FINRA Enforcement has often been accused (again, admittedly, by me, and not too infrequently) of going after the “low-hanging fruit,” that is, taking the easy case when it presents itself.  Putting aside the question whether this observation is accurate or not – for what it’s worth, I think the answer is that it is often, but not always, true – a recent case triggers a better, more nuanced question: does FINRA Enforcement sometimes bring the wrong case, because it is easier?

Here is what made me think of this: a series of cases concerning a mutual fund called the LJM Preservation & Growth Fund (the “LJM Fund”).  You probably recall hearing about it.  The LJM Fund was a so-called “alternative” mutual fund.  Here is how FINRA defines that:

Alternative mutual funds are publicly-offered mutual funds that seek to accomplish the funds’ objectives through non-traditional investments and trading strategies. . . .  Alternative mutual funds are often marketed as a way for retail customers to invest in sophisticated, actively-managed hedge fund-like strategies that will perform well in a variety of market environments. Alternative mutual funds generally purport to reduce volatility, increase diversification, and produce non-correlated returns and higher yields compared to traditional long-only equity and fixed-income funds, all while offering daily liquidity.

The LJM Fund’s investment strategy involved, in part, collecting premiums from the sale of out-of-the-money options on the S&P 500 futures index.  (While the LJM Fund also bought options, overall, it was “net short.”)  Actually, this is a perfectly fine strategy, provided you are in a relatively flat trading environment.  In that setting, all you do is collect the premiums, watch the options you’ve sold expire worthless, and sit back and look like a genius.  In times of volatility, however, it carries the risk of significant losses as those out-of-the-money options suddenly become in-the-money.

On casual review, the LJM Fund apparently looked like any other of the hundreds of mutual funds that appear on the long lists of available mutual funds provided by clearing firms.  It did not readily appear to be an alternative or complex fund, and so was sold by several BDs to customers with conservative or moderately conservative investment objectives.

As you might expect in a story that starts out like this, the worst case scenario did, in fact, happen: on February 5, 2018, the S&P 500 fell 113 points, a loss of about 4.1%.  In just two days, the LJM Fund (and its companion private funds) lost 80% of their value, i.e., over $1 billion (yes, billion with a “b”).  A month later the Fund was liquidated and closed.  Customers suffered large losses.

So, what did FINRA do about this?  You can guess.  It took the easy path.  It went after BDs which had sold the LJM Fund.  In March this year, FINRA accepted AWCs from three such BDs.  The principal allegation that FINRA made was that the firms permitted the sale of the LJM Fund without having conducted reasonable due diligence, i.e., without fully understanding that it was an alternative fund, with unique risks that set it apart from all those vanilla mutual funds that also appeared on the sales platform.

In other words, as FINRA saw it, the customer losses were the fault of the selling BDs.  And that’s how FINRA always sees the world, in much the same way as PIABA lawyers do: it’s always the selling BD’s fault.

Yet, fast forward a few months from March to about a week ago, when the SEC filed a complaint against investment advisers LJM Funds Management, Ltd. and LJM Partners, Ltd. and their portfolio managers, Anthony Caine and Anish Parvataneni.[1]

These are the individuals and entities who ran the LJM Fund.  And what did the SEC allege that these defendants did wrong?  According to the SEC’s Litigation Release, they “fraudulently misled investors and the board of directors of a fund they advised” – i.e., the LJM Fund – “about LJM’s risk management practices and the level of risk in LJM’s portfolios.”  More specifically, while “LJM adopted a short volatility trading strategy that carried risks that were remote but extreme,” allegedly, some of the defendants, “in order to ease investor concerns about the potential for losses . . . made a series of misstatements to investors and the mutual fund’s board about LJM’s risk management practices, including false statements about its use of historical event stress testing and its commitment to maintaining a consistent risk profile instead of prioritizing returns.”

The SEC complaint further alleges “that, beginning in late 2017, during a period of historically low volatility,[some defendants] increased the level of risk in the portfolios in order to chase return targets, while falsely assuring investors that the portfolios’ risk profiles remained stable.”

In other words, at least according to the SEC complaint, these Defendants, who were well aware that “the funds’ investors and their financial advisors were primarily concerned about the risk of loss – including estimated worst-case loss scenarios – and how the risk of investment loss was managed,” intentionally and craftily created a false narrative about the LJM Fund’s risk management practices designed to mask the true risks associated with the fund.  And mask these risks not just from investors, but, as well, from the investors’ financial advisors.  That is, from the same BDs that FINRA decided to sanction because somehow, they failed – LIKE EVERYONE ELSE – to figure out that the folks running the LJM Fund were – allegedly – fraudulently hiding its real risks.

So, now we get to the point: for FINRA, it seems that when customer losses occur, especially after spectacular blow-ups like the sudden explosion of the LJM Fund, it goes after any BD that managed to have its fingerprints on things.  Rather than taking a more deliberative approach, one that takes into full consideration the fact that we are strictly dealing with a “reasonableness” standard of supervision, and one that is open to the possibility that the BD itself may have been a victim of someone else’s fraud, FINRA takes the “easy” route, as it did here with the three firms from which it exacted the AWCs, and just blames the BD.

