The Financial Industry Regulatory Authority (FINRA) oversees broker-dealers and their licensed registered representatives. FINRA rules surrounding U-4 and U-5 filings require FINRA members to report customer complaints, regulatory investigations and, under some circumstances, conduct outside of the workplace. FINRA mandated reporting provides important information primarily to three constituencies: (1) investors who seek information about their investment advisors; (2) prospective employers that seek information about potential hires; and (3) regulators charged with scrutinizing potentially problematic registered representatives. Information about registered representatives is available on FINRA’s Broker Check system accessible through FINRA’s publicly available website.
Registered Investment Advisors (“RIAs”) who are not employed by FINRA members are often not subject to FINRA’s jurisdiction. Instead, they are governed by rules promulgated by the U.S. Securities and Exchange Commission or, if their assets under management are below $100 million and they are based in California, California’s Department of Business Oversight(“DBO”). Until recently, individual advisors affiliated with RIAs disclosed their backgrounds primarily through the form ADVs.
The different reporting systems has led some registered representatives moving from broker dealers to RIAs or setting up their own RIAs to make flawed decisions about participating in FINRA investigations. Some former registered representatives have ignored FINRA investigations or disciplinary complaints because they have unwisely concluded they no longer work for FINRA firms so they need not participate in the FINRA investigation or action. Ignoring the FINRA investigations and disciplinary complaints often results in permanent bars from working for FINRA firms.
The Wall Street Journal reported on this phenomenon recently in an article entitled “Barred Brokers In Our Midst.” The article notes that the fragmented reporting rubrics have allowed brokers barred by FINRA to work as RIAs. Now that the national press has shed light on this problem, we expect SEC and BDO regulators to be vigilant in making sure barred brokers do not find safe havens with RIAs. This crackdown will be aided by the U.S. Department of Labor’s requirement that a uniform fiduciary standard be applied for all advice related to retirement accounts. The DOL fiduciary rule moves the RIA and FINRA broker dealers closer together.
The lesson for registered representatives is that they cannot ignore FINRA investigations even if they no longer work for FINRA regulated employers. A default decision barring them from working for FINRA firms will eventually catch up with them and have an adverse effect on their work as an RIA. It will also result in the need to make potentially embarrassing disclosures to their employers and customers.