By John M. Jascob, J.D., LL.M.
NASAA has offered broad support for a series of FINRA rule amendments that would place further restrictions on member firms that employ brokers with histories of significant misconduct. NASAA noted that high risk brokers present a perennial problem for investors and are the subject of many of the state enforcement actions involving the brokerage industry.
As set forth in FINRA Regulatory Notice 18-16, the proposed amendments would allow FINRA disciplinary hearing panels to place restrictions on the activities of firms or brokers while matters are on appeal. Member firms would also be required to adopt heightened supervisory procedures for brokers while a statutory disqualification eligibility request is under review, while any firm designated as a "taping firm" would have that status disclosed publicly on BrokerCheck. Finally, member firms would be required to submit a written request when a natural person with a criminal action or two or more specified risk events within the past five years seeks to become an owner, control person, principal, or registered person.
Temporary restrictions during appeals. Writing on behalf of NASAA, NASAA President Joseph Borg said that state regulators support FINRA’s proposed changes to allow for temporary conditions or restrictions on practice during the pendency of appeals to the National Adjudicatory Council. NASAA believes that it is appropriate for FINRA to bring its disciplinary procedures more into line with federal and state law, whereby civil and criminal awards or penalties generally become effective automatically after trial. NASAA urged FINRA to delete, however, language that would allow respondents to stay the imposition of temporary conditions or restrictions ordered by a hearing panel merely by appealing them. In NASAA's view, this runs counter to the basic purpose of mandating heightened supervision for these persons.
Disclosure of “taping firm” status. NASAA also agreed with the part of the proposal that would identify on BrokerCheck the “taping firms” subject to FINRA Rule 3170. Given the proposal's lack of specificity on this point, however, NASAA suggested that BrokerCheck should clearly identify these firms as being subject to the FINRA Taping Rule, while explaining in plain English that the rule applies to member firms that employ comparatively high percentages of registered persons who have been disciplined. NASAA's proposed disclosure would also state that the broker-dealer must tape record all telephone conversations between its registered persons and customers and review these conversations for compliance with applicable laws and regulations.
Membership Application Program. Finally, NASAA supports the general thrust behind the proposal's requirement that member broker-dealers request materiality consultations with the FINRA Department of Member Regulation before associating with certain persons that have been the subject of one or more “final criminal matters” or two or more “specified risk events" within the past five years. NASAA suggested, however, that FINRA broaden the definition of “specified risk events” to apply to all individuals who are the subject of customer settlements, consistent with the approach taken on the Form U4. In addition, NASAA believes that the lookback period for disclosure of final criminal matters or specified risk events should be increased to ten years, which would more closely mirror the disclosures on Form BD and Form U4 and better safeguard customers from potential harm.