Christopher P. Parrington 2015-07-21 01:34:10
The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that regulates the business and operations of registered brokers and broker- dealers in the financial services industry. FINRA not only regulates the licensing of registered brokers and broker-dealers, but also provides an arbitration forum for investors who claim to have suffered investment losses due to the alleged wrongdoing of registered brokers and broker-dealers. Through its website, www.finra.org, FINRA provides a Central Registration Depository (CRD), which serves as the central licensing and registration system for the U.S. securities industry and its regulators. According to FINRA, the CRD contains the registration records of more than 6,500 registered broker/dealers and the qualification, employment and disclosure histories of more than 650,000 registered representatives. If a member of the public invests through a registered broker, he or she can discover a significant amount of information through the CRD system. Investors often use the CRD system as part of their due diligence to determine if they want to invest through a particular broker. FINRA rules require that certain information pertaining to a broker’s history be reported to FINRA and made publicly available through the CRD. For example, FINRA Rule 4530 requires that certain information be reported, such as whether a registered broker has been found to have violated any securities-related laws or rules – whether through a customer related dispute or through a disciplinary action commenced by regulators. Other information that should be contained in a registered broker’s CRD includes history of any judgments, tax liens and any history of arbitration or litigation against the broker. Much of the information contained in a registered broker’s CRD is available to the public through BrokerCheck, located on FINRA’s website. The CRD system relies upon self-reporting by registered brokers and broker-dealers. In recent years, FINRA has uncovered a large volume of discrepancies in the CRD records. One of the most concerning discrepancies involves a failure by registered brokers and broker-dealers to update information in the system. As a result, the securities industry has seen a drastic increase in the number of investigations by FINRA focused on errors in filings and registrations related to the CRD system. In 2014, FINRA brought 1,397 disciplinary actions against registered brokers and broker-dealers, which resulted in approximately $134 million in fines. As a result of those actions, 18 broker-dealers were expelled from the securities industry, while more than 700 brokers had their FINRA registration suspended. FINRA ordered more than $32 million in restitution to investors allegedly harmed by CRD filing and registration errors last year. Thus far, it appears that 2015 will be no different with respect to FINRA disciplinary actions related to CRD reporting errors. FINRA has initiated disciplinary actions against registered brokers and broker dealers for errors such as failing to report notice of an IRS tax lien against a registered broker, failing to disclose a registered broker’s prior criminal history, and failing to disclose the existence of outside business activities of a registered broker. These disciplinary actions have resulted in sanctions ranging from multiday suspensions to permanent bars from FINRA, as well as monetary fines in excess of $200,000. Given the number of discrepancies found by FINRA in the past several years, it is anticipated that tens of thousands (if not more) new disciplinary actions will be commenced in 2015 and 2016, related solely to discrepancies uncovered through FINRA’s review of publicly available records pertaining to registered brokers and broker-dealers. If a registered broker or broker-dealer gets notice of a pending investigation relating to CRD reporting discrepancies, it is important that a strong defense strategy be implemented immediately. As part of the investigation process, FINRA can command a registered broker to appear for an on-the-record interview, which could result in unfavorable sworn testimony that could be used against the broker if a disciplinary action results from the investigation. Often, registered brokers attempt to respond to investigations and appear at OTRs without the assistance of counsel, when the investigative process employed by FINRA prior to commencement of a disciplinary action is no different from discovery in a typical lawsuit. Given that FINRA has authority under its sanctioning guidelines to impose fines of up to $50,000 for individuals and $100,000 for firms, in addition to suspensions or bars depending on the seriousness of the allegations, the outcome of an investigation or disciplinary action could be serious. Given the urgency with which FINRA is acting with regard to CRD reporting discrepancies and the potential impact of an investigation or disciplinary action, it is vital that registered brokers and broker-dealers respond to notice of an investigation or disciplinary action the same way they would respond to notice of customer-dispute arbitration or lawsuit in district court. Christopher P. Parrington chairs the national securities practice group at Foley & Mansfield. He can be reached at email@example.com.
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