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FINRA IS FOCUSING ON BROKER VIOLATIONS RELATING TO EXPENSES

The Financial Industry Regulatory Authority Inc. (FINRA) has a new focus on cracking down on brokers who submit inappropriate or falsified corporate expense reports. In recent years, FINRA is increasingly imposing fines and barring brokers from the industry for violations relating to inappropriate submission of personal expenses. To some observers and registered representatives that face FINRA in cases related to allegedly inappropriate submission of expenses, it does seem that these matters are being treated on the same level as sales practices violations involving a customer.

In line with its aggressive pursuit of brokers who commit expense reporting violations, FINRA is requiring that the broker and the brokerage firm provide all the back-up and supporting documentation relating to the expenses, and requires targeted brokers to appear at an on-the-record interview (OTR). OTRs are similar to depositions taken in civil proceedings in that the broker or other associated persons meet with FINRA regulators and answer questions under oath with a court reporter transcribing the proceeding. After completion of an OTR, FINRA frequently suggests a settlement by Acceptance Waiver and Consent (“AWC”) in which the broker agrees to a sever sanctions or bar from the industry. Short of an AWC settlement, FINRA will bring these cases to an Enforcement Hearing. Our firm’s review of the results in AWC settlements and hearings for brokers with allegedly inappropriate submitted expenses show that the results have become more onerous.

By way of example, one former broker registered with Fidelity Investments, faces the possibility of fines and being barred from the industry for expense violations. According to a complaint filed this month by FINRA’s Department of Enforcement, the broker allegedly mislabeled personal expenses including a “meat snack stick” as a general office supply. FINRA has also barred brokers from the industry for misreporting travel expenses. We have been retained by many clients with claims that their expense submission were reviewed by the brokerage firm after they were terminated for other reasons, or by brokers who believe that previously approved expenses reports were re-reviewed by their firms in the hope of finding questionable expenses. Brokerage firms now add the questionable expense to the broker’s Form U-5, which will trigger a FINRA investigation. Lax & Neville LLP recommends all FINRA registered representatives and brokers exercise extreme caution in the submission of expenses.

Lax & Neville LLP has nationally represented brokers, investment advisers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.