Attentive readers may recall that not too long ago I wrote a blog generally complaining of claimants’ counsel who troll for clients by posting notices on their websites of supposed “investigations” that they are conducting of some alleged fraud, and specifically pointing out the intensive campaign they’ve waged to induce investors in GPB to file arbitrations against the BDs that sold GPB.  All that despite the fact that, according to the SEC, the selling BDs were not the bad guys, but were themselves the victims of the alleged fraud that was perpetrated by GPB.

Yet, notwithstanding this conclusion by the SEC, who among us would be surprised in the slightest if FINRA starts filing Enforcement actions against the selling BDs, alleging some supposed failure to have conducted adequate due diligence on GPB?  Sadly, the answer is none of us.  Because we know from its historic practice of playing the role of claimants’ counsel, that FINRA will, inevitably, blame the BDs.  Because it’s easy.


[1] Rather remarkably, mere minutes after I initially posted this blog, I received an email from the “strategic communications and media relations firm” that represents LJM Funds Management.  According to the firm’s website, among the services it offers to its clients is “reputation management,” which is described as follows: “We actively monitor and advise our clients on market and public sentiment around their businesses in the media and online.”  To that end, I was asked to share with you a statement from Mr. Caine in which he (1) denies the allegations, (2) insists that he has “summarily rejected” the SEC’s settlement offer, and (3) states his intent to “vigorously defend these false claims while continuing to aggressively pursue actions to seek financial recourse for LJM investors,” among other things.

The controller has been passed to a new team of players in Washington. New players prefer to hit the reset button and start a new game, not pick up where the prior player left off. We know how our new players like to play the game. They want to control every aspect of the game through regulation, occasionally, using the cheat code to attempt to regulate by enforcement. Securities regulators’ recent interest in gamification exemplifies just that.

According to Merriam-Webster, “gamification” is “the process of adding games or gamelike elements to something (such as a task) so as to encourage participation.” Google’s dictionary provides a similar definition: “[T]he application of typical elements of game playing (e.g. point scoring, competition with others, rules of play) to other areas of activity, typically as an online marketing technique to encourage engagement with a product or service.” Some broker-dealers have employed this marketing concept to their trading platforms in an effort to encourage investors traders to trade more, and thus to generate more revenue for the broker-dealers. In other words, for-profit entities have enhanced their services to differentiate themselves from their competitors by making their services more attractive to consumers in an effort to generate more revenue.

I fail to see the problem with the use of gamification in the broker-dealer industry. It does not directly or proximately cause losses to the consenting adults who choose to trade securities. The performance of the securities that grown men and women choose to buy and sell is dictated by the performance of the securities, not whether confetti pours down, or firework light up, the screen after profitably closing a position. There also is nothing misleading about gamification. I highly doubt that there are any traders, even neophyte traders, who actually believe they cannot lose money buying and selling securities. Broker-dealers disclose those risks in spades. Even gamers know they are not going to win every game they play. Trading securities is no different. You make money on some trades and you lose money on others.

So what exactly is the problem with broker-dealers adding game-like features to their trading platforms? One SVP at FINRA was quoted in a recent article as describing the problem to be: “The real danger here is that investors may be making decisions that are contrary to their own financial goals.” (Emphasis added.) In other words, it is possible that gamification might cause some investors traders to make poor decisions. The reality of the situation is that people who indiscriminately trade securities just for the confetti and fireworks screens, instead of the bottom line, are apt to make poor decisions, with or without the special effects and irrespective of where they fall on the platform’s leaderboard. While there apparently is uncertainty regarding the causal connection between gamification and poor trading decisions, there is no uncertainty that inexperienced and unsophisticated investors are more likely than experienced and sophisticated investors to make poor investment decisions.

FINRA now has a working group dedicated to gamification. Both the SEC and FINRA will be seeking public feedback on gamification. The regulators apparently need testimonials and data to tell them that the more user friendly and exciting a product is, the more likely a consumer is to use and enjoy it. Gamification is widely used to make the mundane more enjoyable. It even makes some human resources and other training and educational endeavors bearable. I have no doubt it has the same intended effect on trading platforms.

Setting aside the new regime’s need to regulate anything and everything, another problem with regulating gamification is assessing where to draw the line. Sure, there are easy things to address, such as leaderboards, but there is also a lot of grey area. Drawing lines will be challenging, if not impossible. If a customer profitably closes a position, what is the limit on how a broker-dealer can convey that generally good news and what is the basis for the limit? Is confetti okay? Money bag emoji? Smiley face emoji? Cha-ching sound effect? A flashing “Congratulations!”? A simple “Congratulations!” Or is that all too much? On some platforms, daily and overall unrealized losses on each position are in red font and daily and overall unrealized gains on each position are in green font. Is this too far? Does this cause some people to sell all of their reds to accumulate greens? What about the “buy” button? What can that permissibly look like?

