“I suspect that the focus will really be on representatives,” Schatzow said. “I think this is an impossible area for the average broker-dealer to supervise. Obviously, we have seen some bigger firms terminate employees recently for applying for loans. However, the level of resources needed to cross-reference the list of PPP applicants against a firm’s roster of representatives, identify their business and then investigate the loan is so far removed from what a typical broker-dealer does in supervising their employees. It also has very little to do with the violation of federal securities laws and protecting customers, which compliance programs should be designed to address.
“I think a compliance department that is spending time determining whether their employees rightfully applied for a loan isn’t the best use of resources or message to be sending to the industry,” he added.
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.
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.
“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. (He’s 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.”
Adam Gana, a securities fraud attorney and managing partner at Gana Weinstein LLP in New York, agrees that brokerage firms themselves should be liable if their reps are found to be using PPP money for such undisclosed outside activities.
“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,” Gana said. “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 and undisclosed broker activities. It’s imperative that Finra take a strong stand on brokers’ outside businesses.”