Justice Brandeis once famously said that sunlight is the best disinfectant. Perhaps, but in FINRA’s purview, settlements might be better. Along these lines, FINRA recently announced that it has reached final settlements in its nearly four-year initiative to obtain restitution from member firms that allegedly failed to waive mutual fund sales charges. These firms also allegedly failed to properly supervise the sale of mutual funds that offer sales charge waivers. The settlements were substantial: 56 member firms agreed to pay $89 million in restitution for 110,000 charitable and retirement accounts.
Sandra Grannum
Articles by Sandra Grannum:
An Imperfect Storm(s): FINRA Bars Compliance Personnel for Falsifying Branch Audit Data
It often is said that “it’s not the crime, but the cover-up” that is the most damaging to someone alleged to have committed misconduct. In a recent FINRA enforcement action, however, the cover-up was the crime. On July 3, 2019, FINRA barred Vincent J. Storms, a now-former Raymond James & Associates (RJA) compliance associate, for particularly egregious falsifications of RJA’s branch audit data that violated FINRA Rules 2010 and 4511.
At RJA, Mr. Storms was responsible for auditing branch offices and performing follow-up work resulting from the audits. As part of the audits, RJA sent an email to each registered representative requesting that they complete a questionnaire that gathered information such as whether the representative had any undisclosed outside business activities or undisclosed securities accounts at other broker-dealers, and whether the branch used third-party vendors to store data.
Alert: FINRA’s 529 Plan Share Class Initiative to Self-Report
On January 28, 2019, FINRA released its Regulatory Notice 19-04 announcing its 529 plan self-reporting initiative. This initiative is part of FINRA efforts to have broker-dealers promptly remedy potential supervisory and suitability violations related to recommendations of share classes for 529 plans. Continue reading “Alert: FINRA’s 529 Plan Share Class Initiative to Self-Report”
A Summary of FINRA’s 2018 Report on Examination Findings
Last week, FINRA issued its 2018 “Report on FINRA Examination Findings.” This report tracks FINRA’s 2018 Priorities letter, which this blog has previously covered. Putting its member firms on notice, FINRA advised that it issued the report as another resource for firms to “strengthen their compliance programs and supervisory controls.” Not surprisingly, the first highlighted observation is “Suitability for Retail Customers.” Specifically, FINRA reported that:
Continue reading “A Summary of FINRA’s 2018 Report on Examination Findings”
Third Circuit Affirms Right to FINRA Arbitration, Widens Circuit Split
The U.S. Court of Appeals for the Third Circuit recently ruled that a broker cannot avoid FINRA arbitration with a customer through contractual forum selection clause that fails to specifically mention arbitration (Reading Health v. JP Morgan, No. 16-4234 (3d Cir. Aug. 7, 2018)). The court’s opinion denying the company’s appeal widens an existing circuit split on the issue of contractual forum selection clauses superseding FINRA’s mandatory arbitration rules.
Under FINRA Rules 12200 and 13200, disputes arising between a FINRA member and its associated persons or customers must be arbitrated through the FINRA arbitration process. In the Third Circuit case, the customer had filed a statement of claim with FINRA in relation to various auction rate securities (ARS) offerings the company had underwritten. The broker refused to arbitrate, and the customer filed in the Eastern District of Pennsylvania seeking to compel arbitration. The customer won at the district court level, and the broker appealed based on a forum selection clause in its broker-dealer agreements that stated:
Continue reading “Third Circuit Affirms Right to FINRA Arbitration, Widens Circuit Split”
Bye-Bye Bureaucracy, Hello Enforcement: FINRA Shakes Up the Structure of its Department of Enforcement
It was once said that “bureaucracy defends the status quo long past the time when the quo has lost its status.” FINRA, apparently a proponent of this idea, recently completed an overhaul of its Department of Enforcement’s structure in an attempt to create a “unified enforcement function.” Specifically, Susan Schroeder, FINRA’s head of enforcement, will head a single enforcement team charged with making decisions on investigations and penalties.
Prior to this consolidation, enforcement was split into two units. One was tasked with handling disciplinary matters concerning trading, and a second unit handled cases referred from FINRA’s other divisions, such as the Office of Fraud Detection.
The ultimate goal of this consolidation is “to facilitate more consistent decision-making and outcomes,” as well as “to better target developing issues that can harm investors and market integrity, and ensure a uniform approach to charging and sanctions.” Additionally, independent commentators believe that FINRA’s new enforcement structure might make investigations shorter and increase transparency.
To savvy observers this consolidation will not come as a surprise. It is the result of FINRA 360, “FINRA’s ongoing comprehensive and improvement initiative” announced July 2017. Consolidation of enforcement functions was listed, among others, as a way to make FINRA a “more effective, efficient regulator.” Other FINRA 360 priorities include: Reporting on FINRA examination findings, reviewing engagement initiatives, and retrospective rule review.
