- SEC’s Enforcement: RIAs Under Scrutiny For Marketing Rule Compliance
- Illinois Advisor Wins Expungement Of 2016 Termination Disclosure
- Rising Tide: The Urgent Call For Advisor Succession Planning
- Arizona Advisor Achieves Expungement Of 2011 Customer Dispute
- Why RIAs Should Consider Outsourced Chief Compliance Officers
In recent months, a significant number of individuals have found themselves with Form U5 terminations or under Financial Industry Regulatory Authority (FINRA) Rule 8210 inquiries or investigations for alleged violations related to electronic document signatures. It appears that FINRA is intensifying its crackdown on this issue, making it crucial for financial advisors to stay informed and compliant. This article delves into the current FINRA enforcement environment surrounding e-signatures and the potential implications for registered representatives, particularly in the context of Form U5 termination filings and FINRA 8210 inquiries and investigations.
FINRA’s Growing Concerns Related To E-Signatures
Digital signature tools have revolutionized the way brokers and customers conduct business in the era of remote work. However, this convenience has come with an increased risk of forgery and falsification. FINRA issued a regulatory notice last August, warning firms about the need for adequate controls to detect instances of signature forgery or falsification. In this blog, we will explore signature-related violations, particularly electronic signatures, based on real-life examples and FINRA’s guidance.
According to FINRA’s regulatory notice, firms have reported concerns about forged signatures on various documents, including account-opening forms, account activity letters, discretionary trading authorizations, wire instructions, and internal firm documents. These incidents highlight the importance of maintaining high standards of commercial honor and accurate recordkeeping, as violations can trigger penalties, under FINRA Rule 2010 and Rule 4511, and initiate Rule 8210 investigations.
Methods Of Forgery & Falsification
FINRA suggests several ways for firms to monitor and prevent infractions. One of the methods involves tracking the Internet Protocol (IP) addresses associated with digital signatures. In some cases, firms have discovered instances where the IP address for both the customer and the broker signing the document were the same, raising suspicions of unauthorized actions. Additionally, brokers have been found sending e-signature documents intended for customers to their personal email addresses for signing, bypassing proper procedures.
The Role Of Broker Support Staff
FINRA advises firms to involve broker support staff in monitoring for potential infractions. Administrative staff, in some cases, have raised concerns to management after brokers directed them to manipulate e-signatures. Training for such staff members is recommended to encourage them to resist pressure to manipulate signature processes.
LPL Financial’s DocuSign Termination Controversy
Although FINRA’s notice does not mention specific brokerage firms, one notable case involves LPL Financial — the largest independent broker-dealer. LPL terminated several brokers, including members of a billion-dollar AUM team, for violations of its document signature policy when using the popular DocuSign tool. Although LPL had initially provided guidance to its representatives for using DocuSign when clients were not proficient with the software, at some point, LPL changed its stance and started terminating brokers for signing documents on behalf of clients — even with authorization. The brokers claimed that they were helping clients who had difficulties with e-signature technology, but their actions inadvertently violated firm rules requiring original signatures.
Through FINRA’s Dispute Resolution forum, AdvisorLaw’s Doc Kennedy, J.D., MBA negotiated Form U5 termination language on behalf of one broker who was impacted by this violation, and he has done so for many others who have found themselves in similar situations. In this case specifically, Kennedy argues that brokers could easily misinterpret LPL’s compliance manual, which stated that all signatures must be original, because of LPL’s approved eSignature program.
The adoption of e-signature and remote work tools, including DocuSign, in the financial industry has raised concerns and led to industry-wide issues. Firms swiftly transitioned to a remote work environment during the Covid-19 pandemic, leading to instances where brokers pre-populated or improperly signed forms, attempting to reduce paperwork for clients. FINRA has brought forward numerous cases related to such practices.
As this issue unfolds, the repercussions of LPL Financial’s termination actions and the broader implications for the industry are yet to be fully realized. The growing scrutiny on e-signature practices and the need for clarity in compliance guidelines highlight the importance of legal support, such as that provided by AdvisorLaw and Doc Kennedy, in navigating the complex situations faced by brokers and financial professionals.
Differentiating Forgery & FINRA Rule 2010 Violations
FINRA’s definition of forgery may not align perfectly with state laws. While state laws often require an intent to defraud for forgery, FINRA considers any unauthorized signing as forgery under Rule 2010. However, it is crucial to differentiate between bad-faith behavior and behavior solely aimed at avoiding customer inconvenience. Firms should exercise discretion when evaluating potential violations under Rule 2010.
Firm Policies & Compliance Guidance
Firms typically have strict rules to prevent misuse of e-signature software. For instance, some wirehouses limit the use of DocuSign to the client’s email address on file, ensuring a secure and traceable process. However, the language used in compliance manuals can lead brokers to interpret that they have permission to sign on behalf of clients, even if they have the client’s authorization.
Navigating E-Signature Violations & FINRA Investigations/Inquiries
The intensified focus on violations related to e-signatures by FINRA serves as a wake-up call for brokers and financial professionals. The growing concerns surrounding forgery and falsification underscore the need for robust controls and accurate recordkeeping within firms. Monitoring IP addresses associated with digital signatures and involving broker support staff in detecting potential infractions are among the recommended practices.
The controversial termination actions taken by LPL Financial in response to alleged violations of its document-signature policy using DocuSign highlight the challenges faced by brokers and the evolving nature of compliance guidelines. AdvisorLaw’s Doc Kennedy has been at the forefront of defending brokers in these types of situations, emphasizing the importance of legal support in navigating complex regulatory environments.
As the financial industry continues to rely on e-signature tools and remote work solutions, it is essential for firms to strike a balance between efficiency and adherence to compliance standards. Clarifying compliance guidelines, ensuring proper training, and exercising discretion when evaluating potential violations are key steps in addressing this issue.
Ultimately, staying informed, compliant, and seeking expert guidance when necessary will be crucial for brokers and financial professionals, as they navigate the changing landscape of e-signature regulations and enforcement actions. By proactively addressing these challenges, industry participants can protect themselves, their clients, and the integrity of the financial system as a whole.
How AdvisorLaw Can Safeguard Your Career
For advisors who have been affected by e-signature violations and are facing Form U5 termination disclosures, formal 8210 inquiries, or investigations, AdvisorLaw is here to provide the legal support and expertise that you need. We understand the complexities surrounding e-signature compliance and the potential implications upon your career. Our experienced team, led by Doc Kennedy, J.D., MBA, specializes in defending brokers under FINRA Rule 8210. We can navigate the intricacies of your case, negotiate Form U5 termination language on your behalf, address FINRA inquiries or investigations, and work toward expungement of any defamatory disclosure that may arise — we work toward protecting your reputation and resolving the issues at hand.
With AdvisorLaw by your side, you can trust that we will diligently fight for your rights and help you navigate the challenging landscape of e-signature enforcement.
Contact us today for a complimentary consultation.
- Illinois Advisor Wins Expungement Of 2016 Termination Disclosure - September 25, 2023
- Arizona Advisor Achieves Expungement Of 2011 Customer Dispute - September 15, 2023
- FINRA Crackdown — Outside Business Activities - September 7, 2023