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.

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