FINRA Lawyer Blog

FINRA’s 2024 Regulatory Oversight

September 3, 2024 | Herskovits, PLLC

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The 2024 FINRA Annual Regulatory Oversight Report provides a detailed overview of FINRA’s regulatory activities, priorities, and key initiatives for the year. The report covers areas such as market regulation, member supervision, enforcement actions, and rulemaking efforts. It also highlights trends in the financial industry, emerging risks, and FINRA’s response strategies. The document emphasizes the importance of protecting investors, ensuring market integrity, and maintaining fair and efficient markets.

Financial Crimes

The financial crime section of the report details FINRA’s focus on combating activities such as money laundering, fraud, and market manipulation. Key initiatives include the use of advanced surveillance technologies and data analytics to detect suspicious activities. FINRA also emphasizes the importance of firms adhering to Anti-Money Laundering (AML) regulations, including thorough customer due diligence and suspicious activity reporting. The report highlights several enforcement actions taken against firms and individuals involved in financial crimes, showcasing FINRA’s commitment to maintaining market integrity and protecting investors.

SEC DIVISION OF EXAMINATIONS ANNOUNCES 2024 EXAM PRIORITIES

October 24, 2023 | Herskovits, PLLC

On October 16, 2023, the Securities and Exchange Commission’s Division of Examinations released its 2024 examination priorities to inform investors and registrants of the key risks, examination topics, and priorities that the Division plans to focus on in the upcoming year. This year’s examinations will prioritize areas that pose emerging risks to investors or the markets in addition to core and perennial risk areas.

“The Division of Examinations plays a critical role in protecting investors and facilitating capital formation,” said SEC Chair Gary Gensler. “In examining for compliance with our time-tested rules, the Division helps registrants understand the rules as well as ensures that markets work for investors and issuers alike. The Division’s efforts, as laid out in the 2024 priorities, enhance trust in our ever-evolving markets.”

“Continuing to make our examination priorities public increases transparency into the examination program and encourages firms to focus their compliance and surveillance efforts on areas of potentially heightened risk to retail investors,” said Division of Examinations’ Director Richard R. Best. “We hope that aligning the publication of our examination priorities with the beginning of the SEC’s fiscal year will provide earlier insight to registrants, investors, and the marketplace of adjustments in our areas of focus year to year.”

FINRA FINES AND SUSPENDS REGISTERED REPRESENTATIVE FOR FACEBOOK POSTS

December 16, 2022 | Herskovits, PLLC

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FINRA recently published an AWC entered into with Richard L. Langer, a registered representative with Planner Securities LLC. FINRA accused Langer of violating FINRA Rules 2210 and 2220. FINRA Rule 2210 governs communications by registered representatives with the public and FINRA Rule 2220 sets forth requirements with respect to options-related communications.

The review of Langer’s communications originated with a cycle examination conducted by FINRA Member Supervision. According to FINRA, between January 2016 and November 2019, Langer maintained a public Facebook page for an investment club he operated. Langer authored 20 posts on the Facebook page regarding the performance, investment returns, industry standing, and purported successes of the investment club and a separate hedge fund at which Langer traded.

For example, on January 9, 2018, Langer posted:

FINRA PROVIDES GUIDANCE ON FINANCIAL ADVISOR SUCCESSION PLANS

November 10, 2022 | Herskovits, PLLC

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FINRA recently released Regulatory Notice 22-23 providing guidance on what firms should consider when constructing succession plans for Financial Advisors (“FAs”) who will no longer service their customers do to expected or unexpected life events.

The Need for a Plan

The Notice begins by listing the various cost/benefits of having or not having a succession plan, which would seem obvious to all. It takes no great imagination to see the benefits of a sound succession plan in the event of an FA’s sudden death or the consequent difficulties of not having such a plan. The Notice, however, provides some interesting real-life anecdotes that FINRA Staff have witnessed of the years regarding succession failures and successes.

ARE RETIRING FA SUNSET PLANS RIFE WITH ABUSE?

October 7, 2022 | Herskovits, PLLC

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It has been reported that Morgan Stanley conducted a “nationwide probe” of abuses associated with its Former Advisor Program, a sun-setting plan that allows retired FAs to receive a split of fees and commissions paid by former clients. Further to this reporting, we conducted a survey of FINRA AWCs issued in the last 12 months in which FINRA claims an FA falsely used his individual rep code on customer trades in circumvention of the appropriate joint rep code, which would have yielded lesser compensation to the FA. The results of this survey were interesting. First, in virtually all cases, the FA worked for Morgan Stanley. That is interesting. It seems doubtful that people predisposed to rig the comp system work only for Morgan Stanley. Second, substantial disparities exist with regard to the sanction imposed by FINRA. Although the conduct is similar in all cases, FINRA’s sanction has ranged from a wrist-slap (10-business day suspension) to potentially career-ending (six-month suspension).

