Self-Reporting and Other Extraordinary Assistance Can Reap Benefits

FINRA and other regulators have long purported that substantial cooperation and self-reporting are given favorable consideration during the disciplinary phase after an investigation.

For over 15 years, FINRA (and its predecessor agencies) have encouraged member firms and associated persons to cooperate with them during exams and investigations in a candid manner, promising at least some level of leniency for those who do so. In July of this year, FINRA provided yet another public notice on this topic, Regulatory Notice 19-23 (“RN 19-23”).

RN 19-23 reiterates that pursuant to FINRA Rules 4530(b), 8210, and FINRA's Sanction Guidelines, a certain level of cooperation is expected any time FINRA is performing an examination, inquiry, or investigation. FINRA recognizes “extraordinary cooperation” as cooperation that is beyond “required cooperation” and does one or more of the following:

1. Shows an acceptance of responsibility and an acknowledgment of the misconduct at issue prior to detection and intervention by a firm or regulator,
2. Voluntarily employees initiatives to correct the issues prior to detection and intervention by a firm or regulator,
3. Voluntarily attempts to remedy the misconduct by restitution or another appropriate remedies prior to detection and intervention by a firm or regulator,
4. Voluntarily provides substantial assistance to FINRA during its examination and/or investigation of the misconduct at issue.

Per FINRA's Sanction Guidelines, “Sanctions in disciplinary proceedings are intended to be remedial and to prevent the recurrence of misconduct.” To the extent that member firms and associated persons show initiative in meeting this goal, FINRA states it will consider that fact when determining what, if any, disciplinary action they issue for misconduct. RN 19-23 provides three examples of FINRA adjusting its disciplinary decision based on what it deemed to be “extraordinary cooperation.”

FINRA also announces certain initiatives from time to time to further its goals of “investor protection and market integrity.” Once example of such an initiative is their “529 Plan Share Class Initiative” where FINRA encouraged member firms to review their 529 plan sales for common supervisory issues. To encourage firms to do this and to report their findings, FINRA stated they would issue settlement agreements for misconduct with no fines to remedy any identified and reported misconduct.

While there is always a risk when self-reporting, there is also a substantial risk in not doing so. Reviewing FINRA's RN 19-23 with counsel versed in securities regulations would be a wise first step in determining if and how you may wish to self-report or self-audit specific activity. Both member firms and associated persons can find themselves in a position where self-reporting should be considered. Taking that step can be daunting. Cosgrove Law Group, LLC has the experience to offer guidance and representation in such matters. Please give us a call!

Presidential Candidate Requests Information on Proposed Amendments to FINRA’s Expungement Rules

The Central Registration Depository (“CRD”) and the publicly available online portal, BrokerCheck, comprise FINRA’s registration and licensing system.  Via BrokerCheck, customers, employers, and regulators can access information regarding customer complaints levied against an individual broker.  BrokerCheck plays a key role in allowing customers to evaluate their broker’s track record before making investment decisions.  By the same token, adverse claims can have a devastating effect on a broker’s ability to retain their clients.   

As such, FINRA has established rules for the expungement of certain adverse claims from CRD.  Currently, FINRA Rules 12805 and 2080 control customer complaint expungement proceedings.  Rule 12805 requires that a broker file a Statement of Claim requesting expungement of the customer disclosure.  The panel must:

·    hold a recorded session regarding the appropriateness of the expungement;

·   when applicable, review settlement documents and consider the amount of payments made to any party;

·    provide a written explanation which indicates which of the grounds for expungement under Rule 2080 is the basis for the order; and

·    assess all fees for the hearing against the party requesting expungement.[1] 

Under Rule 2080, grounds for expungement include:

·    the claim, allegation or information is factually impossible or clearly erroneous;

·  the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or

·    the claim, allegation or information is false.[2] 

Following an arbitration award recommending an expungement, the broker must then file a petition in a court of competent jurisdiction to obtain an order confirming the award and directing such expungement.

In December 2017, FINRA published Regulatory Notice 17-42, a proposed amendment relating to requests to expunge customer dispute information.  Regulatory Notice 17-42 would create a roster of arbitrators with specific training and experience to handle all expungement requests.  It would also require:

·       the broker to appear at his or her expungement hearing;

·       unanimous agreement of the three person arbitration panel;

·      expungement requests to be brought within one year of the dispute; and

·       minimum fees for filing expungement requests.[3] 

Since publishing Regulatory Notice 17-42 for public comment, FINRA has not submitted it to the SEC.  As such, the proposed expungement rules are not currently in effect.  In a March 2019 letter to FINRA President and CEO Robert Cook, Senator Elizabeth Warren requested an update on FINRA’s proposed rule changes to its customer dispute information expungement process.[4]  If eventually submitted and finalized, the new process for removing customer dispute information from a broker’s CRD will be more onerous on the broker and likely decrease the frequency with which expungement requests are granted.  Senator Warren’s letter requests, among other things, a timeline for when FINRA will submit Regulatory Notice 17-42 to the SEC for approval.