It is unclear whether FINRA’s consolidation will achieve its goals. FINRA’s efforts, however, serve as a welcome sign to firms and commentators, as FINRA appears genuinely interested in improving its overall efficacy and efficiency.
Make Senior Investing Safe Again? President Trump Signs Into Law the Senior Safe Act in an Attempt to Curb Financial Abuse of Seniors
On May 24, 2018, President Trump signed into law the Senior Safe Act, which is aimed at curbing elder financial abuse. The Senior Safe Act is the latest effort to protect senior investors, as both FINRA and the SEC included protecting senior investors among their 2018 priorities. This blog has previously covered, at length, the SEC and FINRA 2018 exam priorities. Elder protection was also one of the SEC’s 2017 priorities and has been a FINRA priority since 2016.
FINRA Moves to Amend the Suitability Standard in Lockstep with the SEC’s Efforts
“There is a Chinese curse which says ‘May he live in interesting times.’ Like it or not, we live in interesting times.” (Robert F. Kennedy – June 6, 1966, Speech at University of Cape Town)
May 7, 2018, has come and gone and we have not yet seen a mandate from the Fifth Circuit Court of Appeals in the Chamber of Commerce of United States of Am. v. United States Dep’t of Labor, 885 F.3d 360 (5th Cir. 2018) litigation, which is the final step necessary to effectuate that court’s order vacating the DOL Fiduciary Duty Rule. Presumably that mandate is imminent; however, we do not know for sure. We do know, however, that the DOL will not be filing a motion for rehearing to the Fifth Circuit on its decision, as that deadline has passed. We assume there will not be a DOL writ of certiorari to the United States Supreme Court seeking to challenge the Fifth Circuit Court’s opinion, but we do not actually know that either. Continue reading “FINRA Moves to Amend the Suitability Standard in Lockstep with the SEC’s Efforts”
Bye-Bye Fiduciary Rule?
Should you say goodbye to the Fiduciary Rule? Maybe, but not just yet. The DOL has until the end of April to decide whether to let the 5th Circuit decision vacating the Fiduciary Rule stand or try to get it over-turned. If they do nothing, the ruling becomes effective May 7, and bye-bye Fiduciary Rule – the regulation re-defining fiduciary investment advice for plans and IRAs and the related prohibited transaction exemptions.
Many pundits say this is what will happen. But it’s possible that the DOL will either ask the court to reverse itself – this would mean the 15 judge panel agreeing to re-hear and re-decide the case – or try to get the Supreme Court (SCOTUS) to accept an appeal. SCOTUS doesn’t have to do that, so those who think the DOL won’t let this go are betting on the re-hearing request. While requests for rehearing are rarely granted, in this case there might be a better chance. The decision vacating the Fiduciary Rule was a split decision, with Chief Judge Carl E. Stewart dissenting in favor of the Rule.
SEC’s 2018 Exam Priorities – Worth the Wait
The SEC’s Office of Compliance Inspections and Examinations (OCIE) released its 2018 National Exam Program Examination Priorities on February 7, 2018 (“2018 Priorities Letter”). While issued later than in years past and almost a month to the day after the publication of the priorities letter from the Financial Industry Regulatory Authority (FINRA), OCIE deserves credit for the increased transparency and guidance provided in the 2018 Priorities Letter. By way of perspective, OCIE’s sixth publication of its examination priorities more than doubled the amount of information provided in last year’s edition. This improved transparency is consistent with the public statements of OCIE’s Director. Despite the greater detail, there appears to be one glaring omission: OCIE does not discuss how the anticipated rulemaking by the Commission regarding the development of a fiduciary standard may impact its priorities. However, upon further consideration and recalling that OCIE’s primary mission is to conduct examinations to assess compliance with the current securities laws, we realize it would have been premature for OCIE to discuss views on some yet-to-be formulated SEC fiduciary standard. That said, OCIE is clearly prioritizing the protection of retail investors even more than in years past, which is consistent with the SEC Chairman’s public statements about prioritizing the protection of “Main Street” investors. While the SEC Chairman has made these issues a “Main” priority, the SEC’s heightened focus regarding retail and retirement investors has been strengthening significantly since the Retirement-Targeted Industry Reviews and Examinations (ReTIRE) Initiative announced a few years ago and through the SEC’s announcement this past autumn of the Retail Strategy Task Force. Thus, OCIE leads into the 2018 Priorities Letter in the second and third sentences by opening with: “…we will continue to prioritize our commitment to protect retail investors, including seniors and those saving for retirement. We will especially be looking closely at products and services offered to retail investors, as well as the disclosures they receive about those investments.” This focus is similar to the focuses emphasized by FINRA in its recent priorities letter. Continue reading “SEC’s 2018 Exam Priorities – Worth the Wait”