We all know how this game will end. The SEC and FINRA are not going to pass the controller. Their efforts likely will result in guidance and/or rules on gamification. They believe gamification adversely affects some traders, albeit ignorant ones, so they will act, and likely will overreact, in their efforts to be the perceived champions of main street. Hopefully, they act through guidance and rulemaking, not enforcement. Because the posterchild for gamification appears to be surrounded by Inky, Blinky, Pinky, and Clyde without a Power Pellet in sight, it would not surprise me if they go the enforcement route.

The truth of the matter is every dollar and ounce of energy spent by regulators on gamification in an effort to protect the ignorant would be much better spent on investor education. As Benjamin Franklin observed: “An investment in knowledge pays the best interest.”



Sorry for the flurry of posts this week, but the development Chris writes about here was not expected, and it is important enough that I decided to push it out today, on the eve of a three-day weekend. – Alan

Today FINRA announced in a press release here that it has withdrawn from SEC consideration its proposed rule changes regarding the expungement process.  The proposed rule changes were dramatic and included the creation of a special roster of arbitrators to decide expungement cases, and the appointment of arbitrators to expungement cases (rather than allowing the parties to choose them through the ranking process), as mentioned in these prior posts.

FINRA also pushed out a new webpage today devoted solely to expungement.  It includes key statistic about the numbers of expungements granted, as well as the proposed rules that have now been tabled.  The website indicates that the SEC clearly took issue with the proposed changes, as it required FINRA to respond to comments on three separate occasions (according to the timeline on this new website).

This development is significant, to say the least.  FINRA has been working on these rule changes since 2017, when it published Regulatory Notice 17-42.  Now, four years later, it is not clear where FINRA goes from here.  FINRA describes the withdrawal as “temporary” and vows to keep working to improve the expungement process.  It is too early to declare victory on either side, although PIABA has already done so  and seems to think FINRA will revise the proposed changes to make them even more harsh on brokers.  That may be true, but it may not.

For now, let’s all just enjoy the holiday weekend.

So I spent last week – the whole week – doing an arbitration with JAMS.  It involved some of the typical elements of a FINRA claim, e.g., allegations of the sale of an unregistered security, of an “investment” gone bad, of misrepresentations and omissions in connection with the “sale” of that “investment,” but for reasons not pertinent here, the case did not have to be heard in the FINRA arbitral forum.  Anyway – and I acknowledge that I am painting with an awfully broad brush here – it was a remarkably different, and by different of course I mean better – experience than most any FINRA arbitration.  Let me count the ways.

First, and most important, was the quality of the arbitrator.  My case was heard by a retired Federal District Court judge.  Someone who had sat on the bench for over 27 years.  He has seen and heard it all during that time.  So, even handicapped by having to conduct the hearing through the sometimes glitchy auspices of Zoom, I was always confident that he understood the issues, was listening to hear what he knew would ultimately be relevant to his eventual decision, and could easily filter out the BS (whether from witnesses or counsel).  I would not be able to say the same, unfortunately, about some FINRA hearing panels I have appeared before.  What clearly seemed to matter to the judge were the facts and the law, period.  Well, and, maybe, an effort to be “fair” to both sides.

He was unimpressed by anything that served to waste his time as factfinder.  Both sides were given ample, but hardly unfettered, latitude to put on their cases.  If a line of questioning seemed to be of dubious relevance, he didn’t wait for an objection; rather, he would ask counsel, proactively, what was the point.  If a lawyer had already made his point, he would tell us, with a gentle admonition to move on.  He did not need witnesses or lawyers simply to read (sometimes dramatically) from exhibits when the documents were in the record and he could read them himself.  Closing arguments?  Bah, waste of time.

He was not hesitant to make rulings, or to enforce them after the fact.  I find that too often, FINRA chairpersons can be decision-averse, hesitating before ruling, perhaps hoping that the parties will simply figure it out for themselves and move on.  As a former judge, he was quick to decide any issue that arose, whether substantive or evidentiary.  Indeed, regarding the latter, when’s the last time you had an in-depth discussion with a FINRA arbitrator about the interplay between Rules 404 and 608 of the Federal Rules of Evidence?  I am going to venture to guess that the answer is “never.”  And while the rules of evidence don’t “strictly apply” in JAMS any more than they do in FINRA, that doesn’t mean such rules should be ignored, either, so it was really helpful to have an arbitrator who knew the lingo.

It was also heartening as counsel for the respondent not to have be concerned about the typical arguments that claimants make about arbitration being an equitable forum, so the arbitration panel should feel free simply “to do what’s right” and, well, law shmaw.  This former judge seemed singularly unimpressed by repeated efforts by claimant to evoke sympathy for his claimed plight, or to paint — using a very colorful verbal palette — my clients as greedy bad guys who took advantage of claimant’s feigned naivete.  I mean, he sat there and listened closely to all the testimony, but what he was listening for were facts, not emotional diatribes.

