I was terminated by my firm due to a disciplinary issue that resulted in a 15 day suspension. I’m now applying with a new broker-dealer but I see that the disciplinary matter is already reported on my CRD. I thought I had thirty days before it was reported in order to give me a chance to provide my own comment. Can you help me understand this?

Last December FINRA shortened the time between the filing of a U5 and when the disclosure event will be disclosed to the public. The time was reduced from 15 days to 3 days. (See. Regulatory Notice 15-49). You can still submit your own comment that will be added to the CRD report but, unfortunately, any prospective employer will see the disciplinary matter. Regardless of the shortened time frame, however, firms always had the ability to file the U5 sooner and prospective employers would see the disclosure regardless of whether or not it was being disclosed to the public. Note that there’s an exception to even the three day rule. If an event is reported on Form U5 and the same event is thereafter reported on Form U4 prior to the expiration of the three-business-day period, FINRA will release the information simultaneously upon processing rather than waiting for the three days to expire.

We’re contemplating hiring a rep who has some issues on his CRD report. He seems to be a good guy but made some mistakes and has learned from them. Regardless of whether he’s learned from his mistakes, I think we should put him on heightened supervision but the branch manager doesn’t think it’s necessary. What are your thoughts?

Rule 3120 requires a firm to establish, maintain and enforce supervisory procedures that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules and create additional procedures (or amend existing ones) where necessary. In NTM 05-29, FINRA provided specific guidance regarding that requirement. FINRA emphasized that simply adopting their guidance will not provide a safe harbor. Firms must be sure to craft their procedures to fit the firm’s business and its reps. Heightened supervision involves establishing and updating these systems to address situations where the circumstances call for closer evaluation. This level of supervision is usually required for so-called “problem” employees with a history of customer complaints or troubled regulatory and compliance records. The emphasis on heightened supervision primarily came from the Joint Regulatory Sales Practice Sweep in 1996. The report from that Sweep recommended: (1) improving hiring procedures to identify problem representatives; (2) enhancing supervision of problem representatives; and, (3) tying branch manager compensation to the manager’s effective supervision of the reps. Registered representatives that should be considered as candidates for heightened supervision include those whose records reflect disciplinary actions involving sales practice abuse; a history of customer complaints and/or adverse arbitration decisions.

In deciding whether to impose heightened supervision on a rep, you need to examine the circumstances of the prior bad acts and decide whether your firm’s standard supervisory structure is adequate to address the issues raised by the rep’s record. If the rep engages in further sales practice violations, regulators will closely evaluate whether the firm itself should be subject to disciplinary actions for a failure to supervise the registered representative, beginning with the decision-making process that led to the individual being hired in the first place.

Alan J. Foxman

Alan J. Foxman

Alan J. Foxman is a partner in the law firm of Dew Foxman & Haugh and a senior consultant with National Compliance Services in Delray Beach, Fla.