Broker Misconduct

SEC Wants Comments About FINRA’s Proposed Rules About Broker-Dealer Supervision

Published on: October 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission wants comments on a proposed amendment to the Financial Industry Regulatory Authority’s broker-deal supervision rules. The latter wants to change the rules by consolidating some of them, including NASD Rule 3010 and NASD Rule 3012 into its proposed Rules 3110 and 3120 that have to do with supervisory controls and the supervision of supervisory jurisdictions’ office and branch offices. The proposed rule change would eliminate NYSE Rule 342, which is related to supervision, approval, and controls, Rule 401 about business conduct, and Rule 354 regarding control persons, Rule 351e about reporting requirements. The consolidation is taking place because the SEC says some of the rules are duplicative.

FINRA also wants to eliminate proposed Rule 3110.03, which is a provision about the supervision and control of registered principals at one-person OSJs by a designated senior principal on the site. The SRO also is proposing to amend rule 3110.05 so that an Investment Banking and Securities Business member doesn’t have to perform detailed reviews of transaction if the member is using risk-based review system that is designed in a way so it can focus on areas that have the greatest risks of violation.

Meantime, proposed Rule 3110(b)(6)(D) will be changed so that it is clear that the rule doesn’t establish a strict liability to identify and get rid of all conflicts as they relate to an associated person that is supervised by supervisory personnel. There will have to be procedures to make sure that conflicts of interest don’t compromise the supervisory system.

SEC Officers Guidance on Liability and Compliance for Brokerage Firms

Published on: October 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has published answers to frequently asked questions as guidance about liability that may come out of the Exchange Act related to the responsibilities of chief compliance officers and other legal and compliance staff at broker-dealers. The advisory was issued so firms could consider which circumstances and facts may result in grounds for supervisory liability.

In the FAQ, the SEC notes that for purposes of the Exchange Act Sections 15(b)(4) and (6), a person is a supervisor depending on the specifics of a case and whether he/she had the required ability, responsibility, or authority to impact the behavior of the employee(s) whose conduct is in question. There are, however, legal personnel and compliance staff who can assume a key role without assuming such supervision.

The Commission said that brokerage firms are responsible for establishing compliance programs that make sure compliance with regulations and laws occurs. Firms may want to include processes to identify incidents of noncompliance, a robust monitoring system, and procedures delineating who is tasked with what responsibility and/or supervisory role. The regulator says that compliance and legal staff do play a key part in broker-dealers efforts to create and put into effect a compliance system that works.

FINRA Broker Bonus Plan Would Require Brokers to Disclose Their Recruitment Compensation

Published on: September 22, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority’s Board of Governors has approved a proposal mandating that brokerage firms disclose how much recruitment compensation they were paid to move to another firm. The rule applies to up-front and back-end bonuses, signing bonuses, accelerated payouts, loans, and transition assistance of $100,000 or greater, as well as future payments upon performance criteria.

While the $100,000 threshold is not going to be relevant for many independent representatives, since the majority of their packages don’t reach this benchmark, this could impact independent brokerage firms with higher forgivable notes of up to 40% and may hurt their recruitment.

Now, it is up to the Securities and Exchange Commission to look at the plan and either give its approval or present the proposal to the public for comment.

Broker Gets 1-Year Suspension From FINRA Over Inadequate Due Diligence and Supervision

Published on: September 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Gary Mitchell Spitz, a broker and a registered principal of an Iowa-based brokerage firm, is suspended from associating with any FINRA member for a year and must pay a $5,000 fine. The SRO says that Spitz did not perform proper due diligence of an entity—a Reg D, Rule 506 private offering of up to $2 million—even though this action is mandated by his firm’s written supervisory procedures.

FINRA’s finding state that because of Spitz’s inadequate review, he did not make sure that the offering memorandum had audited financials of the issuer or make sure that these financials were accessible to non-accredited investors prior to a sale—also, a Regulation D requirement. The SRO says that Spitz let certain registered representatives, who were associated with the firm, to sell the entity’s shares and turn in offering documents that customers had executed directly to that entity. This meant that Spitz did not get copies of the documents or perform a suitable review of the transactions before they were executed. Certain customers even invested in the entity prior to Spitz getting the subscription documents from these representatives.