Second was the nature of the discovery we were permitted to conduct.  Specifically, the ability to take select depositions.  Having done arbitrations for the past four decades, I am, by now, pretty good at conducting “blind” cross-examinations, i.e., cross-exams of witnesses who I have not previously deposed.  (Indeed, that’s my standard retort to “litigators” who occasionally insist that doing an arbitration is somehow not as difficult as conducting a court trial: hey, man, when’s the last time you cross-examined an expert witness without having first deposed him/her, or at least had the chance to pore over a written report?  Well, I do that every day.)  With that said, if you offered me the chance to depose a claimant, or a claimant’s expert witness, in advance of the hearing, I cannot imagine the case where I would decline such an opportunity (even at the price of having to produce my own client for opposing counsel to depose).

Here, we got to depose not only the claimant, but his expert, as well as a couple of people who we knew would be called as witnesses.  It made the cross-exams at the hearing quicker, cleaner, and damning, frankly, every time the previously deposed witness attempted to pivot from prior sworn testimony. (Just as it’s supposed to be in court.)  With no surprise answers to deal with, it really was a fairer hearing for all involved, including the judge, than one where impeachment can be difficult in the absence of some document that contradicts the testimony.

I know what you’re going to say: arbitration is designed to be quicker and cheaper than going to court, and adding depositions to the list of permissible discovery tools would run counter to both of those goals.  Well, I suppose I would have to agree with you.  But, I would still vote in favor.  The ultimate goal, after all, is to have everyone who participates in the process agree that they have been treated fairly, and got an equal chance to develop and then present their case.  Allowing the parties some deposition discovery – not unlimited, but some key witnesses – would, in my assessment, greatly increase the likelihood of achieving that end.  Too many times after an arbitration I am forced to look my client in the eye and vainly attempt to argue that what we both just endured was not, in fact, a free-for-all or, worse, a total s***show.  Allowing depositions could at least help avoid these difficult conversations.

Finally, it’s worth noting that JAMS tries really, really hard to provide a smooth experience for all parties.  They are accommodating and attentive.  (And when you do JAMS hearings in person, they have all kinds of snacks!  Including fresh baked cookies, yum.)  I am not necessarily saying this in any relative sense, that is, I am not necessarily saying that JAMS is more accommodating and more attentive than FINRA; I will let you reach your own conclusions about that.  Many FINRA Case Administrators are super at their jobs, and take very seriously their obligation to ensure that the cases run their course without a hitch.  But, with that said, I can’t tell you how many hearings I have participated in that didn’t start on time because the tape recorder failed to show up, and we were dealing with a Case Administrator who was hundreds of miles away, trying to figure out over the phone what hotel employee had supposedly signed for the FedEx package.

JAMS is pricey, no doubt about it.  That alone will be enough to dissuade a lot of people from considering it.  And there are no free rides: you will not get your final Decision unless/until all fees have been paid.  But, you simply have to agree that some of the fundamental things about FINRA arbitrations that are the most troubling – the qualifications of the arbitrators, the ability to prepare the case properly for hearing, and then a fast-paced, smoothly run hearing – are most assuredly not issues in JAMS.  Of course, let me remind you that a few blog posts ago, I told you that I’d be perfectly content if we just ditched arbitrations altogether in customer cases, since I know that many claimants’ counsel simply could not survive in that environment.  Maybe JAMS represents a decent compromise.

I have been in a JAMS arbitration the last week or so, so thanks to Chris — Mr. Expungement — for his thoughts about PIABA’s study. –  Alan

In a move that surprised nobody, PIABA[1] recently released an updated study on expungement awards from 2019/2020, and, in the most predictable fashion, they continue to complain that the expungement process is rigged and that brokers who seek expungement continue to “game” the system.  We’ve blogged about this before, and about the numerous changes FINRA has made to the expungement process recently, and the slew of additional rule changes that are still pending but are expected to be approved by the SEC any day now.  Even though FINRA has taken substantial steps to make expungement harder for brokers to obtain, and easier for customers to oppose, PIABA is still not satisfied.  Dare I say it – you can’t help but feel a little badly for FINRA here, as it seems none of their expungement rule changes can satisfy the PIABA attorneys.  Let’s dive into the study’s findings and PIABA’s erroneous conclusions.

First, the study found that 90% of expungements from August 2019 to October 2020 were granted.  According to the study, that number is basically the same as it was in 2015, before FINRA started making significant rule changes to the expungement process.[2]  PIABA concludes that this means arbitrators are rubber-stamping the expungement requests, arbitrator training is not working, and the recent rule changes are not working to stop useful disclosures from being removed from CRD.

I suggest that there’s a different explanation for why the number of expungements granted has not changed: there was nothing broken with the expungement process in the first place.  For as long as I can remember, FINRA arbitrators have always been warned that expungement is supposed to be an “extraordinary remedy.”  But the standard for granting expungement under FINRA Rule 2080 is that the arbitrators must find that the customer’s allegations were false or clearly erroneous.  The arbitrators are simply seeing the facts laid before them and calling it how they see it.  They either believe the evidence demonstrates that allegations are false, or not.  Unlike a true research study which proffers multiple possible explanations to explain data, PIABA’s “study” doesn’t even contemplate the notion that so many expungement requests are granted is because the claims were frivolous in the first place.  Speaking from personal experience, I take multiple expungement cases to hearing every year and end up winning (knock on wood), but I receive just as many inquiries about expungement that I never file because I will advise the client if their likelihood of success is low.  It is not a secret that attorneys only take cases to trial that they feel strongly about.  If it’s a bad case, it will likely never get to a hearing, and may never get filed in the first place.  That is why the expungement success rate is so high – not because the system is broken.

