FINRA

California Court Decision May Allow Brokers to Expunge Their Records More Easily

September 7, 2012 | Steve Parker

In a decision last month, the California Court of Appeals may have opened the door for brokers to bypass the Financial Industry Regulatory Authority’s (FINRA) rigid expungement rules in order to remove matters from their CRD records. Currently, brokers must abide by Rule 2080 in order to expunge their records. The FINRA rule allows for expungement only upon meeting one of three tests: (1) the claim is factually impossible, (2) the broker was not involved in the conduct or (3) the information is false. The rule states that a broker who seeks expungement “must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.”

In its recent decision, the California Court of Appeals held that a court may expunge a broker’s CRD record in the interest of fairness and equity, regardless of FINRA’s rule. Edwin Lickiss filed a petition in the court in April 2011 seeking expungement of 17 customer complaints and a regulatory action from his CRD record claiming that they were old and irrelevant and negatively affected his profession. The customer complaints against Mr. Lickiss had resulted in total payments of $831,000, and Mr. Lickiss was required to personally pay a $5,000 settlement. FINRA objected to Mr. Lickiss’s expungement request, stating that he was trying to “sanitize his record and prevent regulators, brokerage firms and investors from learning of this history for what amounts to ‘time served.'” The trial court dismissed the complaint, citing the requirements of Rule 2080. The court of appeals reversed the trial court’s decision, holding that it should have looked to equitable principles instead of FINRA rules.
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User Fee Supporters Gaining Momentum

June 26, 2012 | Steve Parker

According to an InvestmentNews poll, 58.7% of 293 advisers who responded to a recent survey support the option of the Securities and Exchange Commission (SEC) charging user fees to defray the costs of increased examinations. This is an increase from a year ago when only 27.8% of 335 responding advisers supported the user fee approach. The poll also concluded that 74.7% of advisers said they oppose permitting the Financial Regulatory Authority (FINRA) from becoming the self regulatory organization (SRO) for advisers.

The increased willingness of advisers to pay user fees suggests that there could be more support for the bill soon to be introduced by Rep. Maxine Waters (D-CA) that would authorize the SEC to charge user fees for advisers to cover or defray the costs of examinations. Rep. Waters’s bill would combat the SRO bill introduced by Rep. Spencer Bachus (R-Al) and Carolyn McCarthy (D-NY).
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FINRA Issues Regulatory Notice Clarifying New Suitability Rule

June 20, 2012 | Steve Parker

The Financial Industry Regulatory Authority (FINRA) released a Regulatory Notice in May clarifying its new suitability rule, Rule 2111. The rule, which was approved by the Securities and Exchange Commission (SEC) in November 2010, will be implemented on July 9, 2012. The Notice is intended to answer industry questions and provide guidance on the new rule.

According to FINRA, the new rule imposes the same obligations as the predecessor rule and related case law. It is intended to clarify and codify three main suitability obligations.

The first obligation is reasonable-basis suitability, which has two components: a broker must (1) perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and (2) determine whether the recommendation is suitable for at least some investors based on that understanding.

The second obligation is customer-specific suitability, in which the broker must have a reasonable basis to believe that a recommendation of a security or investment strategy is suitable for the particular customer based on the customer’s investment profile.
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SEC Approves FINRA Rule Relating to Broker-Dealer Obligations in Private Placements

June 19, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) approved the Financial Industry Regulatory Authority’s (FINRA) Rule 5123 on June 7, 2012. The text of the final rule can be found here. The rule is creates some obligations for broker-dealers when they are engaged in selling private placements of securities. Due to a number of concerns, the SEC did not approve the rule until FINRA made a number of changes to the originally proposed rule. The final rule, which includes three amendments, was approved on an accelerated basis. The rule does not apply to all private placements. Sales to institutional accounts, qualified purchasers, investment companies, and other classes of purchasers are excluded.

The original proposal would have required broker-dealers involved in a private placement transaction to disclose to each of the investors prior to the sale the anticipated use of the proceeds from the offerings and the amount and type of offering expenses and offering compensation. If the disclosure documents did not include this information, the broker-dealer would have had to create a document for the investor containing the information. The proposal also required each broker-dealer to file the document with FINRA within fifteen days of the date of the first sale. If there were any amendments to the documents, then the amendments would also have to be filed with FINRA within fifteen days.
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FSI Supports FINRA as Adviser SRO

June 6, 2012 | Steve Parker

The Financial Services Institute (FSI) Chair, Joe Russo, recently released a letter stating that the FSI supports the Financial Industry Regulatory Authority (FINRA) as the new self-regulatory organization (SRO) for investment advisers. Russo stated that the FSI has conducted two polls of its financial adviser members to determine whether they support FINRA as the SRO and 75% agreed that FINRA should become the SRO.

