FINRA Fines Firms for Fingerprinting Failures
Commentary by Glen Barrentine
A firm settled FINRA charges for failing to (i) fingerprint and use fingerprint results to screen for statutory disqualification of its non-registered associated persons and (ii) maintain proper fingerprint records.
According to the AWC, from January 2016, the firm failed to fingerprint and screen for statutory disqualification approximately 2,000 non-registered associated persons employed by its affiliates in the US, Canada and India. FINRA found that the firm's screening process did not include fingerprint collection or review of fingerprint results for these individuals. Although the firm began remediation efforts in February 2022, it was unable to fingerprint many of the individuals because such individuals were no longer associated with the firm or its affiliates.
In addition, FINRA determined that the firm failed to make and keep required fingerprint records for the associated persons whom it failed to fingerprint. Relatedly, FINRA determined that from January 2016 to December 2021, "[the firm] lacked written procedures requiring the firm to fingerprint and to use fingerprint results to screen for statutory disqualification [of] non-registered associated persons employed by affiliates based in the United States or Canada." Although the firm eventually adopted such procedures, it "still failed to establish and maintain a supervisory system reasonably designed to fingerprint and screen (based on fingerprint results) non-registered associated persons employed by affiliates based in the United States and Canada until January 2023, when it completed remediation efforts as to these individuals." Furthermore, FINRA determined that for affiliates based outside the US and Canada, the firm failed to incorporate into its supervisory system and written procedures "any Exchange Act fingerprinting or screening requirements for non-registered associated persons" employed by such affiliates.
As a result, FINRA found that the firm violated SEA Section 17 ("Records and Reports"); SEA Rules 17a-3 ("Records to Be Made by Certain Exchange Members, Brokers and Dealers), 17f-2 ("Fingerprinting of securities industry personnel"); and FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3110 ("Supervision") and 4511 ("General Requirements").
To settle the charges, the firm agreed to (i) a censure; (ii) pay a $950,000 fine; (iii) an undertaking to review its systems regarding the identification of non-registered employees of the firm or any of its affiliates required to be fingerprinted and screened; (iv) implement a supervisory system and written procedures reasonably designed to achieve compliance with applicable fingerprinting requirements and related requirements; and (v) complete its ongoing review and remediation as to individuals who were not fingerprinted.
Commentary
The AWC charges the firm with a violation of Exchange Act Rule 17f-2 due to the firm's failure to fingerprint "non-registered associated persons" employed by US and non-US firm affiliates. However, it is not clear how the firm's failure to fingerprint such persons could trigger a violation of Rule 17f-2, as such persons do not seem to fall within the scope of Rule 17f-2.
It was previously my understanding that FINRA read Rule 17f-2 broadly to reach any person, whether an employee of the broker-dealer or not, who regularly has access to the keeping, handling, or processing of the securities, monies, or the original books and records relating to the securities or the monies of the broker-dealer and persons who have direct supervisory responsibility over persons engaged in such activities. Thus, it is my understanding that FINRA read Rule 17f-2 as including anyone, whether an employee of the broker-dealer or not, who would not satisfy the permissive exemption set forth in Rule 17f-2(A)(1)(B). The AWC, however, does not characterize the employees of the firm's affiliates in any manner, other than that they are non-registered associated persons employed by affiliates of the firm. This characterization seems to suggest that broker-dealers are required to fingerprint all such persons and not just persons who would not satisfy the permissive exemption set forth in Rule 17f-2(A)(1)(B).
If so, this is an expansive reading of Rule 17f-2—one that is presented without any supporting explanation by FINRA. Given my confusion, it would be useful to hear from readers who might have further views on this AWC.