Second, the study found that customers only participate in expungement hearings 15% of the time, which has not changed much from 2019 when they only participated 13% of the time.  PIABA continues its false narrative that “the current expungement process … does not have safeguards to ensure that customers can participate in a meaningful way.”  That is just not true.  Since at least as far back as 2017 when FINRA issued its Notice to Arbitrators and Parties on Expanded Expungement Guidance, FINRA has expressly told arbitrators that “it is important to allow customers and their counsel to participate in the expungement hearing in settled cases if they wish to.”  The Guidance also contains a laundry list of ways customers are permitted to participate in expungement hearings, including by testifying, introducing documents and evidence, cross examining the broker and other witnesses, presenting opening and closing arguments, and presenting an opposition in writing.  And FINRA’s proposed rules – that will likely be approved by the SEC this week – provide for even more safeguards to give customers notice of the expungement hearings and opportunities to participate both in the pre-hearing conferences and the hearings themselves.  So, to say that there are no safeguards that allow customers to meaningfully participate is total nonsense. The real issue is that customers do not want to participate in the expungement hearings because there is no incentive for them to do so after their cases settle.

The study concludes that customers’ lack of participation in expungement cases is what causes so many expungement requests to be granted.  According to the study, “the data strongly indicates that arbitrators are granting expungement requests 90% of the time because they are being provided with one-sided presentations about the merits of the customer complaints….”   However, the study’s own data completely undercuts that conclusion. The study found that arbitrators are more likely to deny expungement requests when a customer opposes the request – not that much more likely.

According to the study, arbitrators denied expungement requests only 9% of the time when the customer did not participate, but they denied 36% of expungement requests when customers did participate.[3]  In other words, even when customers oppose an expungement request, the arbitrators still decide their allegations are false almost 7 out of 10 times.  The customer participation changes the arbitrators’ minds in only 2.7 out of 10 expungement cases.  That tells you two things: 1) customer participation in expungement cases is highly overrated and inconsequential, likely because arbitrators are smart enough to weigh facts and credibility without hearing the customer’s predictable testimony that he/she was wronged, and 2) the quality of customer claims are not very good.

And therein lies the real issue.  Any investor can file any complaint at any time, regardless of the merit, and it will live in CRD forever unless expunged.  One recent article about the study cited a Stanford Law Professor who acknowledged that FINRA should “impose a higher level of scrutiny” on what’s put on BrokerCheck in the first place. Bingo.

Finally, the study found that the number of “straight-in” expungements filings have “skyrocketed” in recent years. As the study explains, “a straight-in expungement case is an arbitration initiated by a broker against their current or former brokerage firm solely for the purpose of seeking expungement. The customer who made the complaint is not a party.”  This differs from the other scenario where a broker involved in a customer arbitration asks for expungement to be granted in the course of that customer arbitration.  The study found that in 2015 only 59 straight-in expungements were filed, but that number has increased year after year (2016 – 135; 2017 – 339; 2018 – 545; 2019/2020 – 700).  PIABA calls this a “tactic” and suggests that brokers utilize it to limit customers’ ability to participate in the expungement hearing since they will be treated simply as a “fact witness” rather than a party.  (p.21)  This is simply not true.  Even in expungement cases where the customer is not a named party, FINRA requires the broker to provide notice to the customer, and the customer is permitted to participate in many more ways than a fact witness, as described above (opening statement, closing argument, testimony, present exhibits, cross-examine other witnesses).

Furthermore, the study’s authors blatantly disregard the fact that in cases that settle, FINRA is actually in favor of requiring brokers to file a separate “straight-in” arbitration that deals only with the issue of expungement, rather than keeping the arbitration panel from the underlying arbitration in place and having them hear the expungement request.  In FINRA’s Sept. 30, 2020 filing with the SEC regarding their proposed rules (which the SEC may approve any day now), FINRA states:

The proposed rule change would provide that if, during a customer arbitration, a named associated person requests expungement or a party files an on-behalf-of request and the customer arbitration closes other than by award or by award without a hearing, the panel from the customer arbitration would not be permitted to decide the expungement request.  Instead, the associated person would be required to seek expungement by filing a request to expunge the same customer dispute information as a straight-in request under proposed Rule 13805. … FINRA believes this is the right approach because the panel selected by the parties in the customer arbitration has not heard the full merits of the case and, therefore, may not bring to bear any special insights in determining whether to recommend expungement.

So, while PIABA may not like it, there are going to be many more “straight-in” expungement requests filed.  And many more expungement requests granted.  And mark my words – when that happens, PIABA will publish another “study” claiming that the system is still broken.

