Podcast Transcript III




Achieving FINRA Approval after Multiple Rejections

Announcer: Hello and welcome to the Regulatory Compliance podcast series. Here we will be joined by Laura Crosby-Brown, Director of Compliance, as she talks about working with a client to achieve approval from FINRA after repeated rejection of their application.

Laura: The client is a new broker-dealer in the alternative investments realm. They are located in New York City and their parent company had been conducting business very similar to what they were being approved for, for a number of years. They actually had started the process of becoming a brokerage dealer through a law firm, and what happened was they submitted two applications. The first one got rejected by FINRA, the second one went into FINRA and came back with four pages of comments. Some of them, major comments, revolved around the firm’s written supervisor procedures, as well as their financial and operation principal.

The firm had designated a person that is employed by their parent company to be their financial and operations principal. He’s a national from China, his work visa didn’t permit him to work for two companies, so there were a number of issues with that, in addition to his experience. He had no experience as a financial and operations principal. So FINRA really wanted to address those matters. With regard to the written supervisory procedures that the attorneys had included in there, that the firms were doing business of this principle, which basically meant they were buying the product into their own account and selling it out to a client, and their net capital requirements were going to be $100,000.

Some other comments involved the experience of the principals, the compensation they were going to be earning on their products, things like that. So we really take it back, make FINRA understand the way the businesses were really going to be done, what the compensation was going to look like to make sure that it complied with all the regulations. We had to do a change in the FINOP. We actually took over the FINOP duties and assigned a FINOP from our group of FINOPs here so that we could really address those major issues that were holding up the application.

So they were very unhappy, very confused, didn’t know what to do, had a referral from someone to come to us because we do broker-dealer setups. So they called us had a conversation and we started to do their work. We do a lot of broker-dealer setups. We have a reputation in the business of knowing what we’re doing and being able to work with FINRA, and we spend a lot of time with our clients in our business. They’re very important to us. We spend a lot of time interacting with our customers, really understanding what they want, what they expect.

Also, we’re a part of the PILOT program for FINRA’s new member applications system, so we were intimately familiar with the new systems and had a good working relationship with the offices that were reviewing this application. Once they contracted with us, we had to contact FINRA to let them know that we were now taking over this process, that we were going to be their contact on behalf of the firm. Then we had to gather information from the prior attorneys to figure out what had been filed in the past, because basically what we had to do is we had to fix what they had made mistakes on and then respond to other questions that FINRA had.

Probably the biggest challenge was the fact that we didn’t do this application from the beginning. This is something normally when we do an application we do it from soup to nuts. We start the process; we see it through to approval. So it was a struggle to try to get the information we needed in order to answer the questions we needed answered for the regulators. This was very unique to this process because, like I said, we normally start the process and take the client through, and where we had to pick it up for someone else, we didn’t have all the pieces. The other thing is generally when we do an application for membership we register the firm only in their home state, because what happens with a lot of the states is that they purge the application after 30 days because they don’t want old stuff hanging out on their books.

What had happened with these attorneys is that they actually started the registration process in nine states. So in addition to trying to deal with all of the FINRA issues relative to the application and trying to make them understand what the firm was doing and how they were doing it, and to correct some things that were really misrepresented in the application originally, we had to also deal with all of these state issues, and all the questions that were coming from the states. So it made the process a little more complex than it normally is, but it was really fun to do.

I think what a lot of people probably would have done was start the process from the beginning and that would have been a matter of withdrawing the application and starting over. And what needed to be done, although it was a challenge to get it done, it wasn’t impossible, so starting from the beginning would have made the time frame longer and it would have cost a lot more money for the client.

The client is on the fast track to approval. We should expect their approval to be issued some time this month. We actually had their membership interview last month in New York and everything went really well. I think they’re a lot happier with the whole process as a whole. When they came to us they were really, really frustrated. Like I said, the attorneys had done this twice and hadn’t moved them forward to where the client thought they should be. They had spent a lot of money and they weren’t getting the results they wanted. Now they’ve moved to the fact that they’re very close to approval. We’re very close to approval in a number of states, so the client’s got a much better product for actually less money than they would have paid to have the attorneys fix what they did in the first place.

Announcer: that concludes this segment from the Regulatory Compliance podcast series. We invite you to listen to other topics available here on our website, and if there is a question that you would like to ask one of our experts, don’t hesitate to contact us.