FINRA is Going Rogue…Again

From Ulmer’s Broker Dealer Law Corner Blog
By Alan Wolper

I read an article this week bemoaning the fact that “rogue brokers” – a term that is commonly used but steadfastly undefined – apparently remain rampant in the securities industry. Anyone that has read FINRA’s 2017 Exam Priorities Letter knows that this is one of the issues on which FINRA intends to focus its regulatory attention this year (although FINRA tactfully calls them “high-risk and recidivist brokers”).  Indeed, it was the very first issue describe in the letter, as FINRA articulated its three-pronged attack to address it:

  • The recent creation of “a dedicated examination unit to identify and examine brokers who may pose a high risk to investors.” This unit “will rigorously review these brokers’ interactions with customers,” focusing on suitability, OBAs, PSTs, commissions and fees.
  • A promise to review firms’ “supervisory procedures for hiring or retaining statutorily disqualified and recidivist brokers.” To that end, FINRA will evaluate how well BDs are meeting the requirement in Conduct Rule 3110(e), announced in Reg Notice 15-05 (which I blogged about here), within 30 days after a U-4 is filed to “verify the accuracy and completeness of the information” in the U-4 by, “at a minimum,” conducting “a search of reasonably available public records.”
  • The continued evaluation of firms’ branch office inspection programs and supervisory systems for branch and non-branch office locations.

I don’t have an issue with any of these initiatives (although I would certainly quibble with the notion of characterizing them as “initiatives,” as that suggests they are something new; FINRA (or NASD) have supposedly focused on these same sorts of things before). They are sensible, and no one could reasonably argue that paying particular attention to reps who have already demonstrated a proclivity for misconduct is time ill spent.  But, what does bother me is this notion that somehow, all of this happened in some clandestine manner, hidden from FINRA which, like Captain Renault in Casablanca, is now shocked – shocked – to learn that there are registered reps out there with multiple disclosures on their U-4s.  The simple fact is that FINRA has always known it, but has never bothered to do anything about it.

Indulge me for a second as I travel back in time: I joined NASD in 1993 as an attorney in its Enforcement Department, after having spent ten years in private practice defending BDs.  When I first got there, I had fun looking up my former clients on CRD, and it became abundantly clear that some of them had quite the regulatory history.  Yet, there they were, still registered, still selling and earning.  Nothing changed a few years later when I became the Director of NASD’s Atlanta office.  Every examiner in my office District knew exactly the firms that had reputations for hiring reps with “dings” on their records, but there was nothing to be done about it, apart from conducting very thorough exams.

Over the years, FINRA has attempted every once in a while to pass some rule designed to reduce recidivism, but has never gotten very far. Remember this golden oldie from 2003, when FINRA proposed a rule that would require heightened supervision on reps with more than a specified number of customer complaints, etc.?  Well, it died on the vine.  But the point is, 14 years ago, NASD was abundantly aware of the fact that there were reps out there with “long regulatory record[s], . . . a history of customer complaints, disciplinary actions involving customer harm, or adverse arbitrations,” and that such reps presented “higher risk[s]” to investors. For FINRA now to suggest that this is a new problem, or that the industry is somehow at fault, or that FINRA itself is powerless to address it, is just wrong.

Look, I am not advocating that FINRA create a rule that makes firms unable to hire individuals with disclosures on their U-4s. Many of my clients over the years made stupid mistakes that resulted in some disciplinary action, but they learned from their errors and are now solid, productive reps providing quality advice to their investor clients, and representing no risks to anyone.  I mean, the core philosophy behind FINRA’s Enforcement process is that it is remedial, not punitive.  Barring people with “dings” from working in the industry would be senseless overkill and clearly punitive.  So, unless and until FINRA passes a rule against hiring a “recidivist” with some real teeth in it – which doesn’t look like it will ever happen – it should stop pointing fingers at its member firms, and consider that it has no one to blame for this situation but itself.