In its annual regulatory and examination priorities letter released Thursday, FINRA said in 2014 it will put a new focus on brokers who leave firms that have been “severely disciplined by FINRA.” The regulator will also be cracking down on firms that hire high-risk advisors.
The annual letter from the industry's self-regulatory agency addressed many of the same issues as years past—suitability, conflicts of interest, and complex products such as private placements. But FINRA outlined a new concern: recidivist brokers. The watchdog plans to expand its high-risk broker program and create a dedicated enforcement team to bring those cases.
With its heightened focus on brokers who move from troubled firms, FINRA has developed a “Broker Migration Model,” which the regulator says identifies and monitors advisors who move from an expelled firm or one involved in a disciplinary action. FINRA is also closely monitoring the firms that hire these advisors.
“I don’t think it’s fair to pick out someone just because they worked at a firm that was closed down, unless they were the reason for the closing down,” said Richard Roth, founder of The Roth Law Firm in New York. “I shouldn’t have any kind of negative repercussion just because I chose an employer that went under due to no fault of my own.”
As a result, advisors have to be even more careful about the firms they choose to move to, Roth said. Before moving, advisors should talk to everyone they know about the firm, go onto FINRA’s BrokerCheck website and look at the firm’s regulatory history, and Google the firm’s name to see what issues come up.
FINRA’s not telling firms that they can’t hire a broker who moves from a troubled firm, but rather it’s a warning that firms better make sure they know their brokers before they walk in the door, said Mark Knoll, an attorney with Bressler Amery & Ross’s securities law practice group.
“You don’t necessarily have to put that person on heightened supervision when they walk in the door, but because they were at a firm that has this particular history, FINRA’s telling the new firm that you’re kind of on notice,” Knoll said.
Daniel Nathan, a partner with Morrison & Foerster’s securities litigation, enforcement and white-collar defense group, said it looks a lot like profiling, making the broker’s life more difficult without any concrete reason to do it.
“You can damn somebody by association,” Nathan said. “They’ve got to be very careful not to tar brokers with the same brush as a firm that might have exhibited certain problematic behaviors.”
But some advisors—those with a pattern of complaints or disclosures—should be watched more closely, FINRA said. Congress has been putting pressure on FINRA to crack down on problematic brokers who remain in the industry, Nathan said. Problematic brokers are not those who have one or two disclosures on their record, but rather those who have amassed a record of complaints at several places, he added.
Firms have become more stringent in their hiring of advisors who have dings in their regulatory history, Roth said.
“If you hire a high-risk broker, FINRA’s going to put you in the target as well as the broker supervisor in the target,” Roth said.
For firms that do hire a high-risk broker, FINRA start asking questions, such as why they hired the broker, are they aware of his regulatory history, and are they going to put the advisor on heightened supervision, Roth said. They may even do additional audits of the firm and that broker.
Firms have to be ready to answer questions to FINRA about what type of questions they asked the broker and what type of due diligence they conducted before bringing them on, said Knoll.
To prepare for the change, advisors should pull their CRD and review it, Knoll said. They should also pull out their U4 questionnaire and make sure every disclosure is up to date, including any complaints, regulatory action, civil litigations, lien filings, and financial disclosures.
“This is clearly going to cause firms to ask more questions during the onboarding process,” Knoll said. “If you can explain what the facts and circumstances were for each of these disclosures, you’re going to be in a much better position.”
Reps shouldn’t try to fight these disclosures or sweep issues under the rug, so to speak, Knoll added. Instead,
“It’s the open kimono approach,” he said. “You have a license in your back pocket that gives you the right to go out and conduct your business and earn a decent living, but at the same time, that license carries with it a disclosure obligation that is more onerous than almost any other professional licensing scheme in the country.
“Trying to whitewash or sweep things under the rug is only going to come back to either bite you in the butt with your new firm or with the regulator looking at the firm’s supervision of your activities.”