In its latest effort to authenticate its broker records database, the Financial Industry Regulatory Authority is cracking down on firms who have brokers with undisclosed liens and judgments.
In individualized notifications sent to a handful of firms through the central registration depository (CRD) system earlier this week, FINRA flagged cases where a firms’ brokers had liens and judgments that were never reported. At one independent broker/dealer, FINRA was seeking information on 3,400 separate instances of unreported Form U4 issues within 30 days. One case was from 1986 for an $80 lien, according to a source familiar with the matter.
Two other firms also received notifications this week regarding their brokers’ Form U4s related to credit issues and unpaid judgments, some of which go back over 10 years, according to one Southwest-based compliance and regulatory consulting firm speaking anonymously.
“The concept makes sense, but there’s got to be a limitation,” said Richard Roth, founder of the Roth Law Firm, which specializes in litigating securities arbitration and regulatory enforcement actions. “That’s the problem; there’s no time or scope limitations—if it’s customer complaint-related, go back six years.”
Roth calls the initiative “a shake-up and a shake-down.”
“They shake-up the firms and advisors because they have to hire a lawyer and respond to this, and it’s a shake-down because it’s just creating work,” he said.
The individualized notices to firms stem from FINRA’s regulatory notice 15-05 released last Friday, which said the Securities and Exchange Commission had approved updated rules around background checks on brokers and new provisions that required firms to verify information on brokers’ Form U4.
Rule 3110 requires firms have written policies and procedures in place to verify the accuracy and completeness of information contained in a broker’s Form U4 within 30 days of the filing with the regulator. Additionally, firms must perform background checks on brokers that include, at a minimum, criminal records, bankruptcy records, judgments and liens.
FINRA expects to complete the background checks by August 2015. Under a temporary refund program, firms could potentially avoid paying up to $1,500 for each of these old, non-reported items if the judgment or lien at issue was under $5,000 and issued before August 2013 or was satisfied within 30 days after the broker learned of the judgment or lien.
“FINRA’s just at a point now where they’re saying ‘we’re going to require firms to report them all,' whether or not they make sense or serve the investing public,” said Don Runkle, a compliance consultant with Edgerton & Weaver.
“I believe there will be opportunities for firms to make their case that some of these late filings do meet the exemptions outlined in the regulatory notice, in addition to being given some consideration for additional waivers depending on the facts and circumstances of the matter being reported. For example, I would argue that an issue that took place while a rep was at a prior firm should not subject our firm to a late filing fee."
“It reaches a point where it’s just onerous; it creates such additional work for FINRA’s members,” Roth said, especially when it comes to larger firms.
When a firm receives a notification like this, it triggers an expensive process, including the legal department’s involvement, compliance team and possible outside legal services, as well communications between the home office, branch managers and the brokers themselves.
“They have to hand it out to their branches; the branches have to hand it out to the brokers; and then the brokers must to run around to find a lawyer—and you have 30 days,” Roth said.
Some people don’t always know if they have a judgment or lien pending against them, so this could potentially be the first time some of these brokers are hearing about these issues.
“Before anyone writes a check for $10,000 to settle an outstanding lien found through FINRA’s initiative, they have to find the local county where the lien is filed, find the local file—good luck finding files from the 90s—and see if it’s legit,” Roth said.
And the notices sent to firms this week might be just be a tip of the iceberg, as FINRA said in its regulatory filing that the temporary program would be ongoing through August. “I don’t think FINRA is sitting here at the end of March saying that’s all the notifications we’re sending out. This will be trickling down, and they just started with the biggest ones first,” Runkle said.
