Month: December 2014

FINRA Rule 4530 (formerly Rule 3070) requires broker-dealers to report matters such as customer complaints, disclosure events and internal conclusions, among other things. Since 2011, the requirements of the old rule (3070) were incorporated into the new rule (4530) along with a few additional items.

The easy part of Rule 4530 is the reporting of quarterly and statistical information about customer complaints. Generally, the requirement is that any customer complaints received by a broker-dealer must be reported to FINRA by the 15^th day of the month following the calendar quarter in which the compliant was received. And this requirement applies to written complaints. The complaints must be reported in the format FINRA specifies – electronically.

Another requirement of the rule is that broker-dealers must report certain specified events relating to its associated persons to FINRA no later than 30 calendar days after the employing broker-dealer knows (or should have known) about the event. The events requiring disclosure include generally serious issues such as a finding that an associated person has violated securities laws, been convicted of a felony, is a respondent in a securities arbitration involving an award exceeding $15,000, and many other items. The full list can be viewed here.

One of the more controversial aspects of the requirements can be found in Rule 4530(b). This is the section which requires reporting when a broker-dealer, “has reasonably concluded or reasonably should have concluded that an associated person of the member or the member itself has violated any securities-, insurance-, commodities-, financial- or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body or self-regulatory organization.” FINRA has said in the supplementary material to the rule that it only expects reporting of conduct that has “widespread or potential widespread impact” to the broker-dealer, its customers or the markets. It also requires reporting of conduct that arises from, “a material failure of the member’s systems, policies, or practices involving numerous customers, multiple errors or significant dollar amounts.” And for purposes of this reporting requirement, FINRA has stated that the rule applies only to situations where the member has “concluded or reasonably should have concluded on its own that violative conduct has occurred.” In other words, the requirement of paragraph (b) of the rule does not apply to findings by external bodies. Again, the full requirement can be viewed here.

Knowing what should be reported under paragraph (b) of this rule can be complicated. FINRA has issued a significant amount of guidance in this area. And importantly, FINRA expects that its members have developed written procedures about the reporting requirements and how these requirements are implemented given the organizational structure of the broker-dealer.

If you have questions about how FINRA rules may impact your broker-dealer’s operations, Mitch Atkins, FINRA’s former South Region Director is now Principal at FirstMark Regulatory Solutions and can be reached by calling 561-948-6511.

FINRA Rule 3240 addresses the limited circumstances under which a registered person of a FINRA member may borrow money from (or lend money to) a customer. Generally speaking, this practice is a no-no. However, the rule permits borrowing or lending under the following circumstances:

1. The broker-dealer must have written procedures that permit the borrowing and lending of money – as well as procedures on how it supervises that activity.
2. The customer must be a member of the registered person’s immediate family;
3. The customer is a financial institution engaged in the business of lending and is acting in that capacity;
4. The customer and the registered person are both registered with the same broker-dealer (co-workers);
5. The lending is based on a personal relationship with the customer – and that the personal relationship is what caused the loan, not the broker-dealer relationship; or,
6. The lending arrangement is based on a business relationship outside the broker-customer relationship.

In addition to the information above, in order to enter into a lending or borrowing arrangement, the registered person must notify the employing broker-dealer (for circumstances outlined in items 4, 5, and 6 above) and the broker-dealer must pre-approve the arrangement in writing. For item 2 above, the employing firm’s procedures must indicate that the registered person does not have to notify the firm or receive its permission. For item 3 above, the same applies (procedures must indicate that the registered person does not have to notify the firm, etc.) as long as the loan has been made on commercial terms that the customer generally makes available to members of the public in similar circumstances (in other words, no special deals).

Lastly, in the rule, FINRA defines “immediate family” as parents, grandparents, mother or father-in-law, husband, wife, brother, sister, brother or sister-in-law, son or daugther-in-law, children, grandchildren, cousin, aunt, uncle, niece or nephew, and any person whom the registered person supports, directly or indirectly, to a material extent.

Broker-dealers must have procedures relating to this activity. While many prohibit borrowing and lending from customers altogether, they are required to institute reasonable policies and procedures to ensure compliance with the rule. Most employ an annual (or even quarterly) questionnaire or certification which is completed by the registered person. And there have been numerous instances of FINRA enforcement actions in which a registered person has falsely certified on these tools, thereby exacerbating a violation of this rule.

