More On Legal & Compliancefrom The Advisor's Professional Library
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- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
The SEC recently called upon FINRA to conduct a comprehensive review of its rules that allow brokers to erase potentially damaging information from their public records. The North American Securities Administrators Association, or NASAA, which I currently serve as president, strongly endorses such a review.
The SEC’s call was part of its approval on July 22 of FINRA Rule 2081 to prohibit brokers from requiring clients to agree to not oppose the removal or “expungement” of a damage claim as a condition of the claim’s settlement. (See ThinkAdvisor news article, SEC OKs FINRA Rule on Expungement of Broker Black Marks.)
This rule is a positive first step toward discouraging firms and their representatives from bargaining for the removal of potentially valuable regulatory information that should remain available to regulators, employers, customers and potential customers through the Central Registration Depository (CRD) and FINRA’s online BrokerCheck service.
Developed by NASAA and NASD (now FINRA), the CRD consolidated a paper-based licensing and regulatory process into a single, nationwide computerized registration and licensing database. It includes employment history information as well as regulatory and disciplinary actions. Information from the CRD is available to the public from state securities regulators or through BrokerCheck. A similar system, the Investment Adviser Registration Depository (IARD), contains information about registered investment advisors.
Expungement allows industry professionals to permanently remove customer complaint data from these systems. Although expungement is intended to be an extraordinary remedy reserved for the removal of information that has no regulatory value, requests are routinely granted in the arbitration context.
Maintaining the integrity of information contained in the CRD, as well as the IARD, is critical because state securities regulators rely upon these public records to make licensing decisions about brokers and investment advisors seeking to do business within their jurisdictions.
A sketchy CRD or IARD record often will lead a state to demand voluntary withdrawal or termination of the application. Brokers and investment advisers usually accept the state’s request, but those who resist can expect formal state enforcement action in the nature of denial, suspension, or revocation of license.
According to NASAA statistics, more than 15,700 state license applications were withdrawn from 2008 to 2013. States also used CRD and IARD records to deny, revoke, suspend or condition approximately another 4,400 licenses during the same period.
Over the past five years, state securities regulators have used these public records to weed out more than 20,000 individuals in support of our responsibility to screen bad actors and others who seek to harm investors in our jurisdictions. This gatekeeper function is just one of the many ways state securities regulators work to protect investors and bolster their confidence in our financial markets and in the professionals who provide them with important financial services.
NASAA will continue working with FINRA on reforming the expungement process, which is critical for the CRD system from both a system integrity and public policy perspective to ensure the investing public has access to meaningful information about financial professionals.