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FINRA Action Highlights Risks to Broker-Dealers of Allowing Use of Independent RIA’s

A FINRA Hearing Panel issued a decision on March 9, 2015 that will have a potential significant impact on any broker-dealer that allows its registered representatives to have their own investment adviser.  In light of this decision, broker-dealers should assess and evaluate the adequacy of their supervisory systems and procedures relating to supervision of a representative’s outside advisory activities.

In DOE v. Fox Financial Management Corporation (“Fox Financial”), Brian Murphy and James Rooney, the FINRA Hearing Panel found that the firm, its President, and its Chief Compliance Officer failed to adequately supervise a representative (Representative James Rooney, hereafter “JER”).  Specifically, the Respondents failed to adequately supervise JER with respect to his independent registered investment adviser (RIA).  Instead of treating JER’s RIA business as a private securities transaction, the Respondents instead treated JER’s RIA business as an outside business activity.  The Panel imposed principal bars on the supervisors, along with an expulsion of the firm.

FINRA issued Notice To Members (NTM’s) in 1994 and 1996 discussing a firm’s supervisory obligations with respect to a representative’s RIA activities.

In these NTM’s, FINRA indicated that firms were specifically required to assess whether the advisory activities of a representative constituted private securities transactions that were required to be supervised as such and recorded on a firm’s books and records.  FINRA has also issued a series of Interpretive Letters since the NTM’s were released, reiterating that firms were required to assess whether outside RIA activities needed to be treated as private securities transactions.

With respect to the specific facts of the case, the Panel found JER joined Fox Financial in May 2008, and was with the firm until October 2012.  Immediately after joining Fox Financial, the firm had JER complete the firm’s “Outside Activity Approval” form.  Beyond that, however, the firm did not take any steps to supervise JER’s RIA business.  Specifically, the Panel found Respondents’ supervision deficient in the following respects:

  • The firm did not review any customer suitability information for investors;
  • The firm failed to obtain duplicate account information, confirmations and statements from the executing broker-dealer;
  • The Respondents did not take any action to ensure that JER’s actions complied with regulatory requirements; and
  • The firm failed to record the RIA’s transactions on the firm’s books and records.
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April 2014 Client Alerts

Practice groups throughout Bryan Cave often prepare alerts on issues of interest to our clients and friends. Listed below are the Client Alerts published in April 2014.  Please click on the title to read the full text of the Alert.

 U.S. Supreme Court Clarifies Test For Standing to Sue Under Federal False Advertising Statute And Rejects Test Used by Several Circuits to Prohibit Suits Brought By Non-Competitor Businessespublished by the Commercial Litigation, Intellectual Property and Trademarks practice groups on April 1, 2014.

The Australian Privacy Principles:  They don’t apply to me, do they?, published by the Data Privacy and Security team, April 1, 2014.

SEC Convenes Cybersecurity Roundtable:  Highlights Importance of Cybersecurity for Public Companies and Financial Market Participants, published by the Corporate Finance and Securities practice group and Data Privacy and Security Team, April 4, 2014.

Now It Gets Personal:  Department of Justice Obtains its First Ever Extradition on Antitrust Charges, published by the Antitrust and Competition White Collar Defense and Investigations practice on April 8, 2014.

SEC Touts Monetary Benefits of Whistleblowing, published by the White Collar Defense and Investigations, Securities Litigation and Enforcement and Labor and Employment practice groups, April 10, 2014. 

Paving The Way for Increased Data Litigation, Court Refuses to Dismiss FTC’s Use of Deception or Unfairness Authority in Data Breach Cases, published by the Data Privacy and Security Team, April 11, 2014.

$5.15B Cleanup:  Anadarko Environmental Settlement Reveals New Government Tactics, published by the White collar Defense and Investigations and Environmental practice groups, April 11, 2014.

Court of Appeals Issues Opinion in Conflict Minerals Case:  Portion of Rule Violates First Amendment, published by the Corporate Finance and Securities practice group, April 14, 2014.

SEC Staff Responds to Court of Appeals Opinion in Conflict Minerals Case:  Game On, published by the Corporate Finance and Securities group, April 30, 2014.

Will This Be Enough?  Competitors Sharing Cyber Threat Information Will Not Result in Federal Antitrust Prosecutions — Sometimes, published by the National Security, Antitrust and Competition practice groups and the Data Privacy and Security Team

We Know Who You Are:  Companies’ Ability To Deal Confidentially With The CPSC is Further Eroded, published by the Consumer Protection and Data Privacy groups, April 18, 2014.

OCIE Issues Risk Alert Regarding Cybersecurity Preparednesspublished by the Broker-Dealer, Litigation, Arbitration and Regulatory,  and Investment Management groups, April 21, 2014.

Missouri Supreme Court Deals With Trade Secret Issues, published by the Labor and Employment practice group, April 22, 2014.

Missouri Supreme Court Introduces Drastic Change to Workers’ Compensation Retaliation Law, published by the Labor and Employment practice group, April 29, 2014.

New York’s Non-Profit Revitalization Act of 2013 and Its Impact on Non-Profit Organizations, published by the Non Profit Organizations practice on April 1, 2014.

U.S. Expands Sanctions Against Russia By Freezing More Assets and Restricting Exports (IRB No. 522), published by the International Trade group, April 29, 2014.

Partnership Tax Changes:  New Salaried Member Rules from 6 April 2014published by the Tax Advice and Controversy practice group (London) on April 3, 2014.

New Consumer Regulations – Implications for Retailers doing Business in the UK, published by the London Retail team, April 17, 2014.

Sunday Trading Laws in the UK — Is The Customer Still King?, published by the London Retail team, April 17, 2014.

UK Deferred Prosecution Agreements — Key Considerations For Companies Deciding Whether To Self-Report, published by the White Collar Defense and Investigations, Global Anti-Corruption/Foreign Corrupt Practices Act Team, April 2, 2014.

New Consumer Protection Law:  A Reinforced Framework for Distribution Agreements, published by the Paris Consumer Protection and Data Privacy group, April 9, 2014.

New Consumer Protection Law:  A Stricter Regime for Payment Terms, published by the Consumer Paris Protection and Data Privacy group, April 9, 2014.

EU & Competition Law Update – April 2014, published by the European Antitrust and Competition group, April 10, 2014.


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