By Peggy E. Chait
In my younger days, like many women, I was somewhat attracted to the “bad boy.” He was somewhat aloof, ran a bit wild and didn’t conform to the rules. Yet, he was what I wanted. Perhaps when he grew up, he would turn into a law-abiding, conservative Wall Street gentleman, and by then I knew better.
I also remember as the Chief Compliance Officer and Chief Financial Officer of a NYSE Member Firm, back in the mid 1980’s, reviewing U4 forms and disciplinary histories. I have to confess that I was sometimes amused by what I saw disclosed. People that you would least suspect were anything other than upstanding citizens their entire lives, had their past dalliances, generally applicable to their youths, brought to the forefront of their Wall Street careers through the NASD/FINRA registration process. I remember having to approach the former Chief Financial Officer when it was brought to my attention that he hadn’t disclosed his “grand theft auto” charge when he was a teenager in the 1950’s. He grinned when I consulted him, as if it brought back great joy to think of the thrill it gave him. I remember reviewing possession of marijuana charges, and DUI charges in the multiples, especially for those who were children of the 1960’s and 1970’s. FINRA demanded that the individual’s history be addressed, reported if it already hadn’t been, justified and backed up with documentation. It brought great distress to some, and laughter to others. Most of these incidences had occurred in their youths when they were “bad boys.” Most of these disclosures were not securities related. I now realize that the supposed dalliances of even former American presidents might arouse the curiosity of FINRA or other regulators, yet we are an accepting and forgiving people.
FINRA keeps tightening its grip on our histories and squeezing our pasts out of us.
Regulatory Notice 21-09 bore the news that rules have been amended and additional rules will be effected concerning brokers with a “significant history of misconduct” and the broker-dealers that employ them. The implications reach far, amending the rules on heightened supervisory procedures when a disciplinary matter is appealed to the National Adjudicatory Council and when a statutorily disqualified person is under review by FINRA for a statutory disqualification eligibility request, requiring disclosure through FINRA BrokerCheck of the status of a firm as a “taping firm” (FINRA Rule 3170), requiring a member to submit a written request to FINRA’s Department of Member regulation seeking a “materiality consultation” and approval of a CMA, if required, when a “natural person” seeking to become an owner, control person, principal or registered person of the member firm, has in the past five years, one or more “final criminal matters” or two or more “specified risk events” Additionally, these same “specified risk events” will preclude the availability of “safe harbor” to the member for business expansions. (It does come back to bite you). The effective dates for the rule changes range from April 15, 2021 through to September 1, 2021, depending on the rule.
While being a bad boy has a certain mystique about it, and the actions we take, especially in our youth should not define us for the rest of our lives, the reality is that the consequences may come back to haunt us, even in a passive fashion.
We must hope that FINRA will accept the fact that for many, if not most, of the offensive conduct described in the new rule, heightened supervisory procedures are not necessarily a solution for what we might have done in our youth or even recently. Put that in your pipe and smoke it.
As the regulatory world gets more complex and navigation needs more than a simple compass, Integrated Management Solutions is here to guide you and support you in the process. Our team of highly skilled professionals can offer your firm assistance with Materiality Consultations, Written Supervisory Procedures, Regulatory filings and procedures, and Information Technology issues.
