect investors."



To learn the genesis of the process, the purpose of the arbitration requirements, and general history, take a few moments to review the essay



The Historical Basis of Securities Arbitration as an Investor Protection Mechanism by Jill Gross :: SSRN:

FINRA Charges Cantone Research Inc.,and President Anthony Cantone

FINRA announced that it has filed a complaint against Cantone Research Inc. (CRI), of Tinton Falls, NJ, and its President, Anthony J. Cantone (Cantone), charging fraud in connection with the sales and subsequent extensions of more than $8 million of certificates of participation (COP) in five promissory notes. 

According to the SEC, four of the five relevant promissory notes have defaulted, resulting in approximately $6 million in losses to investors. 

According to the complaint, the promissory notes at issue were executed on behalf of one of several entities controlled by Christopher Brogdon, an individual who worked in the assisted living and nursing home industry. Under the terms of the COP Brogdon would use investors' funds to purchase and/or redevelop a nursing home, assisted living facility or other real-estate that he controlled. 

In return, investors were promised 10 percent interest in addition to the return of their principal. The complaint alleges that at the time that CRI and Cantone solicited investors to purchase the COP, and later, when CRI and Cantone extended certain of the COP, CRI and Cantone either misrepresented or failed to disclose material information to investors that cast substantial doubt on Brogdon's ability to successfully make the required principal and interest payments.

While FINRA makes a number of claims regarding the investments which harmed investors if true, FINRA will not recover an investor's losses Investors will need to retain their own attorneys to receover their losses. 

Email us at securitieslawyer@seclaw.com for more information.

FINRA Broker Compensation Sweep Continues

FINRA periodically conducts sweeps on particular regulatory topics. In its most recent Annual Priorities Letter, FINRA claimed that conflicts of interest represent a recurring challenge that contribute to compliance and supervisory breakdowns which can lead to firms and registered representatives, at times, compromising the quality of service they provide to clients.

FINRA seems to be fixated on compensation, despite the complete lack of published statistics or facts to support its conclusion that there is in fact an issue. Regardless, our firm, and our clients must deal with the premise, and FINRA's fixation.

FINRA has announced that it intends to continue its review of this "issue" and will "continue our assessment of the efforts employed by firms to identify, mitigate and manage conflicts of interest, specifically with respect to compensation practices."

Fortunately, FINRA has published its Exam Letter, giving firms a basic heads-up and has released a list of 19 questions that it intends to ask. Naturally, FINRA is not bound by this list, and can expand it whenever it pleases.

FINRA has limited the time period to August 2014 through July 2015, we request that responses to the questions and requests below be provided in writing by no later than Friday, September 18, 2015.

The list is long, and encompasses the following questions. When producing documents to FINRA in this, or any investigation, do yourself a favor - number the pages of the documents that you produce so that YOU can identify the production later. When we produce documents to regulators, we stamp the documents "SA&C0000001" and so on. Later, if the investigation heats up, we can readily identify the document, the fact that it was produced by our client, and when it was produced. Today, stamping documents with Adobe takes seconds, not hours, and should be performed in every document production.

Enough lecturing, here is what FINRA is looking for. Keep in mind that you can modify some of this, if the request is particularly onerous for your firm. We have successfully limited and/or modified FINRA requests on countless occasions to fit our client's particular situations.:

• Identify and describe the composition of the departments or committees that are responsible for reviewing and approving compensation policies for the firm's registered persons, including supervisory personnel, involved in retail brokerage.
• Describe the role of the Board in reviewing and approving individuals' compensation packages as well as compensation policies as a whole.
• What role do corporate functions – such as finance, human resources, compliance, or risk – play in the review and approval of business line remuneration policies?
• Identify and describe the controls utilized to identify compensation-related conflicts of interest.
• Identify the team(s) or individual(s) that are responsible for developing and implementing the identified controls.
• Describe the initial review and approval process that occurred for the identified controls.
• Identify and describe the controls (e.g., neutral grid, fee-capping, compensation penalties) utilized to manage compensation-related conflicts of interest.
• Identify the team(s) or individual(s) that are responsible for developing and implementing the identified controls.
• Describe the initial review and approval process that occurred for the identified controls.
• Identify and describe surveillance efforts or supervisory processes that have been implemented to assess whether potential compensation-related conflicts of interest are materializing in your firm's retail brokerage business.
• Describe specific underlying surveillance/supervision efforts that have been implemented. Include the identity of the department(s) responsible for the surveillance or supervision.
• Describe whether surveillance/supervision efforts are performed on a routine basis and, if so, how often.
• Describe escalation procedures in place for situations that suggest a compensation-related conflict of interest is materializing.
• Indicate how many compensation-related conflict of interest escalations occurred during the period of August 2014 through July 2015.
• Describe how current compensation structures balance short-term incentives for registered representatives and clients' long-term interests. Include a description of any components of compensation structures designed mitigate compensation-related conflicts of interest.
• If changes to compensation structures were made during the period of August 2014 through July 2015, summarize each change and identify the strategic goal of each change.
• Identify and describe the terms and conditions of each standardized enhanced and deferred compensation package your firm offers to recruit or retain registered representatives including who is authorized to provide such packages and who must approve such packages. Indicate the degree to which these compensation packages are contingent upon a registered persons' production derived from particular product types or product families. Identify the number of registered representatives currently receiving compensation from each standardized enhanced or deferred compensation package.
• Describe the use of non-standard (i.e., negotiated) enhanced and deferred compensation packages by your firm to recruit or retain registered representatives. Indicate the degree to which these compensation packages are contingent upon a registered persons' production derived from particular product types or product families. Identify who is authorized to provide such packages and who must approve such packages. Further, identify the number of registered representatives currently receiving non-standard enhanced and deferred compensation packages.
• Identify production thresholds that entitle any registered representative to higher compensation ‘ whether paid in the form of higher commission payout, higher base salary or higher discretionary bonus. Indicate whether these thresholds are communicated to registered representatives.
• Describe the terms and conditions of any direct production penalties in place which, based upon events occurring, can result in a decrease in compensation paid to registered representatives.
• Describe the approach to compensating direct and indirect managers of registered representatives involved in sales to retail accounts, including Sales Managers (or similar function), Business Supervisors and Compliance Personnel. Indicate whether compensation packages are tied to production either through direct commission payout, higher base salary or discretionary bonus. Indicate if thresholds for higher compensation are communicated to managers.
• Describe broadly how products approved for sale are displayed or otherwise communicated to registered representatives. For example, are products presented by product category (e.g., Mutual Fund or Annuity)? Is an internal search feature available?
• For each method used by your firm to display approved product to registered representatives, describe how the display order of products is determined and identify the group or department that makes the decision.
• Describe any methods employed or processes in place to promote the sale of specific products or categories of products. (Example: Preferred Product List, Enhanced Commission Payouts, etc.)
• Using the table in Attachment A identify the products offered to retail accounts and describe all types of income received for each product (e.g., commission/concession, 12b-1 fee, income from other revenue sharing arrangements, payment for shelf space, etc.) For each type of income, state whether the income is split with registered representatives on a per transaction basis pursuant to a payout schedule or other terms.
• Describe your firm's policy for permitting third-party product or sponsor representatives to meet with registered representatives. Include details about requirements, if any, for supervisors or managers to attend.
• Describe your firm's policy for permitting registered representatives to attend off-site, overnight educational session that are sponsored by issuers or product sponsors.
• Identify by name the Top 10 proprietary or affiliated products as well as the Top 10 independent products sold to retail accounts during the period of August 2014 through July 2015. Total revenue to your firm for each product should be the measurement used in identifying products identified on each list.
• Identify any flat fee or annual payments that your firm has received to make a product available for sale by its registered representatives.

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The attorneys at Sallah Astarita & Cox are experienced securities regulatory attorneys, having served at SEC Senior Enforcement Attorneys, in-house and outside counsel to dozens of brokerage firms, including some of the country's largest firms, as well as criminal prosecutors. Our experience can guide you through the examination process, help you to avoid potential pitfalls, and hopefully structure a result that causes the least amount of pain for you and your firm. Call our office at 212-509-6544 for more information. We represent investors, brokers and firms nationwide, and our attorneys have been doing so for decades.

Related articles

• Time to Ban Mandatory Deferred Compensation - Morgan Stanley Admits It Uses Employee Funds For Its Own Benefit (seclaw.blogspot.com)
• FINRA Releases 2015 Regulatory and Exam Priorities Letter (seclaw.blogspot.com)

Investor Alert: Market Risk: What You Don't Know Can Hurt You

FINRA has reissued an investor alert regarding market risk, to remind investors that  investing involves risks as well as rewards and that, generally speaking, the higher the risk, the greater the potential reward.

FINRA believes that "[w]hile it is important to consider the risks in the context of a specific investment or asset class, it is equally critical that investors consider market risk."

Common market risks include Interest Rate Risk, Inflation Risk, Currency Risk, Liquidity Risk, Sociopolitical Risk, Country Risk and Legal Remedies Risk.

Each of these market risks are discussed in the alert, as well as suggestions for managing these risks.

'Market Risk: What You Don't Know Can Hurt You | FINRA.org

Small Percentage of Brokers Fined is a Bad Thing?

It is truly a bizarre world that we live in. Anyone involved in the financial services industry knows that  the overwhelming majority, in fact almost all of the registered representatives in this country, are honest, hard working professionals.

Everyone also knows that not all  of the 630,000 individuals holding a Series 7 license actually deal with retail investors - or investors in general. In FINRA's grab for regulatory turf there are a host of brokerage firm employees  who are required to have the license who do not deal with investors, or trading, at all.

Then why, in a year where FINRA enforcement proceedings are up, and fines are up, are critics complaining that the increase in fines and proceedings are not enough, since "[o]nly a small fraction of the 629, 980 registered securities representatives that FINRA oversees—not to mention the almost 4,300 brokerage firms under the regulator’s supervision—were served with enforcement actions."

How about the fact that financial professionals are honest and hard working. Why isn't it a good thing that less than 1% of all Series 7 licensees have been the subject of a FINRA enforcement action in a year? FINRA certainly isn't slacking off on its enforcement proceedings, and it has become a huge fan of conducting overlapping annual exams at smaller firms.

Do we really want to encourage regulators to 'bring their number up"? To simply bring charges against brokers and firms simply to make the numbers look "better" or to increase their revenue?

That is not the purpose of our regulatory structure, nor should it be the goal of enforcement proceedings.


.A "Tougher" FINRA? | Industry content from WealthManagement.com

Related articles

• Spike in FINRA, SEC Regulation Leaves Star Brokers Exposed

• Feigned Outrage over "Small" FINRA Fines 

• A Lesson in Broker-Dealer Examination Conduct 

Firms Elect Three Industry Governors to FINRA Board of Governors, Two New Governors Appointed | FINRA.org

FINRA announced the results of voting that took place at its 2015 Annual Meeting  in Washington, D.C. last month. Member firms elected three Governors, one from among the small firms, one from among the mid-size firms and one from among the large firms. FINRA also named two new Governors to its Board of Governors.

Governors Elected

Small Firm Governor: Joe Romano, President, Romano Wealth Management
Mid-size Firm Governor: Brian Kovack, Esq., President & Co-Founder, Kovack Securities, Inc.
Large Firm Governor: John W. Thiel, Head of Merrill Lynch Wealth Management
All three Governors are newly elected.

Governors Appointed

Two individuals were named to the Board as Governors:

Kathleen A. Murphy, President of Personal Investing, a Fidelity Investments company, was appointed as an Industry Governor; and Randal K. Quarles, Managing Partner and Co-Founder of The Cynosure Group, was appointed as a Public Governor.

FINRA Bars Former Caldwell Broker for Churning Customer Accounts

FINRA Bars Former Caldwell Broker for Churning Customer Accounts -The Financial Industry Regulatory Authority (FINRA) announced today that it has permanently barred Richard Adams, a former registered representative of Caldwell International Securities Corp., from the securities industry for churning customers’ accounts and other securities rule violations. Adams also failed to report a dozen unsatisfied judgments and liens on his U4 Registration Form as required by FINRA rules."

FINRA Dissident Candidate Wins Board Seat.

Brian Kovack, who ran for the Finra Board of Governors as a self-described "dissident" candidate, won his bid for a seat on the 24-member board, Finra announced Thursday.