[1] PIABA is a group of plaintiffs’ attorneys who market themselves as protecting investors, while at the same time lining their own pockets.

[2] The number dropped to 81% in 2015, 2016, and 2017.

[3] This is actually the data from the 2019 study. The updated study strangely does not give the exact percentages, but just states that the arbitrators are 4.3 times more likely to deny the request when a customer opposes it – which is about the same figure they cited in the 2019 study.

I am writing this while flying home from my first business trip in over 15 months.  I have to tell you, it is more than a bit of a strange feeling to be out and among people again.  While my face is sore from wearing this N95 mask nearly non-stop for three days, my hands are dry and rough from all the washing, and I basically hid in my hotel room if I didn’t have to be somewhere, I think this still marked the start of something that I recognize as sort-of normal. Cheers to that!


FINRA, of course, has lots, and lots, of rules.  Heck, it has rules about making rules.  The things that RRs can and cannot do per those rules are strictly proscribed, mostly in great detail.  Things that ordinary people can do without a second thought are frequently off-limits for RRs.  Yet, notwithstanding the sizable breadth of the gamut of restrictions that FINRA has erected, sometimes, remarkably, BDs feel that FINRA hasn’t gone far enough, and so create their own rules that go above and beyond anything that FINRA ever contemplated.  In other words, BDs are free to create policies that are more restrictive than FINRA rules.  Like this common scenario:  FINRA Rule 3240 prohibits RRs from borrowing money from or lending money to their brokerage customers, subject to certain exceptions, like if the deal involves a family member.  Many BDs, however, prefer simply to disallow any loans, period, since that’s much easier to police.

The issues that this situation tees up are these:  Does FINRA care if an RR violates a firm policy through conduct that does not violate any specific FINRA rule?  And, if it does, should it?

The answer to the first question seems to be “it depends on the policy.”  Take an obvious example, like, I don’t know, dress code.  FINRA undoubtedly would not and does not care if an RR wore flip-flops to the office, contrary to firm policy.  But, if the policy touches the relationship with customers, then FINRA does seem to care.  I am just not sure why, or if it is appropriate.

I started thinking about this a few months ago, when I blogged about the SEC’s decision in Tysk.  Among the rulings the SEC made there in its review of the FINRA decision was a finding that FINRA failed to carry its burden of proof that Mr. Tysk violated Rule 2010 strictly by virtue of the fact that he had violated his firm’s policy regarding note-taking.  According to the SEC, “[a] violation of a firm policy does not necessarily mean that a registered representative has also violated” any FINRA rules.  Rather, FINRA must independently establish that the underlying conduct somehow violated FINRA Rule 2010 because it was unethical.  I characterized that ruling as “huge,” and I stick by that.

So, with that background in mind, I was really intrigued when I read this recent AWC regarding a guy named Gary Wells.  According to the AWC and BrokerCheck, Mr. Wells entered the securities industry in 1983 – the same year I started practicing law! – and stayed for 37 years.  The AWC says he had no relevant disciplinary history; indeed, it appears to me that the only disclosures he has are all related to the same events that led both to the AWC and his dismissal from his last job (which I will get to in a second).  Not a single customer complaint in almost four decades.  That’s pretty dang good (even though FINRA accords no “credit” for it, because FINRA says you don’t get credit simply for doing what you’re supposed to do).

So what happened?  Well, Mr. Wells did not violate any specific FINRA rule.[1]  Rather, like Mr. Tysk, he violated one of his firm’s policies.  In his case, Mr. Wells had the temerity to provide such good service to one of his customers that the customer decided to leave something to Mr. Wells in her will.  The AWC recites that this “long-term customer” – FINRA’s words, not mine – followed Mr. Wells to Wells Fargo Advisors in 2008 from a prior firm.  At some point prior to 2012, the customer named Mr. Wells as a beneficiary and fiduciary in her will. In 2012, as is so often the case in situations like this, not the customer but, rather, someone from the customer’s family, her brother, specifically – perhaps someone who himself stood to inherit from the customer? – filed a complaint with WFA that his sister had named Wells in a fiduciary capacity and as a beneficiary.[2]  The basis for the complaint was not indicated.  Importantly, however, there is zero indication that Mr. Wells had exerted any undue influence over his elderly customer.  Indeed, if he had done that, you could bet the farm that FINRA would’ve included that in the AWC (and that the customer’s brother would’ve mentioned it).

So, what we have is a “long-term” customer who decided, on her own, to leave a legacy to Mr. Wells, but, in so doing, managed to piss off her brother.  Perhaps the story would have just ended there, but WFA had a policy – a policy that went beyond any FINRA rule – that “prohibited acceptance of a bequest or a fiduciary appointment from a nonfamily member in the customer’s will.”  In light of that policy, FA instructed Mr. Wells to have himself removed from the fiduciary and beneficiary designations and, if his long-term customer refused, he should decline the appointments.

