On March 10, FINRA issued Regulatory Notice 21-09 announcing FINRA’s adoption of new rules to address brokers with a disclosure history and the broker-dealers that employ them.

Regulatory Notice 21-09

Effective September 1, 2021, firms will be required to seek a materiality consultation or a change in membership agreement from FINRA when they have any person seeking to become an owner, control person, principal, or registered person when they have a disclosure history including certain criminal or risk events within the past 5 years.

In summary, if a firm wishes to register an individual as a registered person or add an owner, control person, or principal, a materiality consultation (“mat con”) would need to be filed and approved prior to the registration or ownership being approved. There is no fee for a mat con, and they are typically reviewed within 1-2 weeks; however, timelines are subject to change and are dictated by FINRA’s workflow. Disclosures impacted are only within the last five years and include arbitration awards and settlements, civil actions and settlements, criminal matters, and regulatory actions.

Updates to Definitions

Effective September 1, 2021, FINRA will update the following definitions:

(1) The term “final criminal matter” means a criminal matter that resulted in a conviction of, or plea of guilty or nolo contendere (“no contest”) by, a person that is disclosed, or is or was required to be disclosed, on the applicable Uniform Registration Forms (including Form U4 and U5).

(2) The term “specified risk event” means any one of the following events that are disclosed, or are or were required to be disclosed, on an applicable Uniform Registration Form (including Form U4 and U5):

  • A final investment-related, consumer-initiated customer arbitration award or civil judgment against the person for a dollar amount at or above $15,000 in which the person was a named party;
  • A final investment-related, consumer-initiated customer arbitration settlement or civil litigation settlement for a dollar amount at or above $15,000 in which the person was a named party;
  • A final investment-related civil action where: (a) the total monetary sanctions (including civil and administrative penalties or fines, disgorgement, monetary penalties other than fines, or restitution) were ordered for a dollar amount at or above $15,000; or (b) the sanction against the person was a bar, expulsion, revocation, or suspension; and
  • A final regulatory action where (a) the total monetary sanctions (including civil and administrative penalties or fines, disgorgement, monetary penalties other than fines, or restitution) were ordered for a dollar amount at or above $15,000; or (b) the sanction against the person was a bar (permanently or temporarily), expulsion, rescission, revocation, or suspension from associating with a member.

Additional Updates

Additional updates based on rule changes include the following:

  • Allowing a Hearing Officer to require heightened supervision when a disciplinary matter is being appealed or reviewed (effective April 15, 2021);
  • Requiring disclosure via BrokerCheck for the status of a Firm as a “taping firm”. FINRA Rule 3170 requires any member firm with a specified percentage (based on the size of the firm) of registered persons that come from a disciplined firm to be designated as a “taping firm” (effective May 1, 2021); and
  • Requiring a firm to provide a heightened supervision plan when submitting an application to FINRA to continue associating with persons who are statutorily disqualified (effective June 1, 2021).

If your firm has brokers with a disclosure history and need assistance complying with Regulatory Notice 21-09, please contact us.  MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities.