On September 20th, FINRA released the podcast FINRA Enforcement: Bringing Cases Against Individual Brokers. This podcast provides background information on how the enforcement process works against individual registered representatives. Mr. Chris Kelly, Deputy Head of Enforcement, was the guest on the show.
Below is a summary of key considerations and takeaways for Firm’s and Brokers.
Type of Cases Brought Against Individual Brokers
Mr. Kelly noted that there are a wide range of cases brought against an individual broker. These can include failure to report an outside business activity, private securities transactions (aka selling away from the firm), fraud, excessive and unauthorized trading. Firms and brokers can learn more about the types of actions by reviewing the Monthly Disciplinary Actions. This can also be provided examples for Firm’s to incorporate as part of their annual training plan.
From Referral to Final Outcome
The podcast briefly discusses the lifecycle of a Finra action but provides a deeper overview in the unscripted episode, Behind the Process: How an Enforcement Action Becomes an Enforcement Action. Not all cases referred to by individual departments at FINRA end with an enforcement action. There are informal actions, cautionary actions, censures, and formal actions. This means FINRA has tools that enforcement can use to punish or deter behaviors and actions. Considerations for the enforcement division include, if it is the “broker or the firm’s first offense, whether the violation was intentional or result of a good faith mistake, whether there’s any customer harm, and whether or not in the case an individual broker, the firm or some other regulator already disciplined the broker for the misconduct.”
Unlike many governmental organizations, FINRA can prioritize and react to cases that may be occurring in real time to determine violations and potential misconduct. This includes sending out requests for information (under Rule 8210) and investigating and issuing a formal action.
Formal action fines and suspensions can vary from a $5000 fine and 10-day suspension on the low end up to a complete bar from the industry. The podcast discusses examples of serious behavior that might result in large fines, suspensions and bars. These include fraud, conversion, repeat offenses and failure to comply with an 8210 request. An 8210 request is FINRA’s tool to compel information requests from brokers and firms, as they do not have the subpoena power of other governmental organizations. Although FINRA is sensitive to sanction individual brokers because even a small fine or suspension can be life altering for many who are responsible for taking care of their household, brokers need to be aware that it is possible when activities that don’t protect investors or violate securities laws occur.
Firms need to understand sanction considerations and examination priorities to protect the Firm and to provide training needed to ensure brokers are also protected. With decades of experience, our team can provide specialized support to help you design and implement an effective risk-based compliance program. Contact us today.