For those who are not aware, as a registered broker dealer there is more than just the FINRA Rules with which you must remain in compliance. Most are aware, but some may not know, that FINRA also releases Notice to Members.
Notice to members are generally issued based upon common audit findings and other industry issues noted by FINRA that cause serious concerns regarding potential harm to the investing community. In 2019 there have been four Regulatory Notices of concern issued; 19-04, 19-07, 19-10 and 19-13.
Regulatory Notice 19-04 appears to be a follow-up to the SEC’s Share Class Sweep of the investment advisory community. 19-04 puts the broker dealer community on notice regarding the sale of mutual funds share classes to 529 plans based on the fees paid to the broker dealer as opposed to the share class that is more beneficial to the client. As the SEC did this past year, FINRA is providing the broker dealer community to self-report and, “to return money to harmed investors as quickly and efficiently as possible.”
Regulatory Notice 19-10 deals with disclosure issues. 19-10 appears to be an attempt to ensure that clients are well informed when the registered rep on their account left or was terminated from a firm, and most importantly, why. This notice is quite important in that it puts the broker dealer community on notice that they must immediately communicate with clients when the registered representative on their account leaves the firm so that the client can conduct their due diligence and decide whether to keep their accounts with the firm or move their assets elsewhere. Although the broker dealer community is not deemed to owe their clients a fiduciary duty, the client has a right to know that their representative is no longer with the firm and choose who will manage their portfolio.
Regulatory Notice 19-13 is actually quite beneficial to the broker dealer community. 19-13 is putting FINRA members on notice that the SEC has approved an amendment to the FINRA Rules allowing for the use of electronic signatures. This will be a big benefit to both the broker dealer community and the client as it will greatly expedite the new account opening process, money movement and the completion of other required forms.
Regulatory Notice 19-07 is more of a benefit to FINRA than to the investing or broker dealer community. 19-07, for the most part, puts the broker dealer community on notice that financial sanctions are now going to be tied to inflation. Theoretically this provides an incentive for the broker dealer community to avoid FINRA sanctions by doing what is best for the client. Realistically it allows FINRA to increase fees and revenue in order to keep up with inflation. It will be interesting to see if sanctions are reduced in an economy where deflation occurs.
Written by Steven Horn, Red Oak Senior Compliance Consultant