The table below illustrates the point (with hyperlinks to the AWCs):

Case No.	FA	Employing Broker-Dealer	Sanction
2021071531701	Robert Barberis	Morgan Stanley	· One-month suspension · $2,500 fine
2021069218401	Michael Witt	Morgan Stanley	· One-month suspension · $5,000 fine
2021071562601	Jeffrey Martin	Morgan Stanley	· 15-business day suspension · $2,500 fine
2018058614301	Richard Brendza	Morgan Stanley	· Six-month suspension · $5,000 fine
2020068897201	Steven Romjue	Morgan Stanley	· Six-month suspension · $5,000 fine
2021071847701	William Beasley	Morgan Stanley	· One-month suspension · $2,500 fine
2021072169601	Michael Campopiano	Morgan Stanley	· One-month suspension · $2,500 fine
2020068936501	Jazmin Carpenter	Morgan Stanley	· 10-business day suspension · $2,500 fine
2019061720801	Jason Stannard	Morgan Stanley	· 10-business day suspension · $2,500 fine
2021071276801	Thomas Foster	Morgan Stanley	· One-month suspension · $2,500 fine
2021070570201	Michael Dmytryshyn	Morgan Stanley	· 10-business day suspension · $2,500 fine
2020068810301	John Miller	Morgan Stanley	· 15-business day suspension · $2,500 fine
2019063245601	Robert Norris	Cambridge Investment Research	· Two-month suspension · $5,000 fine

This trend is troubling. According to a study by J.D. Power, the average age of a financial advisor is 57 years old and approximately one-fifth are 65 or older. It was estimated by Cerulli Associates that 37% of financial advisors (collectively controlling 40% of total industry assets) will retire within the next 10 years.

All of the major broker-dealers offer sunset plans for retiring FAs. Merrill Lynch offers the “Client Transition Program.” UBS offers the “Aspiring Legacy Financial Advisor Core Program.” Morgan Stanley offers the “Former Advisor Program.” Wells Fargo offers the “Summit Program.” Given the age of the workforce, and the proliferation of sunset plans, I’m wondering this: who is protecting the retiring or retired FA? Is FINRA proactively protecting against abuses by the inheriting FA or are they simply waiting for Form U5s to drop? Have firms other than Morgan Stanley audited their sunset plans to ensure that production credits are properly allocated to the retired FA?

The cynic in me believes nothing is being done to protect the interests of participants in the various sunset plans.

Herskovits PLLC represents financial advisors nationwide. Feel free to call us at (212) 897-5410 to discuss your case.

FINRA RULES EX PARTE TEMPORARY RESTRAINING ORDER RESULTS IN STATUTORY DISQUALIFICATION

October 4, 2022 | Herskovits, PLLC

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FINRA’s Office of Hearing Officers recently rendered a decision on an issue of first impression in Dep’t of Enforcement v. NYPPEX, LLC, et al., (Disc. Proc. No. 2019064813801). Enforcement charged FINRA member firm, NYPPEX, LLC, its former CEO, Laurence Allen, and its CCO, Michael Schunk, with numerous violations of FINRA rules. The charges stemmed from Respondents’ conduct in the wake of a temporary restraining order issued by a New York state court against Allen. Among other things, the order, obtained at the behest of the Office of the Attorney General for the State of New York (“NYAG”), enjoined Allen from engaging in securities fraud and violating New York’s securities laws. Enforcement took the position that the TRO rendered Allen statutorily disqualified from continued association with a FINRA member firm. Allen could have remained associated with the Firm if it applied for, and received, FINRA’s permission pursuant to FINRA Rule 9520. Allen’s supervisor, Schunk, however, purportedly let Allen continue as an associated person at NYPPEX for over a year without seeking a waiver from FINRA.

FINRA’s disciplinary proceeding was triggered by the ex parte TRO. After a two-year investigation, in December 2018, the NYAG commenced an action under Article 23-A of New York’s General Business Law, known as the Martin Act, against Allen and certain others. The NYAG applied on an ex parte basis for preliminary injunctive relief against Allen, NYPPEX Holdings, and others under Section 354 of New York’s General Business Law. The NYAG stated that a preliminary injunction was warranted because of the allegations of fraud and fraudulent practices by Allen and his refusal to produce documents or appear for testimony. In December 2018, the Supreme Court of the State of New York granted the NYAG the relief it sought and issued the TRO without hearing from Allen or NYPPEX. Allan was served with the Order in January 2019 and Schunk learned about it that month as well.

On December 4, 2019, the NYAG filed a complaint in the New York Supreme Court against NYPPEX, Allen and others (Index No. 452378/2019). In February 2020, the New York Supreme Court concluded a five-day hearing and issued a preliminary injunction prohibiting Allen and NYPPEX from, among other things, violating the Martin Act and from “facilitating, allowing or participating in the purchase, sale or transfer of any limited partnership interest in [the fund].” At this point in time, NYPPEX filed an MC-400 Application seeking permission for NYPPEX to remain associated with a disqualified person, Allen. FINRA Enforcement, however, argued that Allen became statutorily disqualified when the TRO was issued in 2018, more than a year before NYPPEX filed the MC-400 Application.

