For several years, the Financial Industry Regulatory Authority (FINRA) has sought to increase oversight of brokers who have a history of misconduct as well as the firms that hire these brokers. In an effort to disincentivize the recruitment of high-risk brokers, the Securities and Exchange Commission (SEC) recently approved FINRA’s proposed Rule 4111, which subjects “restricted firms” to additional capital obligations and hiring restrictions. Specifically, FINRA Rule 4111 targets brokerage firms that have exceeded thresholds of risk-related or investor-harming disclosures compared to similarly sized peers. The new rule, which will go into effect in 2022, is designed to provide FINRA with greater authority to proactively address the risks posed to investors by rogue brokerage firms.
COVID-19 has ushered in a new era for the brokerage industry as financial advisors and professionals across the world have been exiled from regional offices in favor of remote work. Numerous financial advisors may continue working remotely whether due to a novel sense of autonomy, elimination of a commute, or perceived increase in productivity. However, the remote-work era has introduced a plethora of compliance-related issues throughout the brokerage industry. Brokers working remotely possess additional independence to determine when to work and how to communicate with clients, which heightens compliance risks because firms are not able to monitor employees as stringently as they were before COVID-19. Federal regulators, including the Financial Industry Regulatory Authority (FINRA), are responding to newfound compliance risks by issuing updated guidance and investigating potential violations throughout the brokerage industry.
Coronavirus (COVID-19) has shaken the world economy, not the least of which the financial industry. As the financial industry has adapted to work-from-home life under the coronavirus pandemic, industry regulators such as the SEC and the Financial Industry Regulatory Authority (FINRA) have been forced to adapt rules to changing circumstances and shift their enforcement priorities to pandemic related fraud.
On January 28, 2019 the Financial Industry Regulatory Authority (FINRA) released Regulatory Notice 19-04 announcing a 529 Plan Share Class Initiative encouraging firms to self-report potential violations. Broker-Dealers are encouraged to consider self-reporting under the initiative if they have identified specified failures in connection with 529 plan recommendations, and have the ability to assess the impact of the failures. Firms have until April 1st to notify FINRA in writing if it has decided to self-report.
Under Rule 506 of Regulation D (“Reg D”), the U.S. Securities and Exchange Commission (“SEC”) exempts companies making private placements to accredited investors from all federal and state securities registration requirements. As a federal safe harbor, Rule 506 of Regulation D preempts all conflicting state securities regulations, but reserves the states’ rights to require issuers to make notice filings, and to investigate and prosecute securities fraud under state securities laws, commonly known as “Blue Sky Laws.” On its face, Rule 506 of Reg D creates a more efficient securities marketplace. However, the historical lack of consequences for non-compliance at the federal level, combined with inconsistent state notice requirements for using exemptions, further complicates an already over-regulated securities marketplace.
On August 30, 2017, Trump signed Proclamation 9632 declaring September 2017 as National Preparedness Month, encouraging “all Americans… take action to be prepared for disaster or emergency by making and practicing their plans,” also citing that fewer than half of American families report having an emergency response plan. While it is important to have a disaster plan in place for your family to take care of their physical needs, it is also vital to be prepared for the possibility of scams and fraudulent activity in the wake of a natural disaster such as Hurricane Harvey.