Brokerage firms are worried about a new FINRA Rule that would require them to report misconduct to FINRA in situations where the misconduct “has widespread or potential widespread impact” (FINRA’s words) and the firm has concluded or reasonably should have concluded on its own that violative conduct has occurred” (FINRA’s words). See Dan Jamieson’s InvestmentNews article, “New Finra reporting rule alarms B-Ds.”
New FINRA Rule 4530 will require the self-reporting of violations, within 30 calendar days of the when the firm reached (or should have reached) its conclusion that such misconduct occurred.
According to published FINRA supplementary material, FINRA expects firms to report only “conduct that has widespread or potential widespread impact,” arose from “a material failure of the firm’s systems” or involves “numerous customers, multiple errors or significant dollar amounts.”
The misconduct, in addition to being at least potentially widespread in its impact, must involve “any securities-, insurance-, commodities-, financial or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body or self-regulatory organization.”
The new FINRA rule consolidates pre-existing NASD Rule 3070 and NYSE Rule 351. Still, it seems to have prompted some hand-wringing and gnashing of teeth by brokerage industry spokesmen.
“The reporting of internal conclusions is a big change,” Dave Bellaire, general counsel of the Financial Services Institute Inc., which represents independent-contractor firms, was quoted as saying, adding: “It’s a different mindset to look internally” and report problems.”
Broker-dealers will have to develop procedures to determine what they need to report, according to Mr. Bellaire, and “With July 1 fast approaching, broker-dealers need to be designing systems.”
“Some of the internal-control reporting is going to be very problematic,” Lisa Crossley, regulatory-compliance liaison for the National Society of Compliance Professionals, reportedly stated, adding: It “will be an administrative burden, and firms can get into trouble over something that Finra says should have been reported,” but wasn’t.
Curiously, the securities industry took the opposite tack in opposing the whistleblower provisions of the Dodd-Frank financial reform laws that provide financial incentives for employees to report securities fraud and other wrongdoing to regulators, citing the undermining of their “internal fraud-detection efforts” and self-reporting.
J. Boyd Page, the senior partner of Page Perry, a law firm that specializes in representing investors, said: “Doesn’t it seem reasonable to suppose that if firms really had the fraud-detection and self-reporting systems they claim to have, they wouldn’t have such angst about the new FINRA reporting rule? It looks like the firms have their feet planted in two boats that are moving apart.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in investment-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.