On Wednesday, while on vacation, an advisor got a call from his broker-dealer’s compliance department. It was from a young woman who was fairly new to the compliance team. She accused him of altering client-signed documents and cutting and pasting a client signature. In essence, the financial advisor was being accused of fraud.
The advisor got on a plane home Thursday, very concerned for his future and with good reason, as it turns out.
On Friday, after reaching out to contacts in the securities industry and receiving a referral, he engaged Michelle Atlas at AdvisorLaw. Michelle spent 10 years on compliance teams at broker-dealers and now works for individual advisors, helping them protect and defend their livelihood.
Together, over the next week, Michelle and the advisor crafted carefully-worded responses to multiple emails from compliance. Ultimately, the compliance supervisor became involved. Michelle coached the advisor on how to respond to specific questions when he was on the phone with compliance.
In the end, the following Tuesday (13 days later), the advisor was required to affirm in writing his understanding of the firm policies. The event was over—no heightened supervision, no letter of caution, no further actions by the firm.
This could have gone very differently. The compliance supervisor confided that, earlier in the year, the firm had ultimately terminated another advisor for a similar instance. Once a U5 termination is filed, FINRA often opens a regulatory inquiry, which can then lead to a FINRA enforcement action and may ultimately end in sanctions, including a fine and a suspension or even a bar from the securities industry.
How you respond to what may seem like an innocent compliance question regarding any of your sales practices or document processing can be the difference between a few hours of inconvenience and the destruction of your hard-earned business. It only makes sense to ask a professional for help.
Defense attorneys often lament that they spend most of their time trying to reposition and reframe statements that a client has made in response to an initial question. When a person is taken off guard, because he cannot believe he is being accused of some wrongdoing, he is not at his best.
Thankfully, this financial advisor had the wisdom to reach out to an experienced professional. Now, for him, it is business as usual.
When you click on the “About FINRA” hyperlink located at the very top of FINRA’s website, the first sentence you will see is:
“FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of broker-dealers.”
In fact, you will see the words “investor protection” countless times on FINRA’s website and throughout its regulatory notices and guides. The names below are changed but the very true case you are about to read really begs the question of to what, exactly, FINRA is “dedicated.”
AdvisorLaw has been retained by previously-registered broker, Mr. FA. In 2012, while he was finishing his undergraduate coursework, FA began his securities industry career with broker-dealer, The Firm, in California. FA was registered with The Firm for less than one year in 2013, as he had plans to attend graduate school in Massachusetts for a Master’s of Business Administration, right after completing his undergraduate degree.
In 2012, an acquaintance of FA’s, Mr. X, reached out for some assistance with his portfolio. At the time, Mr. X had a self-managed account at another firm, where he was engaged in penny stock trading. FA made some general recommendations, but Mr. X was hesitant.
In September of 2013, Mr. X reached out again. After several conversations and a proposed financial plan, Mr. X decided to open an account with The Firm. FA had Mr. X execute the necessary paperwork, including the transfer forms needed for the previous firm to move money to the new account with The Firm.
About a month later, Mr. X had a change of heart and decided that he wanted to go back to his self-managed platform with the previous firm. Mr. X alleged that he had never authorized FA to open the account or to move his funds to The Firm.
Around this time, FA was gearing up for graduate school. The Firm told him that it would handle the complaint. The Firm investigated Mr. X’s allegations and denied his customer dispute.
After FA had been at graduate school for a month, Mr. X filed for arbitration with FINRA. FINRA then opened an investigation inquiry after receiving Mr. X’s claim. However, instead of sending the initial FINRA inquiry notice to FA, now at school in Massachusetts, FINRA sent the 8210 Letter to his California address.
In Mr. X’s arbitration claim, he requested compensatory damages totaling $600, punitive damages totaling $49,000, fees, and a declaratory judgment that his investment account was not valid. An attorney, hired by The Firm, represented FA at the FINRA arbitration hearing.
On May 29, 2014, the arbitration panel, made up of FINRA-authorized arbitrators, denied Mr. X’s claims in their entirety. In other words, the arbitration panel empowered by FINRA, found that the claims had no basis for relief.
On May 30, 2014, FINRA issued a suspension letter to FA for failure to respond to the inquiry investigation letter. Yet it was not until he was informed by his family, after they received the FINRA inquiry notice, that he was even made aware of the inquiry for the first time.
FA called FINRA, and FINRA informed him that he had been named in an arbitration by Mr. X and that a formal regulatory investigation had been opened into Mr. X’s allegations. FINRA also informed him that The Firm had hired an attorney to represent him.