If you have questions about how FINRA rules may impact your broker-dealer’s operations, Mitch Atkins, FINRA’s former South Region Director is now Principal at FirstMark Regulatory Solutions and can be reached by calling 561-948-6511.

The holding of customer mail is generally frowned upon by regulators in the securities industry. This is because there have been many instances in which fraud and theft of customer funds has occurred and the perpetrator was able to prevent (or delay) the client’s discovery of the situation. In many instances where a theft of client funds has occurred, the perpetrator found a way to suppress the client’s statements of account. These statements are generally sent by a separate clearing broker or by the clearing unit of a brokerage firm. Having this statement redirected to the perpetrator’s office is one way to suppress it, and potentially alter it.

FINRA has a Rule which governs this activity – FINRA Rule 3150. This rule specifies the limited conditions in which a FINRA member may hold mail (i. e. customer statements and confirmations) for customers. The first circumstance is when the member receives written instructions from the customer requesting that mail be held for a specific time period. Any request for a hold mail time period over three (3) months must include an acceptable reason. FINRA has stated that “convenience” cannot be a reason for holding mail beyond three (3) months.

The reality is that some customers, particularly those who live in certain countries where security is a concern, have very legitimate reasons to request that their broker-dealer hold mail rather than send it to an address in their country.

If a FINRA member accepts such a request, it must contact the customer in writing and let them know of alternative methods of statement and confirmation delivery (e.g. email, online, etc.) so that the customer can monitor activity. The FINRA member must also obtain the customer’s confirmation that it has received this notice, and then must verify at what FINRA calls “reasonable intervals” that the hold mail instruction still is valid. Of course, the member holding the mail must have supervisory procedures designed to ensure that the mail is securely held and not used inappropriately.

If you have questions about how FINRA rules may impact your broker-dealer’s operations, Mitch Atkins, FINRA’s former South Region Director is now Principal at FirstMark Regulatory Solutions and can be reached by calling 561-948-6511.

One of the most powerful tools available to FINRA, Rule 8210, has received a fair amount of criticism from the industry. However, having a perspective from both sides is important to understanding the operation of this rule.

Because FINRA does not have the power to issue subpoenas to conduct its investigation, it must use other means to obtain information from its membership. That means is Rule 8210. By entering the securities industry (signing a Form U-4), a registered representative submits to the jurisdiction of FINRA and thus becomes subject to FINRA’s rules. FINRA retains this jurisdiction over a registered person for two years after the registered person has terminated their association with a broker-dealer. This two year period may be extended in some instances. For example, if the broker-dealer files an amendment to the representative’s Form U-5 (e.g. the representative becomes subject to an internal investigation or other item requiring a “yes” answer on the form) then FINRA’s jurisdiction extends two years from the date of that amendment. This allows FINRA time to investigate the issues surrounding the individual’s termination or events that occurred prior to termination. FINRA’s jurisdiction during this time period extends to the activities of the representative prior to termination from the last employing broker-dealer but does not extend to the activities during the two year period following that termination – the period while the registered representative was not associated with a broker-dealer.

Rule 8210 states that FINRA may request information from persons associated with broker-dealers in connection with an examination. This permits FINRA to require testimony from its associated persons and to compel the production of documents and other information. FINRA is permitted by Rule 8210 to serve an 8210 request on the last address reported to the CRD system, so it is important for representatives to keep their CRD address updated. The Rule permits FINRA broad authority to request information, including information that may be considered “personal” in nature such as cellular telephone bills, tax returns and personal bank statements. This is because these items may contain information necessary to complete an investigation.

Many have criticized this Rule. It certainly gives FINRA significant authority. And some complain that they believe FINRA oversteps that authority, either by asking for items that may seem unrelated to the investigation or asking for too much information (e.g. scope of email requests). However, without this rule FINRA would arguably have a difficult or impossible task in carrying out its regulatory responsibilities. Representatives should be aware that FINRA executives have stated in numerous instances that FINRA is willing to negotiate the scope and volume of information requested under Rule 8210. A well-reasoned argument often goes a long way in securing a negotiated production in terms of due dates and scope.

Mitch Atkins, FINRA’s former South Region Director has extensive experience with Rule 8210 requests, including the preparation of responses and negotiated production. Call Mitch Atkins, Principal of FirstMark Regulatory Solutions at 561-948-6511.

There are other ways that FINRA can assert jurisdiction, even if an individual never signed a Form U4. However, for purposes of this piece, we will leave it at this to keep it simple.