Investor Protection: The antecedents to FINRA Regulatory Notice 07-55, reviewed in our last posting, go back more than ten years. In 1997 the NASD (now FINRA) released Notice to Members 97-17, a far-reaching by-product of The Joint Regulatory Sales Practice Sweep (Sweep), which was a 1994 initiative involving the staffs of the NASD, the New York Stock Exchange, the SEC and representatives of the North American Securities Administrators Association (NASAA). This “working group” was formed to review the sales practice activities of selected registered representatives, and the hiring, retention, and supervisory practices under existing NASD and NYSE rules of the brokerage firms employing them.

The Working Group Report: From the end of 1994 through November 1995, the Sweep working group “conducted on-site examinations of 179 branch and main offices of 101 different brokerage firms throughout the U.S. The examinations focused on the sales practice activities of 347 registered representatives who were selected based on criteria including, among other things, a history of customer complaints, disciplinary problems, or arbitrations. One-fifth of the Sweep’s 179 examinations resulted in enforcement referrals and an additional one-fourth of the examinations resulted in the issuance of letters of caution or deficiency letters.” The following is NASD’s revealing synthesis of the working group’s written findings when the Sweep Report was released in March 1996 (as reported in the NTM 97-19 Memorandum, “The Joint Regulatory Sales Practice Sweep, Heightened Supervisory Procedures” (April 1997)):

• Some firms are willing to employ registered representatives with a history of disciplinary actions involving abusive sales practices or customer complaints.
• Many of the branch offices examined conduct only the minimum background review required by NASD or NYSE rules before hiring a registered representative. This may contribute to the significant movement within the securities industry of registered representatives with a history of customer complaints, disciplinary actions, or arbitrations.
• Supervisors in certain branches examined conducted either inadequate or no routine review of customers’ securities transactions effected by registered representatives to detect sales practice abuses.
• While one-half of the branches examined engage in some type of cold-calling activity, almost one-half of these did not fully comply with the applicable laws or regulations governing unsolicited telemarketing.

Was the obvious goal as expressed in NTM 97-19, of heightened supervision over potentially troublesome or even rogue brokers, implemented in a way that would adequately serve to protect the investing public? While some investors who fell victim as a result of lax hiring and supervision in the intervening years may be skeptical, we have at least one simple, eminently practical suggestion that might help level the playing field.

See our next Securities Fraud Hotline Posting for more. . .