D Magazine Publishes Article by Rogge Dunn Covering FINRA Regulations That Stress Firm Transparency

D Magazine published an article written by Rogge Dunn covering FINRA’s recent regulatory notice that stresses firm transparency in all communications with the investing public and clients, specifically when it involves departing FAs. Read the article below, or click here to read it on D Magazine’s website.

rogge dunn d magazine

The article in D Magazine reads:

FINRA’s enforcement efforts, SEC rules and securities laws stress transparency in all communications and interactions with investors. This transparency is not limited to providing investment advice and managing portfolios. Transparency is expected in allcommunications with the investing public and clients—including FAs who have left a firm.

FINRA has long required a firm to be honest about an FA’s departure so “customers can make a timely and informed choice about where to maintain their assets when their registered representative… leaves… [a firm].” Last month FINRA issued a regulatory notice stressing obligations that firms (“Oldco”) have regarding departing financial advisors (“FA”): FINRA Regulatory Notice No. 19-10 (April 5, 2019). FINRA’s rationale for imposing these obligations is “so customers may make informed decisions about their accounts.” 

Firm’s obligations under the FINRA Notice 19-10 include:

1. Oldco “should promptly and clearly communicate to affected customers how their accounts will continue to be serviced.”

2. Oldco “should provide customers with timely and complete answers…. when the customer asks questions about a departing registered representative.”

3. Oldco should “clarify that the customer has the choice to retain his or her assets at [Oldco] and be serviced by the newly assigned registered representative, or a different registered representative or transfer the assets to another firm.”

4. If the FA leaving “has consented to disclosure of his or her contact information to customers, [Oldco should] provide reasonable contact information, such as phone number, email address or mailing address, of the departing representative.”

5. Oldco “should communicate clearly, and without obfuscation, when asked questions by customers about the departing registered representative….”

FINRA has made it clear that Oldco–and FAs at Oldco trying to keep AUM from following the departing FA to a new firm–should not play games. FINRA warned in the Regulatory Notice that “ as with all communications with customers, information provided by [Oldco] about the departing registered [FA] must be fair, balanced and not misleading.”

The SEC has held that: “The entry of accurate information in firm records is the foundation for FINRA’s regulatory oversight of its members and ‘[i]t is critical that associated persons, as well as firms, comply with this basic requirement.’” In the matter of the Application of Saad at 7 (quoting Charles E. Kutz, 52 S.E.C. 730, 734). FINRA and Panels of Arbitrators have recognized that using the marking of a U-5 as a weapon is improper. A firm’s failure to honestly and accurately mark a U-5 is not only wrong, it’s actionable by the FA who is defamed. For example, an FA was awarded $625,000 in actual damages, plus $1,250,000 in punitive damages and attorneys’ fees by a FINRA arbitration panel because his U-4 and U-5 were improperly marked with false, defamatory statements. Ulrich v. Wharton Whitaker and Eaton Vance Distributors. Numerous FAs have won sizable arbitration awards against their old firms for negative oral comments made by Oldco’s branch managers and FAs trying to keep AUM at Oldco.

 What Firms Should Do Regarding Departing FAs

Firms get into trouble where they disparage departing FAs, play dumb, give misleading answers to investor’s questions or use the marking of a U-5 as a tactic to discourage investors from ACATing their investments to the departing FA’s new firm. Oldco’s compliance Department should send a notice to all employees in the department where the departing FA worked reminding them not to make misleading statements about the formerly employed FA and to answer clients’ questions truthfully and provide the new contact information when the departing FA has authorized Oldco to provide same. The compliance department should warn Oldco employees that violation of this procedure could lead to serious discipline, including termination of their employment. The marking of the departing FA’s U5 should be honest and accurate and never used as a weapon or as leverage to seek repayment of a promissory note or leverage to achieve other goals.

What Departing FAs Should Do to Protect Themselves

FINRA does not expect Oldco to affirmatively ask departing FAs for their new contact information. That is why any FA who resigns or is fired should send the Branch Manager at Oldco an email asking it to provide their new contact information to any client who calls for them. An FA should ask Oldco what boxes they are going to check on the U-5 and what narrative statements they are going to make. It’s much easier to negotiate what Oldoc will put on the U-5 before it makes a final decision and files the U-5. Prompt action is a must as Oldco is supposed to file the U-5 no later than 30 days after an FA’s employment ends. Once the U-5 is filed and an FA disputes the language on their U-5, the FA must commence the expensive expungement process, which can take a long time. A departing FA should also check the CRD every day until they learn how Oldco marked their U-5. 

Resources available to Firms and FAs include contacting FINRA’s office of General Counsel:
Philip Shaikun, Associate General Counsel, (202) 728-8451,Philip.Shaikun@finra.org
Jeanette Wingler, Associate General Counsel, (202) 728-8013, jeanette.wingler@finra.org

In addition, FINRA Rule 2210 is informative.


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