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Double trouble: This firm has 2 regulators on its case

Q: I’m a compliance officer at a small broker-dealer, and I’ve been informed that FINRA is conducting an investigation into possible wrongdoing by several former employees. These guys had come to us from a firm with a less-than-stellar reputation, but we felt they were worth taking a risk on. We’re cooperating in the investigation, but we also have been informed that our state securities regulator will also be conducting an investigation into the same issues. The state has asked me for the same material as FINRA. Is it really necessary for these agencies to duplicate their efforts?

A: Often an investigation by one regulatory agency may prompt similar investigations by other agencies since there is so much overlap between the various regulators. However, based on their limited resources, they will sometimes agree to piggyback onto another agency's investigation. I would suggest you speak with the investigator or examiner from both FINRA and your state's securities department and let them know that the other is conducting an investigation. Ask them if they would speak to each other to see if they can coordinate their investigation. There's no guarantee, but it is possible that one may let the other take the lead.

FINRA finra headquarters Financial District Zuccotti Park regulation

As a separate issue, be aware that FINRA Notice 18-15 reiterates FINRA’s guidance regarding the obligation of member firms to impose heightened supervision on associated people with a history of industry or regulatory-related incidents. The notice reminds member firms that they need to craft supervisory procedures to ensure they are “appropriately tailored for each associated person and take into consideration, among other things, customer-related regulatory actions; criminal matters; the firm's pre-registration investigation; internal investigations; firm-imposed discipline; disciplinary actions; final, pending and settled arbitrations; past, open or settled customer complaints; terminations for cause; and other items disclosed on the person's uniform registration forms.”

Even if specific workers do not have a history of problems, FINRA Rule 3170 (the so-called “Taping Rule”) requires certain member firms to “establish, maintain and enforce special written procedures for supervising the telemarketing activities of all of its registered persons” when a certain percentage of them were associated with a so-called “disciplined firm.”

The term "disciplined firm" means “either a member that ... has been expelled from membership or participation in any securities industry self-regulatory organization or is subject to an order of the Securities and Exchange Commission revoking its registration as a broker-dealer; or [certain] futures commission merchant[s] or introducing broker[s] that has been ... closed down and permanently barred from the futures industry ... or ... is subject to an order of the Securities and Exchange Commission revoking its registration as a broker or dealer.”

So even if those reps haven't picked up any bad habits of their own, the mere fact that they came from a so-called problem firm means that they should have been subject to certain additional supervisory requirements.

Take note that, in regards to one recent enforcement action, FINRA's director of enforcement has said, “When a firm and its senior managers have reason to be aware of potential problems and fail to address the issues appropriately, they have not fulfilled their supervisory obligations.”

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