Articles Posted in FINRA Rules

FINRA recently filed a complaint against a South Carolina-headquartered broker-dealer that allegedly charged exorbitant fees in connection with saltwater disposal well investments. The defendant, Sandlapper Securities, is a mid-size firm that employs about 60 brokers across its 13 locations.

According to FINRA, Sandlapper “participated in a fraudulent scheme and defrauded investors by selling investments in saltwater disposal wells at excessive, undisclosed markups through a middleman ‘development’ company owned and controlled by the firm, its CEO and a firm principal.” The fraudulent markups of as much as 270% “totaled over $8 million,” according to the complaint.

Starting in 2012, Sandlapper allegedly started using a development company as an intermediary between the fund and the saltwater well purchases, charging the fund substantial markups.

During a recent Financial Services Subcommittee oversight hearing, both Democrat and Republican lawmakers raised concerns before FINRA CEO Robert Cook. Some of the issues discussed were the Regulatory Authority’s standing as a private entity and its handling of fine proceeds, which hit a record $173 million in 2016.

One of the main criticisms voiced by House Representatives referred to FINRA’s practice of keeping fine proceeds instead of giving them back to harmed investors. In this regard, California’s Democratic Representative Brad Sherman pleaded for increased transparency in the regulator’s activities.

Cook heard many hard questions during the hearing, from both sides of the aisle, and he attempted to reply in a satisfactory way. Whenever FINRA’s present reality seemed inadequate, he assured current problems would be addressed by upcoming changes in many aspects of the entity’s activities.

At a recent event hosted by the American Bar Association’s Securities Litigation Committee, three Chief Counsel from the Financial Industry Regulatory Authority’s Enforcement division discussed the agency’s current priorities.

Chief Counsel Sue Light, Gina Petrocelli, and Lara Thyagarajan shed light on the areas that FINRA will be scrutinizing more closely through the second half of 2017.

As per FINRA’s 2017 Priorities Letter, the Regulatory Authority is shifting its focus from a “culture of compliance” to a “blocking and tackling” model, emphasizing on watching brokers with a track record of disciplinary actions.

With the increase in FINRA enforcement activity in the last year, we hear daily from concerned RAs and other financial industry professionals – this post is intended to decode the basics of the process and offer some cautions to avoid pitfalls awaiting the unwary.

1. How can you become a target of a FINRA investigation?

The Financial Industry Regulatory Authority (FINRA) is a self-regulating organization.  Although it is not a government agency, its primary mission is to protect investors by regulating its members.  All broker-dealers, down to the last firm employee, must abide by FINRA’s rules.