It is unclear if or when the new CRD expungement rules will be submitted to the SEC and put into effect.  FINRA spokespersons have declined to comment on the substance of Senator Warren’s letter, stating, “We have received the senator’s letter and are working to respond accordingly.”[5] 

Given the uncertainty of the status of FINRA’s expungement rules, it is important that brokers seeking CRD expungement select an attorney capable of guiding them through expungement proceedings under the current and any potential future FINRA rules.  Cosgrove Law Group, LLC has represented numerous individuals in CRD expungement proceedings under the current rules and stands ready to represent brokers in proceedings governed by the proposed amended rules.  If you are seeking expungement of customer complaints from your CRD/BrokerCheck, you may wish to consult with experienced counsel at Cosgrove Law Group.

BY: Max Simpson

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[1] FINRA Rule 12805, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=7229

[2] FINRA Rule 2080, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=8468

[3] Regulatory Notice 17-42, http://www.finra.org/industry/notices/17-42

[4]Letter, Sen. Warren to Cook, March 21, 2019, https://www.warren.senate.gov/imo/media/doc/2019.03.21%20Letter%20to%20FINRA%20re%20Broker%20Expungement%20Data.pdf

[5] Financial-Planning.com, Warren presses FINRA for answers on expungement reform, https://www.financial-planning.com/news/elizabeth-warren-presses-finra-for-answers-on-expungement-reform

OBTAINING WHISTLEBLOWER STATUS THROUGH YOUR BROKER-DEALER’S COMPLIANCE DEPARTMENT

A financial adviser that provided a tip through his broker-dealer’s compliance department recently received a whistleblower award of $4.5 million.  In late May, the SEC accepted the Claims Review Staff’s Preliminary Determination recommending that hefty award.  

The SEC’s analysis hinged on the application of Exchange Act Rule 21F-4: whether “original information submitted by a whistleblower led to the successful enforcement of a judicial or administrative action.”  Rule 21F-4(c)(3) even allows for whistleblower status if you “reported [the] original information through [your broker-dealer’s] internal whistle blower, legal or compliance procedures for reporting allegations of possible violations of house before or at the same time of law before or at the same time to reported them to the Commission . . . You must also submit the information the Commission . . . within 120 days of providing it to the entity.  (Emphasis Added). 

This last clause is your key takeaway from this blog.  If you provide original information to your compliance department but fail to follow through with the Commission, you might lose out on millions of dollars!  It is also important to understand that 1) you are taking a risk, 2) the compliance or legal department might not investigate and report to the SEC without a push, and 3) Rule 240 is an extensive fine-print maze of definitions and procedures.  In sum, you should obtain legal counsel to help you evaluate your “original information” and guide you through a complicated process that can take years to run its course. 

There are many attorneys out there claiming on their websites that they represent whistleblowers. But if you are a financial advisor or investment adviser what you need is an attorney that has experience representing whistleblowers in the financial industry. Food for thought.

Steps To Take Upon Termination by a Broker Dealer

So the unimaginable happens. You receive a call and are told to report to HR. There you are handed a letter stating you have been terminated for cause and that the broker-dealer has terminated your registrations with the firm.

What steps should you take?

First, and before leaving HR, you should request that they not file the Form U5 until after they have been contacted by your attorney. Pursuant to FINRA rules, the broker-dealer has 30 days from the date of termination to file the Form U5 that sets forth the reasons for the termination. And, what is stated by the firm on the Form U5 will be critical in determining your ability to join another firm, have clients move with you to your new firm, and avoid a FINRA Enforcement investigation.

Experienced securities industry counsel may be successful in framing the wording on the Form U5 such that it is accurate, which would avoid the subsequent time, expense and aggravation of removing inaccurate information from your Form U5. Pursuant to the laws of some states, broker-dealers have actual immunity or qualified immunity from defamation claims for statements made on Form U5s. Therefore, it’s imperative that you have experienced securities counsel on your side to try to prevent defamatory statements from being placed on your Form U5.

Second, you need to consider the host of other legal issues that may need to be resolved. Such as whether you are going to be subject to a FINRA Enforcement investigation, what information regarding your clients you may take from the firm, or what your continuing obligations are under your broker/registered representative agreement. 

Therefore, if you are a broker agent/registered representative and you have been terminated for cause, do not delay in consulting your securities industry attorney. You should consider having counsel engage with your broker-dealer before your Form U5 is filed. If you need assistance, you may wish to consult with experienced securities industry counsel at Cosgrove Law Group.

By: Brian St. James, Cosgrove Law Group, LLC