FINRA recently settled two cases, each for a six-figure fine, in matters that have significant implications regarding the need for broker-dealers to communicate across departmental lines. At issue in the UBS and Vanguard Marketing Corporation matters was both firms' failures to communicate to compliance that certain associated persons were the subject of a wide range of events that were required to be reported on the associated person's Form U4. FINRA found that both firms received, through various departments, notices that associated persons were the subject of a wide variety of garnishment orders as a result of: judgments from creditors, child support orders, tax levies from federal and state tax authorities, and bankruptcy wage withholding orders.

In the case of UBS, FINRA found that, from May 2010 to May 2013, the firm never conducted any further inquiry to determine if these underlying events required a Form U4 amendment. Further, the firm's Payroll Department, which received this information, never apparently communicated it to the Compliance Department. FINRA found that in 76 instances, during the relevant period, the Firm failed to file a Form U4 amendment, and in 27 other instances the Firm filed the amendment many months after the underlying event. Moreover, FINRA found that the firm failed to have any written procedures to ensure that the Payroll Department communicated to other departments (including the Compliance Department) the information it received. Finally, in 22 instances UBS representatives identified in annual, on-line compliance certifications that they were the subject of potentially reportable items, such as liens; the firm, however, never documented any review of these disclosed reportable items. FINRA fined UBS $500,000. (See UBS Financial Services, Inc., FINRA No. 2013037118101)

In the case of Vanguard, in February 2013 the firm became aware that its Payroll Department was aware of various garnishment orders that could trigger Form U4 amendments for various representatives. At that time, the firm created a procedure whereby the Payroll Department would notify the Compliance Department of any garnishment orders. The firm, however, did not implement this procedure until July 2014, with the result that for an additional year-and-a-half the firm further failed to disclose judgments and liens for which it had notice. FINRA found that in 60 instances during the relevant period the firm failed to file a Form U4 amendment, and in 20 other instances the Firm filed the amendment months after the underlying event. FINRA fined Vanguard $350,000. (See Vanguard Marketing Corporation, FINRA No. 2013038325801)

FINRA advised firms in its 2015 Regulatory and Examination Priorities Letter that it had found that certain firms were not reporting, in certain instances timely and in other instances at all, a wide variety of events that required reporting. ( FINRA advised firms that in 2015 it would be conducting a review of public records for all active registered representatives.

Finally, as set forth in FINRA Regulatory Notice 15-05, the SEC recently approved a proposed change to FINRA Rule 3110(e). ( 05.pdf) This amendment requires firms to adopt written procedures designed to verify the accuracy and completeness of the information contained in a potential registered representative’s Form U4 no later than 30 days after the Form U4 is filed with FINRA. More specifically, this new requirement imposes on firms an obligation to have policies that are reasonable for verifying information in an applicant’s Form U4. In light of these recent FINRA Enforcement cases and the recent guidance FINRA has provided, firms should consider the following:

  • Evaluate their supervisory systems to ensure that there is a process for a Payroll Department (or similar department) promptly communicating to the Compliance Department any notifications regarding liens, garnishments or any similar events that may require reporting;
  • Ensure that the firm has rigorous annual training and certifications for registered representatives to remind them of the types of events that require reporting, along with the time-frame in which events must be recorded; and
  • Conduct, itself, some type of review of public records or similar background check, to assess whether any of its representatives have disclosable events. This is particularly important given the requirements in FINRA Regulatory Notice 15-05.