Spitz also is accused of not acting to make sure that the representatives made reasonable attempts to get information about the financial status, risk tolerance, and investment goals of customers. FINRA says he did not retain and review these representatives’ email correspondence and that they worked for a company that was the entity’s manager. Spitz let these representatives use the company’s email address to dialogue with customers and prospective clients but that the firm’s server did not capture the correspondence.

FINRA Fines Santander Investment Securities Inc. $350,000 For Not Supervising Foreign Fund Offerings

Published on: September 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining Santander Investment Securities Inc. $350,000 over allegations that the brokerage firm failed to adequately supervise foreign fund offerings. The SRO says that the broker-dealer did not have a system in place to properly oversee communications between brokers, a registered firm principal, non-registered employees, and investors about the purchase of non-US funds.

FINRA found that the principal had the job of determining interest from institutional investors in the US for funds overseen by a fund manager who was affiliated with the firm but was not regulated by SRO or based in the US. The principal and those mentioned above contacted investors about buying non-US funds in the future.

FINRA says that Santander Investment Securities should have had a registered individual supervising the registered personnel in relation to these communications. It also found that these interactions took place at presentations where sales materials were given out to prospective investors. However, notes the SRO, the brokerage firm did not appoint an individual registered with the firm to make sure procedures and policies were being enforced at these gatherings, nor did it apply these protocols with the public or look at and approve the fund presentations and other materials. Copies of the material that was distributed were not kept, as required. FINRA says that the materials included claims that were exaggerated.

SIFMA Wants FINRA to Take Tougher Actions Against Brokers that Don’t Repay Promissory Notes

Published on: January 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities Industry and Financial Markets Association wants the Financial Industry Regulatory Authority Inc. to prevent brokers from being able to plead poverty to escape arbitration payment orders. The promissory notes provide money for retention and recruiting incentives, and as long as a broker agrees to stay with a financial firm for an agreed up on time, they are structured as forgivable notes.

Many brokers obtained such deals following the economic crisis. Since then, financial firms have gotten more active about submitting arbitration claims to get brokers to pay them back. In 2011 alone, 778 promissory note cases were filed. 1,152 such cases were filed the year before. In most cases, it is the financial firm that ends up winning.

When a broker won’t pay an arbitration award, FINRA files an action against him/her that could lead to suspension. However, if the broker demonstrates that he/she can’t pay it, then suspension may be avoided.

Many SIFMA members believe that FINRA should take more aggressive measures to get brokers to pay up. The trade group wants the SRO to prevent brokers from being able to claim that they cannot pay when slapped with a case from an industry claimant.
Such a move would likely mean that if a broker were unable to repay a promissory note, he/she would likely be suspended or have to file for bankruptcy. SIFMA also wants enhanced disclosure of awards that brokers don’t pay, because it believes that the consequence of having this failure made public is incentive for the broker to make good on the matter.

In a letter to FINRA that it sent last November, SIFMA voiced members’ concerns that the inability-to-pay defense was being abused and that not only was this resulting in compliance and regulatory risks, but also it was creating an unnecessary risk to investors. SIFMA claimed that FINRA Rule 9554 discriminates against industry claimants, who aren’t given the same protections as customer claimants, who don’t have to contend with the inability-to-pay defense from a broker. The trade organization noted that the Securities and Exchange Commission obligates FINRA to take appropriate disciplinary action against defendants that use this defense in bad faith.

SIFMA, Finra clash over deadbeat brokers, Investment News, January 15, 2012

FINRA Rules

Securities Industry and Financial Markets Association

More Blog Posts:
SIFMA Offers Up Best Practices for How Financial Firms Can Interact with Expert Networks, Institutional Investor Securities Blog, October 16, 2011

SEC and SIFMA Divided Over Whether Merrill Lynch Can Be Held Liable for Alleged ARS Market Manipulation, Institutional Investor Securities Blog, July 29, 2011

Micah S. Green, Expected New CEO of Largest Securities Industry Group, Resigns During Scandal, Stockbroker Fraud Blog, May 18, 2007