by Howard Haykin

Have you noticed how much emphasis FINRA places on Annual Compliance Questionnaires when it takes disciplinary action against individuals for violations? A LOT. Take, for example, a case that was reported in June and posted today on Financialish.com - “Private Securities Transactions End Badly for Broker and Sales Assistant.” FINRA barred a registered rep from the industry, in part because he had lied on his firm’s Annual Compliance Questionnaire – saying he had not participated in any private securities transactions when, in fact, he had done so.

Fact is, many FINRA disciplinary actions that involve registered persons play out a similar scenario. While I believe that FINRA is right to identify this issue and to characterize falsifying or lying on one’s Annual Compliance Questionnaire as a violative action, I’m troubled by the following notion:

FINRA places too much reliance in its disciplinary sanctions on responses to Annual Compliance Questionnaires.

But before addressing this issue, I’d thought it would be helpful to have a look at a somewhat similar situation – one that pertains to sanctioned firms. Recently, Merrill Lynch, Pierce, Fenner & Smith Incorporated,agreed to settle FINRA charges that it “failed to submit to the OTC Reporting FacilityTM (ORFTM) last sale reports of transactions in OTC equity securities within 10 seconds after execution.”  [FINRA Disciplinary Actions for June 2017] 

In what has become a common refrain, FINRA attributed Merrill’s failures to the fact that “the firm’s supervisory procedures were not reasonably designed to achieve compliance with respect to the applicable securities laws and regulations and FINRA Rules concerning late trade reporting.” If asked to justify the charge, FINRA would say that had Merrill’s procedures been reasonably designed, the firm would have detected and corrected the errors.  

To this I say – Wrong! Merrill’s supervisory procedures are, no doubt, reasonably designed. And as far as Merrill’s failure to timely report trades? Hey, mistakes happen, they’re part of life. And Merrill does not have unlimited time and resources to seek out and correct every known error.

Yet, I would consider it downright offensive for FINRA to use this charge as justification for assessing additional penalties.

Now, back to our issue at hand: Does FINRA place too much reliance in its disciplinary sanctions on responses to Annual Compliance Questionnaires? To begin to form an opinion, let’s consider the pros and the cons.

YES, INCREASE SANCTIONS WHEN A BROKER IS CAUGHT 'LYING' ON ACQ'S.

• A broker who engages in undisclosed PSTs is likely knows that he or she is violating firm policy and industry regulations, and the ACQ provides that individual with a "last opportunity to come clean" or "to confess one's sins."  Failure to do so, therefore, would be a 2nd and separate violative action.

• Long before a broker engages in undisclosed PSTs, he or she has had significant training on firm policies and industry guidelines so, by now, they know "right from wrong," "acceptable from unacceptable activities." Their four resources: (i) by reading the firm's compliance manual; (ii) by seeking advice of the firm's compliance officer; (iii) by attending  and digesting annual continuing education programs; and, (iv) by completing the ACQ, which is a reminder of the many relevant guidelines. Entering false information on ACQs is nothing short of lying, which demonstrates an utter disregard for rules and regulation and, therefore, should stand on its own as a violative action.

• Policies, rules and regulations are in place to protect everyone involved in all transacdtions - customer, counter-parties, associated persons, firms. Letting an indvidiual "slide" on an infraction or violative action would be tantamount to admitting that protection is not relevant or important. And that simply is not true. The only way to reinforce compliance is through sanctions. 

NO, GIVE LITTLE OR NO WEIGHT TO ACQ'S WHEN ISSUING SANCTIONS.

• Few people will ever incriminate themselves after violating firm policies or securities rules and regulations. And it's a rare occasion when a firm self-reports violations. So why should FINRA hold registered persons to a higher level of compliance. If anything, FINRA should reduce any potential sanctions when an individual self-reports.

• The affirmation on an ACQ by an individual that he or she did not engage in a violative action, when in fact he or she had done so, should be viewed simply as the continuation or furtherance of the original violative action(s) - and not a separate act unto itself. 

• FINRA's declaration that lying on one's ACQ causes a firm's book and records to be inaccurate is, at best, a trumped up or "feather bedding" charge that really should carry no weight.

• ACQ's are, in large part, "CYA's" for broker-dealers by addressing those regulatory obligations that a firm is unable to fulfill through basic supervisory procedures - and for that reason, its purpose should not be extended by FINRA for penalizing individuals. 

Readers are invited to share their comments.