Bates Research - 05-16-19

FINRA on AML, Departing Registered Representatives, New Proposed Rules for Firm Misconduct

Over the last month, FINRA issued guidance on anti-money laundering (AML) compliance and customer communications concerning departing registered representatives. FINRA also proposed a rule adding obligations to firms with a significant history of misconduct. In this article we take a closer look at these moves and the stepped-up expectations that flow from them.

Compliance and Anti-Money Laundering

Concerned with emerging areas of risk, particularly with respect to digital assets, FINRA published new AML guidance “to assist broker-dealers in complying with their existing obligations.” The new guidance highlights conditions under which brokers must monitor and report suspicious activities under a firm’s written AML compliance program, as required by FINRA Rule 3310.

As noted in Bates’ recent Compliance Alert, circumstances that require the filing of reports include the detection and reporting of transactions by a broker-dealer that “involves or aggregates funds or other assets of at least $5,000, and the broker-dealer knows, suspects or has reason to suspect that the transaction” (i) contains funds from an illegal activity; (ii) is designed to evade regulations under the BSA; (iii) does not appear to have a "reasonable explanation;" or (iv) might be facilitating criminal activity. Broker-dealers must report such activity by filing suspicious activity reports (SARs).

The FINRA guidance enumerated examples of potential money laundering “red flags” for firms to consider incorporating in their compliance programs. FINRA highlighted these examples under various categories, including customer due diligence and interactions with customers, deposits of securities, securities trading, money movements, insurance products and other indicators of suspicious customer behavior. The sheer number of red flags—likely taken from examinations—should urge firms to review the myriad potential vulnerabilities in their existing compliance program.

Compliance on Communications Concerning Departing Brokers

Concerned that customers may be less than fully informed about the maintenance of their assets in the event that their registered representative leaves a firm, FINRA offered guidance on what firms must do under these circumstances. FINRA recognized how different business models (customer advisory center, group service or one-on-one) may affect customer relations. However, they expect that all firms must “promptly and clearly communicate to affected customers how their accounts will continue to be serviced” and “provide customers with timely and complete answers, if known, when the customer asks questions about a departing registered representative.”

Specifically, FINRA expects firms to have appropriate policies and procedures in place to ensure direct communication and continuity for the client should their registered representative depart. Firms are obligated to update these policies annually and make them available to all customers. Among the required elements, firm policies must include providing a customer with points of contact, ongoing trade instructions and answers about the departing representative themselves. FINRA expects firms to clearly communicate to customers an option to stay with the firm (and be serviced by a newly assigned registered representative or someone else) or to transfer the assets to another firm. FINRA also stated that the firm must provide the departing registered representative’s contact information, so long as the departing representative consented to such disclosure. That said, FINRA noted that any information provided about the departing representative must be “fair, balanced and not misleading.”

Proposed New Rules For Firm Misconduct

Concerned with the heightened risks that firms with “a significant history of misconduct” pose to investors, FINRA proposed new rules that would identify these firms and then place additional obligations on them. The proposed new Rule 4111 (the Restricted Firm Obligations Rule) would require these designated firms to (i) make deposits of cash or qualified securities that cannot be withdrawn without FINRA's written consent, (ii) be subject to restrictions on operations deemed necessary or appropriate to protect investors, or (iii) be subject to a combination of both those obligations.

A further proposed rule outlines expedited procedures that allow for the review of determinations under the Restricted Firm Obligations Rule, providing members the right to challenge any new obligations that may be imposed. FINRA states that the determination is based on specified numeric disclosure event thresholds “developed through a thorough analysis” and relative to “the number of events at similarly sized peers.”

At the 2019 FINRA Annual conference, Robert W. Cook, President and CEO of FINRA, said that “the goal is to use objective criteria” when determining whether a firm must comply with additional obligations. He said that FINRA’s chief economist found, when focusing testing on the objective criteria, that the number of miscondent events is high. “Firms that have been caught in a funnel may have as many as nine times events than their peers,” said Cook.

Beyond the numbers, Mr. Cook shared with the conference audience that FINRA considered other factors including information from the member applications program (MAP), the firm’s regulatory history and examinations. He also said that there would be dialogue with the firm including as to the types of things they are doing that pose the greatest risk to investors and ask the firm to “put aside greater capital to cover future unpaid arbitration awards.”

The proposal states that restricted firms, “while small in number, present heightened risk of harm to investors…their activities may undermine confidence in the securities markets as a whole.” Mr. Cook echoed this rationale, stating, “we want to be sure that FINRA is doing everything we can to address this outsized risk and the high numbers of misconduct issues” they represent.

To learn more about Bates Group’s services, please contact:

Edward Longridge, Managing Director, Financial Crimes -

Robert Lavigne, Managing Director, Bates Compliance Solutions -


See here for a recent conversation on AML compliance issues with Bates Group’s Managing Director of Financial Crimes, Edward Longridge.

Visit us at the 2019 FINRA Annual Conference this week at Booth #7.


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