I own a small boutique brokerage firm and was recently notified that FINRA was conducting an investigation into some possible wrongdoing by one of my former employees. I'm cooperating fully in the investigation but was just notified by my state's securities regulator that it is also conducting an investigation into the same matter. The state has asked me for basically the same material as FINRA. Is it really necessary for these agencies to duplicate their efforts?

— W.T., via e-mail

Often, an investigation by one regulatory agency may prompt similar investigations by other agencies since there is so much overlap between the various regulators. However, none of them want to "reinvent the wheel," and based on their limited resources, they typically are only too happy to piggyback on one another's investigation. I would suggest you speak with the investigator/examiner from both FINRA and your state's securities department and let them know that the other is conducting an investigation. Ask them to speak with each other and see if they can work out a method so you only need to go through this once. There's no guarantee but in my experience, one or the other is likely to allow the other to take the lead. Note that in the event that disciplinary action is required, the agencies should also be able to coordinate that as well, so you don't get hit with multiple fines or suspensions. Again, there's no guarantee of this and it would depend on whether the penalty imposed was acceptable to the other agency.

My firm recently opened a new branch and made me branch manager. I'm responsible for hiring new brokers and have been getting a lot of inquiries from reps who used to work for another firm that was recently closed down. While I like the fact that these reps have some good sales experience, I'm a little concerned that they might have picked up some bad habits. What should I do?

— G.W., California

The NASD Rule 3010 requires, generally, that each member establish and maintain a system to supervise the activities of each registered representative or any other associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable NASD Rules. However, it also requires certain member firms to adopt special supervisory procedures over the activities of their registered employees when a certain percentage of them were associated with a so-called "disciplined firm" within the last three years. The term "disciplined firm" means a firm that has "been expelled from membership or participation in any securities industry self-regulatory organization or is subject to an order of the Securities and Exchange Commission revoking its registration as a broker-dealer."

It can also include certain companies that have been closed down and permanently barred from the futures industries, or those subject to an order of the SEC revoking its registration as a broker-dealer. So, even if those reps haven't picked up any bad habits, the mere fact that they came from a so-called "problem firm" will mean that you have to provide them with greater supervision. Also, take note that in regards to one recent enforcement action, FINRA's Director of Enforcement said: "When a firm and its senior managers have reason to be aware of potential problems and fail to address the issues appropriately, they have not fulfilled their supervisory obligations."

Alan Foxman is an attorney in private practice
in Boca Raton, Florida. His comments are not intended
as legal advice. He can be reached at this address.