A member firm's culture of compliance must include procedures designed to ensure the firm's associated persons' CRD filings are timely, accurate and complete. FINRA By-Laws require associated persons to promptly disclose to FINRA reportable U4 and U5 events, including, but not limited to, regulatory actions, customer complaints, bankruptcy filings, liens, judgments and criminal charges.1 Rule 3010 has long required firms to maintain WSPs "reasonably designed to achieve compliance" with applicable laws and rules, including keeping associated persons' U4/U5 filings current.
In 2014, as part of its efforts to ensure associated person compliance and increase transparency, FINRA began making sweeping changes to its supervision rules, amending Rule 3010 (and renumbering it as Rule 3110) to require member firms to verify the accuracy and completeness of their associated persons' U4 disclosures.2 The changes were highlighted in FINRA's 2015 Regulatory and Examinations Priorities Letter and required member firms to "establish and implement written procedures reasonably designed to verify the accuracy and completeness of the information contained in" the U4s of new applicants and experienced associated persons moving their registrations to new firms.3 On a parallel track, FINRA examined public financial records for all registered persons and also notified "a handful of firms" that it had "flagged cases where a firm's brokers had liens and judgments that were never reported."4
The gravity of failing to meet this disclosure-related obligation is apparent in last week's announcement by FINRA of a $300,000 settlement with, and censure of, RBC Capital Markets, LLC ("RBC").5 FINRA found: (1) "RBC Failed to Amend and Timely Amend Firms U4 to Report Unsatisfied Liens and Judgments;" and (2) "RBC Failed to Establish a Supervisory System to Review Wage Garnishment Orders for Reportable Events." The findings stem from the firm's receipt of 71 wage garnishment orders among its 5,300 registered representatives during a 2 ½ year period and its failure to "conduct a sufficient inquiry to determine if the underlying event … should have been reported on the affected individual's Form U4." In 26 instances the required amendment was never filed, and in another 15 instances the amendment was untimely. FINRA also found the firm did not have sufficient WSPs governing the review of wage garnishment orders so the firm could determine if the garnishment involved a reportable event and take appropriate disclosure steps as required.
This action serves as a reminder that firms must adopt and implement reasonable procedures to verify that their associated persons' disclosures are timely, accurate and complete.
FINRA By-Laws Article V, Section 2(c) and Form U4
FINRA Going After Firms For Unreported Judgments, Liens by Megan Leonhardt, Wealthmanagement.com (March 16, 2015), available at http://wealthmanagement.com/regulation-compliance/finra-going-after-firms-unreported-judgments-liens