Advisor Alert — FINRA Imposes Stricter Obligations on Member Firms Concerning Recidivist Brokers
On March 10, 2021, FINRA issued Regulatory Notice 21-09, adopting new rules pertaining to brokers with significant histories of misconduct, as well as the brokerage firms at which they are employed. Specifically, there are several forthcoming amendments to various FINRA rules, having various effective dates spanning the second and third quarters of 2021.
These changes have been years in the making, with FINRA repeatedly expressing concern about member firms hiring high-risk, recidivist brokers with, for example, a history of customer complaints. FINRA’s concerns were highlighted in 2013 by its “High Risk Broker Initiative” and through various pronouncements made in more recent Regulatory and Examination Priorities Letters. The new rules represent a next, more aggressive step, one which may well directly impact hiring practices by various brokerage firms.
While there are many detailed changes present in the new rules, the most notable points are as follows:
Activities and Supervision – Effective April 15, 2021. When a disciplinary matter is appealed to the National Adjudicatory Council (NAC) or subject to NAC review, a hearing officer may restrict a respondent member firm’s or respondent associated person’s activities, and require the employing firm to adopt heightened supervisory measures. In turn, respondents could seek expedited reviews of orders imposing such conditions or restrictions. FINRA staff may bring an expedited proceeding against a respondent that fails to comply. This change amends the FINRA Rule 9200 series (Disciplinary Proceedings), the Rule 9300 series (Review of Disciplinary Proceedings by National Adjudicatory Council and FINRA Board; Application for SEC Review), and Rule 9556 (Failure to Comply with Temporary and Permanent Cease and Desist Orders, or Orders that Impose Conditions or Restrictions).
Taping Firm Disclosure – Effective May 1, 2021. FINRA BrokerCheck would disclose the status of a member broker-dealer that is categorized as a so-called “taping firm” under Rule 3170 (Taping Rule), rather than FINRA disclosing this information only in response to a telephonic inquiry. The Taping Rule is designed to ensure that a broker-dealer firm—with a certain number of affiliated stockbrokers who were previously employed by disciplined (or, expelled) brokerage firms—has specified supervisory procedures in place including recording all telephone conversations between the firm’s registered persons and both existing and potential customers. This change amends FINRA Rule 8312 (FINRA BrokerCheck Disclosure).
Heightened Supervision – Effective June 1, 2021. Member firms seeking to continue associating with “statutorily disqualified” associated persons must impose interim heightened supervisory measures while FINRA reviews a statutory disqualification eligibility request. Under the Securities Exchange Act of 1934, brokers can be presumptively excluded or disqualified from engaging in the securities industry based on certain types of misconduct. This change amends FINRA Rule 9522 (Initiation of Eligibility Proceeding; Member Regulation Consideration; and Requirements for an Interim Plan of Heightened Supervision).
Business Expansions Involving Brokers with a History – Effective September 1, 2021. Member firms must provide FINRA’s Department of Member Regulation, through the Membership Application Group, with a written request for a materiality consultation and approval of a continuing membership application (CMA), if required by FINRA, when a natural person seeking to become an owner, control person, principal, or registered person of the member broker-dealer has, in the prior five years, one or more “final criminal matters” or two or more “specified risk events.” A final criminal matter is a criminal matter that resulted in a conviction or a plea of guilty or no contest. A specified risk event includes various investment-related civil or regulatory actions in which a broker has to pay more than $15,000 or is sanctioned via a bar, expulsion, recission, revocation, or suspension. This change amends the FINRA Rule 1000 series (Member Application and Associated Person Registration).
The attorneys at Giarrusso Law Group LLC have considerable experience with issues unique to the financial services industry, including SEC, FINRA, and state-level rules and regulatory developments. If you have a question regarding this recent announcement or any other regulatory matter, you may contact us at (201) 771-1115 or info@gialawgroup.com for a no-cost, confidential consultation.