Industry participants know that FINRA’s monthly posting of its Disciplinary and Other FINRA Actions offers insight into its enforcement priorities. One can also say it offers various teaching moments. The March edition is no exception.
Of interest to me was a Letter of Acceptance, Waiver and Consent (AWC) that FINRA accepted from a broker-dealer to resolve violations of FINRA Rule 3110. FINRA stated, among other things, that until 2020 this firm maintained written supervisory procedures (WSPs) that cited an NASD rule that FINRA had replaced in 2012. From where I sit, there is no louder signal to a regulator that a suite of WSPs may not be, as Rule 3110(b)(1) requires, “reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules” than to cite to outdated or decommissioned rules. Indeed, during my time at FINRA I saw several WSPs concerning the sale of private placements that included provisions of pre-JOBS Act Regulation D, which I took as a clear sign that further inquiry was needed. I highly recommend that both broker-dealers – and although not subject to FINRA authority, registered investment advisers – include in their annual review a specific item to vet their WSPs against any changes to the applicable rules.
Also of interest was FINRA’s complaint in which it alleged a former registered representative excessively traded customer accounts. Defending sales practice complaints and arbitrations taught me that there is sometimes a fine line between aggressive trading and excessive trading. I was curious to see where FINRA drew the line. FINRA did not have to sharpen its pencil very much; the representative allegedly traded the clients’ accounts to the tune of annualized cost-to-equity ratios of 56% to 246% and portfolio turnover rates of 17 to 75. It came as no surprise that this case settled shortly thereafter. I strongly encourage compliance departments to include metrics such as cost- or commission-to-equity ratios or portfolio turnover ratios in their suitability reviews. These data can be very compelling. Witness the case above.
Thank you for reading this post. Please know that I wrote it for informational purposes only (some may consider it ADVERTISING MATERIAL) and did not intend for it to be legal advice or to form an attorney-client relationship with you – especially in jurisdictions where I am not licensed to practice law. I encourage you to seek your own counsel to help you with your specific situation. To that end, I invite you to contact me if you would like to discuss my services.
Ryan Smith is a partner of Practus, LLP and based in the Washington, D.C. area. His practice focuses on helping broker-dealers, registered investment advisers and their associates address a wide range of legal and compliance issues.