FSI has been asked by a number of critics why it has not advocated repealing the Dodd-Frank Wall Street Reform and Consumer Protection Act. In response, FSI says that the act will likely not be repealed as a practical matter. Therefore, FSI has decided to focus its legislative efforts on securing for its members the least intrusive of the three options for investment adviser regulation posed by the Securities and Exchange Commission (SEC). Those options are (1) the SEC charging user fees to fund more examiners, (2) FINRA becoming the dual SRO for broker-dealers and investment advisers, or (3) creating a new SRO.
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GAO Claims SEC Oversight of FINRA is Insufficient; SRO Hearing is This Week

June 5, 2012 | Steve Parker

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Government Accountability Office (GAO), a non-partisan investigative agency of Congress, conducted a study which criticized the Securities and Exchange Commission’s (SEC) oversight of the Financial Industry Regulatory Authority (FINRA). The purpose of the study was to determine how the SEC has conducted its oversight of FINRA, including the effectiveness of FINRA rules, and how the SEC plans to enhance its oversight.

The GAO found that both the SEC and FINRA do not conduct retrospective reviews of the impact of FINRA’s rules. As a result, the GAO believes that “FINRA may be missing an opportunity to systematically assess whether its rules are achieving their intended purpose and take appropriate action, such as maintaining rules that are effective and modifying or repealing rules that are ineffective or burdensome.” The GAO also noted that the SEC does not conduct sufficient oversight over FINRA’s governance and executive compensation. The SEC has responded to the survey by saying that it is focused primarily on oversight of FINRA’s regulatory departments, which the SEC claims has the biggest impact on investors.
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POGO Writes Letter to Congress Opposing SRO Bill

May 31, 2012 | Steve Parker

The Project on Government Oversight (POGO), on May 29, wrote to Rep. Spencer Bachus (R-AL) and Rep. Barney Frank (D-MA) opposing the self-regulatory organization (SRO) bill that was reintroduced in the House of Representatives in April. We discussed the bill in a previous post, SRO Redraft Bill Reintroduced. POGO joins a long list of groups, including the Investment Advisers Association, the Financial Planning Coalition and the American Institute of CPAs, opposing the bill. POGO is particularly opposed to the Financial Industry Regulatory Authority (FINRA) becoming the SRO because it believes that “FINRA’s regulatory effectiveness is undermined by its inherent conflicts of interest, its lack of transparency and accountability, its lobbying expenditures, and its executive compensation packages, among other issues.”

The letter addresses each area of concern POGO has relating to FINRA becoming the SRO for investment advisers. First, POGO states that FINRA’s “conflicted mission” will lead “to cozy ties with the industry.” POGO says the conflict arises because FINRA collects fees from member firms and is also charged with regulating the investment adviser industry. POGO believes that FINRA’s “inherently conflicted self-funding model has contributed to an incestuous relationship between FINRA and the industry it is tasked with regulating.” In contrast, POGO contends that government agencies are not conflicted because they must comply with federal ethic laws and agency regulations designed to alleviate the conflicts.
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AICPA Urges Congress to Maintain SEC Investment Adviser Oversight

May 9, 2012 | Steve Parker

Another large group in the financial service industry has come forward to oppose authorizing the Federal Industry Regulatory Authority (FINRA) to become the self regulatory organization (SRO) for investment advisers. The American Institute of CPAs (AICPA) has voiced its desire to keep the oversight of investment advisers with the Securities and Exchange Commission (SEC).

The AICPA is the world’s largest association representing the accounting profession. It is interested in the oversight of investment advisers because a number of its members work for firms that are registered or affiliated with a registered investment adviser. Members also provide audit, tax, retirement consulting, plan administration and financial planning services to their clients.
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FINRA Proposed Rule: Expungement Procedures for Unnamed Persons

May 8, 2012 | Steve Parker

The Financial Industry Regulatory Authority (FINRA) has proposed a rule which would allow individuals who are not named as parties to a customer-initiated arbitration case to seek expungement relief by initiating “In re” expungement proceedings. Currently, unnamed persons do not have a prescribed way to seek these types of expungements, and must seek relief by:

Asking their current or former firm that is a party to the arbitration to request expungement on their behalf;
Seeking to intervene in the arbitration filed by the customer; or
Initiating a new arbitration case in which the unnamed person requests expungement relief and names the customer or firm as respondent.

According to Regulatory Notice 12-8, “FINRA believes that the current options do not always adequately address a number of issues that can arise in connection with expungement requests.”
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FINRA Releases Cost Estimate to Become Investment Adviser SRO

May 7, 2012 | Steve Parker

The Financial Industry Regulatory Authority (FINRA) has responded to the Boston Consulting Group (BCG) study that estimated the cost of FINRA becoming the investment adviser self regulatory organization (SRO). The BCG study, which we have discussed in a previous blog, was sponsored by the Financial Planning Coalition, comprised of the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisers. The Financial Planning Coalition, along with a number of other groups, is urging Congress to maintain investment adviser oversight by the Securities and Exchange Commission (SEC).

The BCG study concluded that, if FINRA were to become the investment adviser SRO, the one-time start-up cost would be between $200 million and $255 million, and the annual cost would be about $550 million to $610 million. In response to the BCG study, last month FINRA released its own cost estimates. According to FINRA, its start-up cost would be approximately $12 million to $15 million, with annual cost of about $150 million to $155 million. FINRA contends that the BCG projection is inaccurate because “BCG used as its base the costs for establishing the PCAOB (Public Company Accounting Oversight Board) and the CFPB from scratch. BCG used figures – set up costs for organizations that didn’t even have one desk or employee to start with – and provided for only a 20% discount off the from-scratch start-up costs to allow for efficiencies in FINRA’s existing infrastructure.”
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