When the Financial Industry Regulatory Authority Inc. released their exam priority letter in January of this year, they made it very clear their target is on rogue or recidivist brokers and the broker-dealers that supervise them. By many accounts, this is a positive move that will hopefully weed out the registered reps in the business who have no place giving clients advice, but what about the quality advisers who are being terminated for misunderstandings or things beyond their control? Is the industry in such a rush to pacify the regulators that they are throwing undeserving advisers under the bus?
Take, for example, an adviser I recently assisted in changing broker-dealers. David had been at his current firm for more than 20 years. His health took a bad turn in 2013, and, as a result, he ended up with two tax liens. As his health rebounded, he put a payment plan in place to start repaying the liens. His broker-dealer had known about these liens for more than three years and never had a problem with his disclosures. Out of the blue, David received a call from compliance that they were terminating his license.
For every one of the stories I have heard from advisers like David, there are hundreds more behind him.
For many broker-dealers, the problem lies in assessing what Finra deems a rogue broker, as there is no clear definition. Finra is quick to point to the number of "yes" answers an adviser has. These yes answers can be anything from a compromise with creditors, to a denied customer complaint, to a termination. The problem is, the sheer number of disclosures does not tell the story behind an adviser's record. Was an adviser terminated because he left a firm that was trying to hold on to his book of business, and therefore searched for any tiny slip up to slow their transition, or did the adviser legitimately do something wrong? Was the customer complaint settled because it was found the adviser had wronged a client or because their firm decided it was less costly to settle as opposed to the expense of arbitration? The list of nuances goes on and on. The fact is, marks on advisers' CRDs are not black and white issues. If advisers are judged solely based on numbers, unfair treatment is almost certain.
Another affected area is who firms are willing to bring on. Broker-dealers that used to listen to an adviser's side of the story now have blanket policies against acceptance if there is any kind of termination or number of complaints. "The current regulatory environment has definitely made it harder for advisers with disclosures on their records or termination language on their Form U5 to make a move between firms. Advisers are reporting that many firms only want to take on reps with no disclosure history and no termination language," said Kimberley Cronin, a partner at Messner Reeves who offers legal advice to advisers and RIAs.
So what can an adviser do to proactively protect their record? Take control, own your CRD and never assume disclosures are reported accurately or that your broker-dealer will automatically make updates.
The biggest mistake I see advisers make is they don't really know what's on their record, how it reads or how those "yes" answers affect them. For example, a compromise with a creditor is considered a disclosure. Too often, I see advisers with minor compromises that should have been paid off to avoid a disclosure. Also, if you have older disclosures, hire an attorney to evaluate whether items can be expunged. This can be a costly process, but well worth it, especially in today's environment.
If you are terminated, don't sit back waiting for your broker-dealer to come up with language. Hire a securities attorney to represent you to negotiate the language being put on your U5. "If an adviser waits until after a Form U5 is filed with Finra to try to modify the termination language, it's nearly impossible to get the language changed," Ms. Cronin said.
The current environment doesn't tolerate much when it comes to CRD disclosures. Don't wait until there is a problem to be proactive.
Jodie Papike is the executive vice president of Cross-Search, a third-party, independent broker-dealer recruiting firm that connects advisers with broker-dealers.