Last year, FINRA established a new exam unit that focuses on high-risk RRs/brokers and repeat offenders. In 2017 FINRA began ranking all 600,000 RRs/brokers it regulates. Now the new exam unit, based in New York City, has vowed to identify approximately 100 to 200 financial advisors/Registered Representatives (“RR”) who FINRA believes are a danger to investors.
Tom Drogan, an SVP at FINRA who is Deputy of FINRA Member Regulation, Sales Practice Department spoke in Dallas and discussed the “rollout” of FINRA’s plans and objectives on this issue.
Drogan said FINRA is not relying on one singular definition of a high-risk RR. Instead, he said FINRA will use both quantitative metrics and qualitative considerations to identify and monitor problem RRs.
Drogan warned that FINRA will even examine RRs who “may not be quantitatively high…in terms of the number of disclosures or customer complaints…in their history…[but who] have been working with individuals who perhaps were barred or have a high degree of customer complaints or disclosures, or worked at disciplined firms.” Drogan said FINRA is “going to spend some time focusing on these individuals…[and] trying to conduct more examinations of these individuals.”
“Some of my clients have said we’ve heard these pronouncements in the past where FINRA says it will aggressively monitor and take action against RRs but then there always seems to be no noticeable change in FINRA’s enforcement efforts,” says employment law trial attorney Rogge Dunn. “While it remains to be seen just how aggressive FINRA will be, my impression from RRs and firms who have been investigated is that this time FINRA is devoting more resources and energy into disciplining high-risk RRs. Therefore, every RR needs to be prepared.”
Since FINRA will concentrate on repeat offenders, Dunn says it’s advisable that all RRs work hard to avoid the first blemish on their U-4/U-5. Once your record has been marked, then the chances that FINRA will investigate and/or monitor your activities increases significantly. Obviously, for those RRs who already have a bad mark on their record it is doubly important to fight a second bad mark on your U-4/U-5.
“Given FINRA’s pronouncements and actions, I am seeing more and more RRs insisting that frivolous or weak customer complaints go all the way to an arbitration award, where the RR can win, rather than having it on their record that the claim was settled and the customer was paid money,” says Dunn. “I am also seeing an increase in the number of expungements RRs are filing to remove negative entries on their U-4/U-5.”
“FINRA enforcement attorneys I’ve talked to say RRs are in a new environment,” says Dunn. “I agree. Elizabeth Warren and other Senators have put substantial pressure on FINRA and the SEC, resulting in new regulations and the on again off again DOL fiduciary rule.”
“More importantly, is how the firms are reacting. Firms have significant impact on whether or not FINRA will take action. Obviously, statistically the odds of FINRA investigating you are not anywhere near the likelihood that FINRA will investigate you if your own firm reports you. And, remember, just like FINRA, the firms are ‘feeling the heat’ from powerful politicians pushing a consumer agenda in the financial industry.”
Don’t rely merely on your firm or compliance manager to be sure you are in compliance; educate yourself on compliance issues. Take advantage of your firm’s in-house continuing education. Sign up for continuing education programs, many are available online and some are free or inexpensive. (Go to www.FINRA.org and click on “education and training”).
Read FINRA and SEC press releases and consent decrees. Go towww.FINRA.org and click on “Newsroom,” then click on “News Releases.” Read the reprimands, fines and suspensions FINRA imposes on RRs and firms and publishes every month. These are easy to find. Go to www.FINRA.org and enter “disciplinary” in the search bar. That will lead you to a list of disciplinary actions FINRA historically took each month against firms and RRs. You can see in real time what RRs recently did that led to private and public reprimands, fines, suspensions and being barred from the industry. It takes five to 10 minutes to scan these and should be a once a month routine for you. Pay attention to periodicals focusing on RR’s work in the financial industry; read Bloomberg, WSJ and AdvisorHub. One small dose of AdvisorHub a day, keeps the FINRA regulators away.
Be inquisitive/inquire when you see an issue in Bloomberg, AdvisorHub, etc. Consult with your compliance department. Be client-centric; always focus on clients. If you take care of your clients, everything else takes care of itself. Be compliance-centric. When in doubt, obtain your compliance department’s approval before taking action.
