FA Magazine July/August 2022 | Page 17

assets are on the line when it comes to satisfying claims against their business , something single-member limited liability companies don ’ t have to worry about .
LLCs ( like corporations ) can limit that liability , though they may be taxed as sole proprietorships if owned by one individual , according to the IRS . The agency says that the number of sole proprietorship returns showing LLC status has jumped more than
16 times in the past two decades .
The warning to sole proprietors is clear : “ Make sure you ’ re protected from an insurance and liability standpoint ,” Ekoniak says .
— Jeff Stimpson

B-Ds Start Firing Reps With Spotty Records

Broker-dealers have started terminating reps with compliance issues to dodge a label that the financial Industry Regulatory authority will begin to use on them in mid-july .

The firms are trying to avoid being tagged as “ restricted firms .” under finra ’ s “ restricted firm ” rule , broker-dealers with a record of numerous disciplinary actions , or whose reps have a large number of disciplinary incidents , must create a restricted deposit of capital or securities that will require finra ’ s permission to withdraw .
Restricted firms may also have to deal with finra placing restrictions on their lines of business , product sales and hiring practices , and they may face public disclosure of their riskier “ restricted ” status on Broker- Check , officials say . on june 1 , finra began sending preliminary notices to firms that would likely appear on the “ restricted ” list , either because of the risks posed by their reps or the firms ’ own disciplinary history .
The initial reports give firms about 30 days to fire riskier brokers and begin to make disclosures that may be missing about the reps ’ or the firms ’ risks and disciplinary events .
“ We have heard and seen reps being terminated ... which is a proactive approach to prepare and be aware of risks that will cause firms to be designated ‘ restricted ,’” says
Kosha dalal , vice president and associate general counsel at finra . finra ’ s rule gives firms a onetime option to reduce staff the first year they find themselves on the restricted list , dalal warns .
Riskier brokers who get terminated can ’ t be rehired for one year , she says . If another firm decides to hire the higher-risk broker , it will need to have a discussion with the regulator under the new rules .
“ We do have firms that do have concentrations of these individuals ,” dalal says . “ We want to make sure this type of individual just doesn ’ t go to another firm .” She adds that the rule is intended to capture firms whose disclosures show their disciplinary history is “ in most cases significantly outside the norm .” finra ’ s designation of some firms as high risk will depend in part on the firms ’ responses to the june 1 notices . The responses will help finra determine whether a firm will be designated restricted by mid-july , at which point finra plans to decide which of the 3,500 firms that it regulates should carry the label .
“ Be proactive ,” dalal advises firms . “ after the june date when [ firms ] receive that first predictive report , add or amend disclosures and terminate reps who fall into [ a higher-risk ] category .” finra , a self-regulatory organization for the brokerage industry , is not trying to chase firms out of business , says Bill St . Louis , executive vice president of the organization ’ s national Cause and financial Crimes detection Program .
The june 1 report is only the beginning of the process for firms , he notes . “ I get calls from firms asking about this . The june 1 reports we provide do not make a firm a restricted firm . That starts the process that can ultimately lead to you being designated restricted ,” St Louis says .
The initial reports give firms about 30 days to fire riskier brokers and begin to make disclosures that may be missing about the reps ’ or the firms ’ risks and disciplinary events .
a number of regulators have reached out to finra to say they support public disclosure for firms that are designated restricted , the regulator ’ s officials say .
“ Some form of public disclosure is warranted here ,” dalal says . “ In the current year , firms that are identified as restricted will get a tag on BrokerCheck denoting the firm is a restricted firm . If someone looks for you , they ’ ll see a little tab .
“ This is a proposal pending with SEC staff that has not been formally filed yet , but be on the lookout ,” she adds .
— Tracey Longo
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