On December 4, 2014, following the death of the customer at age 92, Mr. Wells received a bequest in the form of a wire transfer from the customer’s estate to his WFA brokerage account. WFA reversed the transfer and told Mr. Wells the firm would not permit him to receive the funds because they represented a bequest from a non-family member.  After WFA informed him that he could not accept such funds, Mr. Wells then proceeded to accept three separate bequests from the customer’s estate, in accordance with her will.  Finally, after receiving the money, Mr. Wells “concealed the fact that he was the beneficiary and had received bequests from the customer’s estate by making false statements on [a] . . . compliance questionnaire.”

That’s the entire case.  No violation of any specific FINRA rule, but, because Mr. Wells violated a firm policy that FINRA says in the AWC was “designed to protect customers,” FINRA deemed this to be a violation of Rule 2010, the catchall rule prohibiting unethical conduct.

I am not sure why FINRA bothered with this one.  In Reg Notice 20-38, in which FINRA announced its new Rule 3241, it explicitly gave BDs the right to approve bequests from customers, particularly “long-term” customers and those customers whose bequests were not accompanied by “any red flags of improper conduct by the registered person,” such as when “the customer has a mental or physical impairment that renders the customer unable to protect his or her own interests,” or “any indicia of improper activity or conduct with respect to the customer or the customer’s account (e.g., excessive trading),” or “any indicia of customer vulnerability or undue influence of the registered person over the customer.”   Exactly NONE of those issues existed here.  To the contrary, there is no evidence of any red flags at all.  So, even though Rule 3241 was nothing more than a fantasy that FINRA harbored at the time of Mr. Wells’ conduct, and even though under that rule the facts suggest that Mr. Wells would have been permitted to inherit from his long-term customer had he asked, for the simple fact that WFA had an absolute prohibition on inheriting from customers, FINRA brought this case.

I simply do not see why, in circumstances like this, FINRA takes it upon itself to enforce BD policies.  You can make a decent argument that WFA’s policy does exist to protect customers; but that does not mean that FINRA should otherwise ignore the pertinent facts, which, as FINRA laid them out in the AWC, fail to tee up any customer protection/sales practice issues.  As it has done hundreds of times before, all FINRA did in the Wells case was prove that he violated a firm policy, not that he acted unethically.  The Tysk case states that this is not enough for FINRA to carry its burden of proof on a 2010 violation, and I agree.  FINRA needs to do more, and if it can’t, then cases like this either should no longer be brought, or hearing panels should start dismissing them.


[1] While FINRA currently has a rule – Rule 3241 – that prohibits an RR from inheriting from a non-immediate-family customer absent approval by the BD, at the time of the conduct in question, that rule was still years away from being effective.

[2] As I mentioned earlier, there are NO customer complaints reflected in Mr. Wells’ BrokerCheck report, so I don’t really know what to make of this supposed complaint from the brother.  Was it not reported because it’s not from a customer?  Was it not reported because it does not relate to sales practices?  I don’t know, but it is a bit puzzling that the AWC not only calls this a “complaint,” given that there is no record that WFA bothered to report it on Mr. Wells’ U-4, but that this “complaint” was enough to trigger an exam, and an eventual Enforcement case.

For many years, FINRA has attempted in several settings to substitute objective criteria for subjective ones, to try and make things easier for itself, and to make things more consistent from district to district and from firm to firm.  For instance, FINRA used to – and may still today – identify firms whose exam cycles should be accelerated by assigning numerical values to a variety of characteristics (theoretically risk associated), and then adding them up.  If your firm’s total exceeded whatever cutoff FINRA established, well, you were lucky enough to be examined more frequently.  And then there was that infamous episode about 20 years ago, when FINRA decided to evaluate the performance of its District Offices by creating objective, numerical goals against which actual performance could be measured.  The problem was, the objective goals were themselves sometime stupid (and even controversial, such as the one that required at least 10% of exams to result in formal disciplinary actions).

Well, FINRA is still at this game, and continues its goal of identifying specific circumstances that it could use as some objective basis to cull out those individuals and firms on which to focus its regulatory attention.  Last week, a number of rule amendments became effective (others don’t become effective until May, June and September, respectively) that fulfill that desire, and they are laid out in Reg Notice 21-09.

I started talking about this in a blog post two years ago, when FINRA first broached the subject.  At the time, I expressed my concern about utilizing a quantitative standard as a means of identifying firms that ought to garner more attention.  Sadly, at least in my view, FINRA shares no such concerns.  To the contrary, citing a 2015 study published by FINRA’s Office of the Chief Economist[1] – comically, a study that admonishes on page one that “[t]he views expressed in this paper are those of the authors and do not necessarily reflect the views of FINRA” – FINRA strongly believes in “once bad/always bad” when it comes to brokers.  Given this somewhat simplistic view of the world, FINRA has now made a number of rule changes that actually implement this philosophy.

The changes impact several rules.  Let’s review them.

