Firm Settles FINRA Charges for Fingerprinting Failures
Commentary by Glen Barrentine
A firm settled FINRA charges for failing to fingerprint and implement background screening procedures for non-registered employees.
According to the AWC, the firm failed to: (i) timely fingerprint 2,317 non-registered associated persons based in foreign locations and screen them for statutory disqualification; (ii) timely fingerprint 1,663 US-based non-registered associated persons; and (iii) maintain fingerprint records for all non-registered associated persons that it had fingerprinted. Further, FINRA found that the firm's WSPs lacked any procedures to determine whether any employees were exempt from the fingerprinting requirements.
As a result, FINRA found that the firm violated SEA Section 17 ("Records and Reports") including: Rule 17(a) ("Rules and Regulations,") Rule 17a-3 ("Records to Be Made by Certain Exchange Members, Brokers and Dealers,) Rule 17f(2) ("Fingerprinting"), FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3110 ("Supervision") and 4511 ("General Requirements") and NASD Rule 3010.
To settle the charges, the firm agreed to (i) a censure, (ii) pay a $1,250,000 fine, (iii) an undertaking to review its systems regarding the identification of non-registered employees and affiliates required to be fingerprinted and screened and (iv) complete its ongoing review and remediation as to individuals who were not fingerprinted. FINRA recognized that the firm voluntarily commenced remediation efforts prior to FINRA's investigation.
Commentary
While Rule 17f-2 requires fingerprinting with respect to "partners, directors, officers, or employees" of a broker-dealer, it is likely that the US securities regulators read the term "employees" broadly to include associated persons consistent with the broader definition of such term found elsewhere under the Securities Exchange Act—at least to the extent those persons are not exempted by the categories listed under Rule 17f-2(a)(1)(i).
Put another way, the regulators read the term "employees" to include associated persons, as in persons affiliated with a controlling or controlled entity or entity under common control, who handle securities, monies or original books and records. In this regard, it is notable that, except when citing the language of the rule, the AWC generally refers to "associated persons" of the firm, rather than employees.
Accordingly, broker-dealers should probably fingerprint people occupying these positions even if those persons are not, technically speaking, "employees" of the broker-dealer and regardless of whether they are located in the US or abroad.