The compliance department and your CSR/client associate should always be your “best friends.” Avoid getting cross wise or disrespecting the folks on the front line of inputting trades and transactions and in compliance. Always exhibit heartfelt concern for and appreciation of your compliance obligations. Often employees in compliance or CSRs cannot wait to see a successful RR get into trouble/have a great fall. These people are in position to be your “compliance radar” or report you to compliance/FINRA. Trouble doesn’t happen randomly. Compliance issues are predictable. If it’s predictable, it’s preventable.
Says Dunn, “My branch manager and C-Level industry sources tell me that firms are actively looking to take action against, and make an example, of RRs who violate the rules–even if they are big producers–to help them in their overall relationship with FINRA. This is every RR’s worse nightmare: firms being overly picky and meting out harsh punishments to the detriment of RRs, who are being offered up to FINRA as sacrificial lambs.”
“I know of one of the large foreign firm that had the same investigator investigate 13 RRs,” he says. “Those 13 RRs were fired on two consecutive days! Substantial evidence indicates the firm fired them so the firm could look tough and committed on compliance issues when it is audited by FINRA. It also makes it easier for the firm to retain your clients if the narrative is you’ve been fired for cause/violating FINRA rules.”
Dunn says, if you have to ask if it’s ok, it’s not ok. That little voice in the back of your head that says ‘should I do this?’ is an immediate big red stop sign. When you have even the slightest doubt, consult compliance; notify compliance in writing of what you are doing. Best practice is to wait on written approval from compliance.
If it’s not in writing, assume it never happened. The best outcome for you if it’s not in writing, is a “he said/he said,” “he said/she said,” á la the Kavanaugh Supreme Court nomination.
Your best defense is to know the compliance rules, slow down and pay attention to risks, and use compliance-centric approach, says Dunn. You can stick your head in the sand and simply listen to what your doctor tells you in your yearly check-up. Or, you can read, pay attention, and educate yourself for better health and well-being. The same is true in the financial industry. Don’t just listen to your compliance manager–take the initiative to educate yourself on compliance issues.
To connect with an employment lawyer at Rogge Dunn Group, click here.
Tom Drogan, an SVP at FINRA who is Deputy of FINRA Member Regulation, Sales Practice Department spoke in Dallas and discussed the “rollout” of FINRA’s plans and objectives on this issue.
Drogan said FINRA is not relying on one singular definition of a high-risk RR. Instead, he said FINRA will use both quantitative metrics and qualitative considerations to identify and monitor problem RRs.
Drogan warned that FINRA will even examine RRs who “may not be quantitatively high…in terms of the number of disclosures or customer complaints…in their history…[but who] have been working with individuals who perhaps were barred or have a high degree of customer complaints or disclosures, or worked at disciplined firms.” Drogan said FINRA is “going to spend some time focusing on these individuals…[and] trying to conduct more examinations of these individuals.”
Will FINRA’s Bite Match its Bark?
“Some of my clients have said we’ve heard these pronouncements in the past where FINRA says it will aggressively monitor and take action against RRs but then there always seems to be no noticeable change in FINRA’s enforcement efforts,” says employment law trial attorney Rogge Dunn. “While it remains to be seen just how aggressive FINRA will be, my impression from RRs and firms who have been investigated is that this time FINRA is devoting more resources and energy into disciplining high-risk RRs. Therefore, every RR needs to be prepared.”
Five Suggested Strategies to Help RRs Avoid Compliance Problems
- Clear communications with clients and your firm
- Identify risks and warnings to clients in plain English
- Confirm clients’ goals
- Make sure all your written communications are client-centric & compliance-centric
- Put all significant communications in writing
Guarding Your U-5 and Protecting Your Good Name
Your best defense is to know the compliance rules, slow down and pay attention to risks, and use compliance-centric approach, says Dunn.
Since FINRA will concentrate on repeat offenders, Dunn says it’s advisable that all RRs work hard to avoid the first blemish on their U-4/U-5. Once your record has been marked, then the chances that FINRA will investigate and/or monitor your activities increases significantly. Obviously, for those RRs who already have a bad mark on their record it is doubly important to fight a second bad mark on your U-4/U-5.
“Given FINRA’s pronouncements and actions, I am seeing more and more RRs insisting that frivolous or weak customer complaints go all the way to an arbitration award, where the RR can win, rather than having it on their record that the claim was settled and the customer was paid money,” says Dunn. “I am also seeing an increase in the number of expungements RRs are filing to remove negative entries on their U-4/U-5.”
