FINRA uses a combination of tools to reduce the risk of harm to investors from member firms and the brokers they hire that have a history of misconduct. In Regulatory Notice 21-09, they set out some newly adopted rules along with the implementation.

Changes

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

Effective September 1, 2021, FINRA will require a member firm to file a materiality consultation or CMA prior to adding an owner, control person, principal, or registered representative when they have certain events within the past 5 years:

  • One or more “final criminal matters” – 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.
  • Two or more “specified risk events” – 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:
  1. 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;
  2. 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;
  3. 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
  4. 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.

Recommendations

MasterCompliance recommends that Firms takes the following actions:

  1. Update your processes and procedures for changes in ownership, control, and registrations to include a 5-year look back to the items listed above.
  2. Consider how you will identify the specific risk event and then how you will address the registration or ownership request.
  3. Consider setting parameters as to when a material consult or CMA will even be considered.

See Regulatory Notice 21-09 for more information.

MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting for your firm’s compliance responsibilities. If there are any areas where you would like to explore additional assistance or services, please contact us.