SEC ANNOUNCES EXAMINATION FOCUS ON NEW RIA MARKETING RULE

September 30, 2022 | Herskovits, PLLC

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On September 19, 2022, the SEC’s Division of Examination issued a Risk Alert concerning the new investment adviser marketing rule, Advisors Act Rule 206(4)-1 (“the Marketing Rule”). In connection with the Marketing Rule, the Commission also amended the Books and Records Rule, Advisors Act Rule 204-2 and the Form ADV. The Marketing Rule became effective on May 4, 2021 but firms were given an 18-month transition period. Thus, firms must be compliant with the Marketing Rule by November 4, 2022.

According to the Staff’s announcement, examinations will focus on four areas: a) Policies and Procedures, b) the Substantiation Requirement, c) Performance Advertising Requirements, and d) Books and Records

With regard to policies and procedures, the Commission’s noted that the Marketing Rule Adopting Release, stated that firms must adopt procedures that, “include objective and testable means” of preventing violations of the Marketing Rule. Examples of such means are:

SEC CHARGES INVESTMENT ADVISER FOR FAILING TO DISCLOSE SPAC-RELATED CONFLICTS

September 16, 2022 | Herskovits, PLLC

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On September 6, 2022, the SEC issued an order instituting administrative and cease-and-desist proceedings against Perceptive Advisors LLC (“Perceptive”) a New York based investment adviser. In anticipation of the institution of the proceedings, Perceptive and the SEC entered into a Settlement.

Perceptive provides investment advisory advice to pooled investment vehicles and according to its March 31, 2022 Form ADV it had approximately $10.36 billion in assets under management. One of Perceptive’s investment vehicles is the Perceptive Life Sciences Master Fund, Ltd. (the “PSLM Fund”).

The gravamen of the SEC’s order revolves around Perceptive’s activities concerning special purpose acquisitive companies (“SPACs”). A SPAC is generally a publicly-traded, shell company which raises money, through an IPO, for the purpose of acquiring other, privately held companies. SPAC’s have “sponsors” that launch the IPO and generally manage the business of the SPAC, including the process of acquiring target companies. The sponsor is typically compensated on a percentage (often 20% to 25%) of the SPAC’s initial public offering proceeds (in the form of discounted shares and, at times, warrants). This compensation is sometimes referred to as the sponsor’s “promote” or “founder shares,” and it is received upon completion of a SPAC’s acquisition of a target company.

FINRA AWC PROVIDES A PRIMER ON ACTIVITIES VIEWED AS AML RED FLAGS

September 1, 2022 | Herskovits, PLLC

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On August 23, 2022, FINRA published an AWC reflecting a settlement with ViewTrade Securities, Inc. The AWC alleges that ViewTrade failed to establish and implement written AML policies and procedures that could reasonably detect and cause the reporting of suspicious transactions in violation of FINRA Rule 3310. FINRA Rule 3310 requires that each member firm develop and implement a written AML program reasonably designed to achieve and monitor the member’s compliance with the requirements of the Bank Secrecy Act (31 U.S.C. 5311, et seq.) (BSA). Rule 3310(a) further requires firms to, “[e]stablish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under [the BSA] . . . . ” The regulations implementing the BSA, in turn, require every broker-dealer to file a Suspicious Activity Report (“SAR”) with the Financial Crimes Enforcement Network any time they detect, “any suspicious transactions relevant to a possible violation of law or regulation.”

FINRA’s past guidance on this issue (NTM 02-21 and Regulatory Notice 19-18) advised firms to look for red flags and provided several examples:

Customers’ mailing address is associated with multiple other accounts or business that do not appear related,

FINRA RELEASES GUIDANCE ON SUPERVISION RELATING TO DIGITAL SIGNATURES

August 12, 2022 | Herskovits, PLLC

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FINRA recently released Regulatory Notice 22-18, reminding firms about their obligation to supervise registered representatives to prevent falsification of digital signatures. FINRA’s guidance comes on the heels of multiple investigations concerning instances when registered representatives forged or falsified client signatures on account transfer documentation or on disclosure forms, “acknowledging a products alignment with the customer’s investment objective and risk tolerance . . . .”

FINRA’s notice explains the varied methods used to forge or falsify electronic signatures and how firms can thwart such forgeries or detect them after the fact. Generally, electronic signatures have an audit trail with identifying information such as the recipient’s IP address and e-mail address. Financial advisors have been admonished for sending documents to their personal e-mail addresses or to an assistant to sign the documents themselves. Firms also found instances where documents were sent to an IP address that was the same as the registered representative or that was inconsistent with the customer address on file. Sometimes representatives sent e-mails to the e-mail address associated with an outside business activity. FINRA’s guidance recommends that firms review correspondence to look for these red flags.

FINRA reports that, in some cases, administrative staff raised issues to management about pressure by representatives to manipulate the digital signature process. FINRA encourages training for such staff to encourage them to resists such pressure.

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