Financial Services Litigation & Investigation Monitor : Financial Services Lawyer & Attorney : Perkins Coie Law Firm : Government Investigations, Class Actions

On Wednesday, February 17th, the Financial Industry Regulatory Authority (FINRA) announced that it will seek authority from the SEC to significantly expand the amount of information available to the public on current and former securities brokers through its online BrokerCheck service.

The proposed BrokerCheck expansion would enable the public to access more data on customer complaints; extend the time that the public may view the full record of a broker who has left the industry from two years to 10 years; and make certain information about former brokers available permanently, such as criminal convictions and certain civil and arbitration judgments.

Commenting on FINRA’s proposals to make more information about former brokers available to the public for longer periods of time, FINRA Chairman and CEO Rick Ketchum stated that such changes “will provide valuable information about persons who have left the securities industry, often not of their own accord, but who can still cause great harm to the investing public. Recent regulatory and criminal proceedings in the financial services sector reveal that former brokers have been engaging in fraud and other misconduct long after establishing themselves in other segments of the financial services industry.”

Specifically, FINRA's proposed expansion of BrokerCheck would:

Disclose all historic complaints, including customer complaints, arbitrations or certain litigation dating back to 1999 for individual brokers who are currently registered or whose registrations were terminated within the preceding two years.  If the SEC approves all of FINRA’s proposals, the reporting of historic complaints could apply to brokers whose registrations were terminated within the preceding 10 years.

Expand the disclosure period for former brokers from two years to ten years.  The current two-year period coincides with the period in which an individual remains subject to FINRA's jurisdiction.  The new proposal calls for making a former broker's record public for 10 years.

Increase the amount of information that is permanently available on former brokers.  Last year, BrokerCheck made information about final regulatory actions (i.e., bars, suspensions, fines, etc.) against former brokers permanently available to the public.  The new proposal would add more information to that list, including criminal convictions or pleas of guilty or nolo contendere; civil injunctions or findings of involvement in a violation of any investment-related statute or regulation; and arbitration awards or civil judgments based on the individual's involvement in an alleged sales practice violation.

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Effective February 8, 2010, FINRA members will be subject to new rules governing financial responsibility that are based in part on, and replace, provisions in the NASD and Incorporated NYSE Rules. The rules add new requirements relating to minimum net capital, financial reporting, and notification rules for member firms that clear or carry customer accounts and firms that operate under an exception created under SEC Rule 15c3-3(K)(2)(i) that either (1) clear customer transactions pursuant to this exemption, or (2) hold customer funds in a bank account established pursuant to this exemption.

Collectively, the FINRA Financial Responsibility Rules consist of FINRA Rules 4110, 4120, 4130, 4140, and 4521. The new Rules also amend FINRA Rules 9557 and 9559 to provide an expedited appeals process for members served with a notice under the Financial Responsibility Rules to increase capital or net worth. FINRA Regulatory Notice 09-71 provides an overview of the Financial Responsibility Rules, including their impact on: minimum net capital requirements; notification rules; certain restrictions on business activities; reporting requirements; and audits.

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The Financial Industry Regulatory Authority (FINRA) has announced that the SEC approved a major expansion of  FINRA's BrokerCheck service — to make records of final regulatory actions against brokers permanently available to the public, regardless of whether they continue to be employed in the securities industry.  Under current rules, a broker's record generally becomes unavailable to the public two years after he or she leaves the securities industry and is no longer under FINRA's jurisdiction.

BrokerCheck is a an online service through which investors can reviewthe employment, qualifications and disciplinary history of more than 650,000 brokers under FINRA's jurisdiction. FINRA estimates there are more than 15,000 individuals who have left the securities industry after being the subject of a final regulatory action and whose disciplinary history is not currently available on BrokerCheck.

Disclosure records for former brokers will become available on November 30 and will include any final sanction (such as bars, suspensions and fines) imposed by the SEC, the Commodity Futures Trading Commission, any federal banking agency, the National Credit Union Administration, any other federal regulatory agency, any state regulatory agency, any foreign financial regulatory authority or any self-regulatory organization (such as FINRA).

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The SEC and Financial Industry Regulatory Authority (FINRA) filed separate lawsuits alleging that 16 brokers from the now defunct Brookstreet Securities Crop. fraudulently mislead investors that derivatives based on mortgage-backed securities were safe and conservative investments.  In its complaint, the SEC alleges that 10 Brookstreet brokers failed to inform customers about the risks associated with investing in collateralized mortgage obligations.  The brokers portrayed collateralized mortgage obligations as secure investments to more than 750 customers, which ultimately cost those investors more than $36 million in losses, but earned the brokers $18 million in commission and salaries, according to SEC allegations.  The SEC is seeking civil penalties and repayment of ill-gotten gains.

FINRA filed a companion complaint against six other former Brookstreet brokers.  According to a FINRA press release,  from June 2004 through May 2007, the brokers sold collateralized mortgage obligations to customers when the brokers themselves lacked a basic understanding of these complex and illiquid securities.

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