What FINRA Insiders Are Saying
“FINRA enforcement attorneys I’ve talked to say RRs are in a new environment,” says Dunn. “I agree. Elizabeth Warren and other Senators have put substantial pressure on FINRA and the SEC, resulting in new regulations and the on again off again DOL fiduciary rule.”
“More importantly, is how the firms are reacting. Firms have significant impact on whether or not FINRA will take action. Obviously, statistically the odds of FINRA investigating you are not anywhere near the likelihood that FINRA will investigate you if your own firm reports you. And, remember, just like FINRA, the firms are ‘feeling the heat’ from powerful politicians pushing a consumer agenda in the financial industry.”
Educate Yourself
Don’t rely merely on your firm or compliance manager to be sure you are in compliance; educate yourself on compliance issues. Take advantage of your firm’s in-house continuing education. Sign up for continuing education programs, many are available online and some are free or inexpensive. (Go to www.FINRA.org and click on “education and training”).
Read FINRA and SEC press releases and consent decrees. Go towww.FINRA.org and click on “Newsroom,” then click on “News Releases.” Read the reprimands, fines and suspensions FINRA imposes on RRs and firms and publishes every month. These are easy to find. Go to www.FINRA.org and enter “disciplinary” in the search bar. That will lead you to a list of disciplinary actions FINRA historically took each month against firms and RRs. You can see in real time what RRs recently did that led to private and public reprimands, fines, suspensions and being barred from the industry. It takes five to 10 minutes to scan these and should be a once a month routine for you. Pay attention to periodicals focusing on RR’s work in the financial industry; read Bloomberg, WSJ and AdvisorHub. One small dose of AdvisorHub a day, keeps the FINRA regulators away.
Attitude
Be inquisitive/inquire when you see an issue in Bloomberg, AdvisorHub, etc. Consult with your compliance department. Be client-centric; always focus on clients. If you take care of your clients, everything else takes care of itself. Be compliance-centric. When in doubt, obtain your compliance department’s approval before taking action.
Your New Best Friends
The compliance department and your CSR/client associate should always be your “best friends.” Avoid getting cross wise or disrespecting the folks on the front line of inputting trades and transactions and in compliance. Always exhibit heartfelt concern for and appreciation of your compliance obligations. Often employees in compliance or CSRs cannot wait to see a successful RR get into trouble/have a great fall. These people are in position to be your “compliance radar” or report you to compliance/FINRA. Trouble doesn’t happen randomly. Compliance issues are predictable. If it’s predictable, it’s preventable.
Disturbing Trend: Firms Incentive to Sacrifice RRs
Says Dunn, “My branch manager and C-Level industry sources tell me that firms are actively looking to take action against, and make an example, of RRs who violate the rules–even if they are big producers–to help them in their overall relationship with FINRA. This is every RR’s worse nightmare: firms being overly picky and meting out harsh punishments to the detriment of RRs, who are being offered up to FINRA as sacrificial lambs.”
“I know of one of the large foreign firm that had the same investigator investigate 13 RRs,” he says. “Those 13 RRs were fired on two consecutive days! Substantial evidence indicates the firm fired them so the firm could look tough and committed on compliance issues when it is audited by FINRA. It also makes it easier for the firm to retain your clients if the narrative is you’ve been fired for cause/violating FINRA rules.”
It’s so Easy to Protect Yourself: Just Stop and Think
Dunn says, if you have to ask if it’s ok, it’s not ok. That little voice in the back of your head that says ‘should I do this?’ is an immediate big red stop sign. When you have even the slightest doubt, consult compliance; notify compliance in writing of what you are doing. Best practice is to wait on written approval from compliance.
Reminder: Put it in Writing
If it’s not in writing, assume it never happened. The best outcome for you if it’s not in writing, is a “he said/he said,” “he said/she said,” á la the Kavanaugh Supreme Court nomination.
Your Best Defense
Your best defense is to know the compliance rules, slow down and pay attention to risks, and use compliance-centric approach, says Dunn. You can stick your head in the sand and simply listen to what your doctor tells you in your yearly check-up. Or, you can read, pay attention, and educate yourself for better health and well-being. The same is true in the financial industry. Don’t just listen to your compliance manager–take the initiative to educate yourself on compliance issues.
To connect with an employment lawyer at Rogge Dunn Group, click here.
