Financial Advisor, January 27, 2021 - The Financial Industry Regulatory Authority is investigating some brokers who took forgivable Paycheck Protection Program (PPP) loans and other aid for pandemic relief for possible improprieties.
In an examinations letter sent to multiple brokers by Finra’s National Cause and Financial Crimes Detection Program and signed by Associate Principal Investigator Nicole Floyd, the regulator said it is conducting “examinations to determine whether violations of the federal securities laws and Finra rules have occurred.”
"Finra is proactively looking at registered representatives that obtained loans through undisclosed outside business activities. It is core to Finra's mission to detect, deter and investigate potential fraud,” Finra spokesman Andrew DeSouza told Financial Advisor magazine. “This is not a Finra targeted examination Letter,” he added. He declined to comment on how many brokers were under review.
Attorneys believe Finra is using the exam letter to zero in on brokers who used funds for outside activities that may or may not be supervised by their brokerage firm—activity that may pose “failure to supervise” enforcement actions for broker-dealers themselves.
“We are closely following this effort by Finra to investigate brokers who may have accepted PPP loans for undisclosed outside businesses,” said David Meyer, president of the Public Investors Arbitration Bar Association.
Wells Fargo & Co. in October fired more than 100 employees suspected of improperly collecting coronavirus relief funds the firm said were meant for small businesses. JP Morgan Chase & Co. found evidence of employees and customers misusing the government’s flood of stimulus funds this spring and said it was cooperating with authorities, but declined further comment.
Finra’s review seeks extensive information from brokers, including loan documents, bank statements and tax filings. The 13 areas outlined in the exam letters include including why the broker applied for a loan, copies of all loan applications, statements on how the funds were used and all compensation received since Oct. 1, 2019.
The Finra letter also asks for descriptions of any outside business activity in which the broker has participated since 2015 and whether that activity was disclosed to the rep’s brokerage, along with state and federal tax refunds since 2017 and all bank and brokerage accounts statements.
“I hope this investigative action leads to the expansion of Finra's rules to provide greater supervisory oversight and investor protection for outside business activities,” said Meyer, who is also managing principal of Meyer Wilson, a securities firm that represents investors. “Such activities continue to pose a serious risk to investors as evidenced by the numerous examples of fraudulent private placements, Ponzi schemes, and other investment frauds.”
According to the Small Business Administration, more than 1,400 self-proclaimed investment advisors received more than $150,000 each in the first round of PPP loans.
“The real issue will be for firms who are on the hook for supervision. Broker-dealers have an obligation to detect their brokers’ undisclosed activities and businesses,” said Adam Gana, managing partner of Gana Weinstein, LLP.
“Firms have a clear duty to search for and ferret out red flags. In my humble opinion, firms do not do nearly enough to do this and they’re constantly being put on the hook for it. Most of our cases involve failure to supervise both disclosed an undisclosed broker activities. It’s imperative that Finra take a strong stand on brokers’ outside businesses,” Gana added.
Brokers have until Feb. 3 to provide the information Finra requested.
Andrew Stoltmann, a partner with Stoltmann Law Offices, said, “This is one of the rare instances where I think Finra is on a little bit of a fishing expedition. While the optics of financial advisors and brokerage firms getting PPP money is repugnant to many of us, the purpose of those funds is to keep people employed. Therefore, brokers, or RIAS and brokerage firms, should be allowed to have these funds. I think Finra primarily is doing a technical, by the books review,” Stoltmann added.
Finra stipulated last year that Covid-relief loans did not have to be disclosed on U-4 forms as a significant financial event because of their forgiveness, but the Securities and Exchange Commission has required that loans be disclosed in filings “if the circumstances leading you to seek a PPP loan or other type of financial assistance constitute material facts relating to your advisory relationship with clients.”