Despite the fact that Mr. X’s investor claims had already been denied in their entirety by an arbitration panel, FINRA pushed forward with its investigation. FA, with the guidance of the attorney hired by the firm, responded to FINRA’s 8210 letter inquiry and attended an OTR (On the Record) interview. FINRA later presented an AWC (Acceptance, Waiver and Consent) to FA, with the “Facts and Violative Conduct” section being an exact regurgitation of Mr. X’s claims—the claims that had already been denied by both The Firm and the FINRA arbitration panel.
The attorney hired by The Firm, for some reason unknown, encouraged FA to sign the AWC, stating that the only consequences would be the $15,000 fine and 20-month suspension, the majority of which would occur while FA was finishing school anyway. The attorney advised him that he had his whole career ahead of him, and failed to inform FA of the permanent black mark that would be attached to his CRD record and BrokerCheck.
Fast forward to present day, and FA has not been able to obtain another job in the securities industry since he left The Firm.
Now, there is much to be inquired about the arguable malpractice on the part of the attorney supposedly representing FA, but the real questions here are glaring:
The reason why we must keep asking these questions is exactly why AdvisorLaw fights and represents only the interests of the financial advisor.
Erica Harris, J.D.
FINRA repeatedly points to their self-described bad actors—member firms and associated persons with disclosures on their records—as the culprits tearing down the financial industry’s integrity. FINRA already imposes increased regulatory requirements and monitoring on these so-called bad actors with a history of misconduct. But what FINRA has failed to acknowledge is that, while enforcement criteria are based on unvetted U4 disclosures, all of these rule changes and increased regulations will fail to protect the investing public or have any real value. What these rule changes will do, however, is overburden every firm and associated person with meritless or non-investor-related disclosures on their CRD record; case in point—proposed FINRA Rule 4111.
With FINRA’s Proposed New Rule 4111, FINRA has once again delved into the medicine cabinet and pulled out a translucent band-aid to heal a six-inch laceration. Clearly, the securities SRO needs trained medical attention itself, in order to help solve the industry’s ailments. It’s time to schedule a visit with Dr. Commissioner for a healthy regimen of prescription antibiotics, some stitches, and perhaps a tetanus shot. Maybe then, FINRA will create rules which provide real impact on protecting the investing public from firms and advisors complacent with screwing over their clients.
Rule 4111 would allow FINRA to establish criteria, based on firm size and number of BrokerCheck and CRD disclosures for the firm and its associated persons, for designating member firms as “Restricted Firms.” These firms would be required to deposit a specified amount of capital into a separate, FINRA-controlled bank account. Even after a firm no longer qualifies for the Restricted Firm designation or terminates its FINRA membership, the funds would remain in the account until such time as FINRA approves.
FINRA states that Rule 4111 is to “incentivize member firms to comply with regulatory requirements and to pay arbitration awards.” Regulatory Notice 19-17. Essentially, FINRA is trying to persuade everyone that this Rule will help curb unpaid arbitration awards. What it really does is create a veil that will shield FINRA from liability for pushing out (1) any firm that employs a higher number of associated persons with disclosures, or (2) the associated persons themselves.
(1) FINRA designates the maximum deposit requirement as the amount that the firm could deposit that would not “significantly undermine the continued financial stability and operational capability of the member,” or that the amount should “not [be] so burdensome that it would force the member out of business solely by virtue of the imposed deposit requirement.” These standards could allow FINRA to designate the maximum deposit requirement as $1 less than the amount that would force the firm into bankruptcy and then wait for a few too many pens to disappear. Any member firm could be forced out of business at the discretion of FINRA.
(2) FINRA has also proposed a provision that, if a member meets the Criteria for Identification for the first time, it would have a one-time opportunity to reduce its staffing levels to no longer meet these criteria. FINRA will undoubtedly use this rule to threaten overly-burdensome deposit requirements, forcing member firms into having only one choice—to terminate associated persons with U4 and U5 disclosures.
Sticking with recent themes, FINRA has pointed to CRD disclosures as the indicator of which firms or associated persons will enact inflict the greatest harm upon investors. While it should not be discounted that this seems rational on the surface, until FINRA ceases their attack on removing meritless and non-investor-related disclosures, its basic criterium for enforcement will continue to fail regulators and the public.
President and Founder
This blog is our ongoing effort to inform and educate FINRA licensed professionals about the evolving regulatory ecosystem in which we operate.