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Foreign Associates Cause FINRA Headache For US Brokerage
August 11, 2016
Wall Street is more a global financial village than a one-way street in lower Manhattan. Sometimes employees have to relocate away from their homelands to where the jobs are. Sometimes employers go to foreign markets where they see potential for new lines of business or cheaper labor. Whatever the motivation, a FINRA member firm's use of Foreign Associates has regulatory and compliance ramifications. In a recent FINRA regulatory settlement, the violations involving Foreign Associates don't come off as particularly serious but the lessons are invaluable for firms contemplating similar relationships.
Case In Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Vision Brokerage Services, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Vision Brokerage Services, LLC, Respondent (AWC 2013035110601, August 1, 2016).
Since 2010, Vision has been a FINRA member firm with about 40 registered representatives and 10 branch offices. The AWC asserts that the firm had no prior relevant formal disciplinary history with the Securities and Exchange Commission, any self-regulatory organization or any state securities regulator.
Foreign Associates
The AWC asserts that in June 2010, Vision started to register Foreign Associates ("FAs") and by April 2013, the firm had four FAs, who were all located in Europe. Vision's written supervisory procedures provided that its FAs would be supervised in the same manner as its domestic representatives. The AWC asserts, however, that there were marked differences in the supervision of Vision's domestic reps and its FAs.
Prior to May 2013, the AWC asserts that Vision:
- did not assign FAs firm email addresses;
- did not require that the FAs' business-related communications be retained by the firm; and
- required all domestic representatives to disclose all outside business activities on an annual attestation form, but did not require the same of FAs.
During the relevant period, the AWC asserts that although Vision domestic reps were required to do so, the firm did not require FAs to:
- disclose any non-Vision accounts and
- provide duplicate monthly statements to the firm's compliance department.
Non-Branch Locations
Finally, during relevant period, Vision designated the FAs' offices as non-branch locations, when they should have been registered as firm branches, which would have required annual inspections rather than the once-every-three-year inspection of non-branch locations (which resulted in no inspections during the relevant period).
FINRA Sanctions
FINRA deemed Vision's above conduct to constitute a failure to establish, maintain and enforce a supervisory system, including written supervisory procedures, reasonably designed to supervise the activities of FAs in violation of NASD Conduct Rule 3010 and FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Vision a Censure and a $25,000 fine.
Bill Singer's Comment
As is often best, let's go to the rulebook:
NASD Rule 1100: Foreign Associates(a) All persons associated with a member who are designated as Foreign Associates shall be required to be registered but shall be exempt from the requirement to pass a Qualification Examination. Persons associated with a member shall be designated as Foreign Associates if they meet the following criteria:
(1) They are not citizens, nationals, or residents of the United States or any of its territories or possessions;(2) They will conduct all of their securities activities in areas outside the jurisdiction of the United States and they will not engage in any securities activities with or for any citizen, national or resident of the United States.
(b) Prior to the time the exemption provided for in paragraph (a) hereof may become effective, the member desiring to employ any such person must file with NASD a "Uniform Application for Securities Industry Registration or Transfer" for each such person and must certify that such person meets the criteria of paragraph (a), as well as that:
(1) Such person is not subject to any of the prohibitions to registration with the Association contained in Article III, Section 4 of the By-Laws of the Association;(2) Service of process for any proceeding instituted by the Association in respect to such person may be sent to an address designated by the member.
Also, consider the "Foreign Associates" section on FINRA's "Registration and Qualification Frequently Asked Questions" webpage:(c) In the event of the termination of the employment of a Foreign Associate, the member must notify the Association immediately by filing a notice of termination as required by Article V, Section 3 of the By-Laws.
Foreign Associates1. Who is eligible for registration as a foreign associate? What functions may a foreign associate perform at a firm?A foreign associate is an individual who is not a citizen, national, or resident of the United States or any of its territories or possessions. A foreign associate does not engage in securities activities with or for any resident, citizen, or national of the United States. This person may engage in securities activities for the firm outside the jurisdiction of the United States only.2. How do I become registered as a foreign associate?The FINRA-registered firm must submit a Form U-4 through Web CRD to request registration as a foreign associate on your behalf. There is no examination requirement associated with this type of registration.3. In what capacity may a foreign associate act on behalf of a firm?A foreign associate may act in any registered capacity on behalf of the firm, consistent with his/her designation as a foreign associate. This can include acting as a trader or being the registered person responsible for servicing accounts of a foreign national.4. In what capacity may a foreign finder act on behalf of a firm?Foreign finders are not considered as associated persons of a firm. The sole involvement of a foreign finder in the business of a firm is the initial referral of non-U.S. customers to the firm.