First, and perhaps most impactful – and NOT in a good way – on FINRA member firms, let’s see how it affects hiring decisions.  Under current rules, if a BD wants to hire someone as a registered rep, there’s really nothing to stop the firm from simply doing so, and without asking permission.  Yes, it’s true that in some very limited situations, the hiring of even a single rep might trigger a CMA if the addition of that registered rep would constitute a material, quantitative change in the firm’s business based on the number reps the firm already had as of the date of the hiring, but everyone understands that.  Here, I am not talking about that; rather, I am talking about the typical hire, one that would be permitted by a firm’s Membership Agreement without a CMA, or because the firm had the right to take advantage of the “safe harbor” in IM-1011 (also obviating the need for a CMA).  Under FINRA’s new rule, things are very, very different.  Under certain specific circumstances, a BD may NOT simply hire a registered rep – even though the rep is otherwise qualified and not statutorily disqualified – if that rep has in the prior five years, either (1) “one or more final criminal matters” or (2) “two or more specified risk events.”[2]  If he or she does, then before the BD can hire the rep, it must first file a MatCon – a Materiality Consultation – with FINRA.  If FINRA concludes the hiring would be material, then a full-blown CMA is necessary (the filing fee for which costs, at a minimum, $5,000, something FINRA pointed out would in and of itself constitute a disincentive for firms to hire reps who meet FINRA’s new criteria).  In other words, FINRA is unilaterally determining that registered reps who have these particular disclosures – disclosures which do NOT prohibit these reps from registering at any BD – cannot be hired unless FINRA says so.

As you can see, based solely on criteria that it simply plucked out of thin air, and its own unchallenge-able determination of what constitutes “materiality,” FINRA is going to be acting as gatekeeper, theoretically to prevent or dissuade firms from hiring people that FINRA’s own predictive analysis machine suggests will be likely (or more likely than others) to commit sales practice violations in the future,[3] in deference to its own awful logic that “a member firm’s hiring of a broker with a significant history of misconduct – and other associations with such persons – would reflect a material change in business operations.” Ah, FINRA is in the crystal ball business!  What ever happened to “past performance is no guarantee of future results,” a disclaimer that both the SEC and FINRA look for?  I guess it doesn’t apply to people.  (I would ask, too, what ever happened to due process, but I fear I know the answer to that one already.)

I could go on and on about this one rule change, which I think is a game-changer in terms of the power that FINRA just gave itself, but let me hit the others.

For anyone unlucky enough to have been involved in a FINRA Enforcement case, you likely know that if you lose the hearing and appeal to the NAC, then the sanctions – whatever they are, no matter how severe, even including a permanent bar – are stayed pending the disposition of the appeal.[4]  You can keep working, keep earning (perhaps to pay your attorney, which is not a crime by any means), until the NAC finally decides your fate.  That has now changed.  The new rule MANDATES that in this scenario, the BD MUST impose a heightened supervision plan on the rep.  This marks the very first time in history that FINRA has identified a circumstance that requires an HSP.  Prior to this, indeed, even as recently as Reg Notice 18-15, such a determination resided with each BD, based on guidance that FINRA offered regarding circumstances that it believes suggest that an HSP be considered.

And that’s not all.  In addition to the mandatory heightened supervision plan, FINRA has the right to ask the Hearing Officer – the very person who just found the rep to be liable in the first place – for the “imposition of conditions or restrictions on the activities” of that rep that are “reasonably necessary for the purpose of preventing customer harm.”  Not really sure how these “conditions or restrictions” differ from a heightened supervision plan, or under what circumstances FINRA will seek to impose restrictions.  The only hint, sort of, lies in a footnote in the Reg Notice:  “The conditions and restrictions are not intended to be as restrictive as the underlying sanctions imposed in the disciplinary decision and would likely not be economically equivalent to imposing the sanctions during the appeal.”

I didn’t say it was a helpful hint.  If you can figure out what this means, please, by all means, let me know.

For what it’s worth, at least these can be challenged.  If FINRA files a motion to impose these restrictions, the motion can be opposed, and the Hearing Officer’s decision can be promptly appealed to the NAC.  (Yes, that’s right, the same NAC that is going to hearing the appeal itself.  Again, no conflict of interest here!)  It is going to be exciting to see how FINRA wields this new power.  Will it seek restrictions in every case?  Only those in which bars are imposed?  Time will tell.

Having decided that it was comfortable announcing a mandatory heightened supervision plan for respondents who appeal to the NAC, FINRA just kept going.  The new rules, therefore, also require that BDs impose an HSP on registered reps on whose behalf an MC-400 is filed.  While HSPs are universally proposed in support of an MC-400 – because they are the key tool to providing FINRA with the comfort of knowing that if a disqualified person is permitted to associate with a BD he or she will not repeat the misconduct that got them disqualified in the first place – they have not, to date, been necessary prior to the approval of the MC-400.  (Again, in Reg Notice 18-15, an HSP in this scenario was merely suggested, not mandated.)  Now, the HSP must be implemented even while the MC-400 is under consideration.

Two years ago, I closed my blog post by urging members to speak up in response to FINRA’s rule proposal.  In reviewing the SEC’s Order approving the rule changes, it seems that maybe four comments were received…and two of them were in favor of the changes.

[1] Read this thing if you choose, but let me save you the time.  The authors essentially concluded that the worst 20% of brokers, based on their disciplinary disclosures, are responsible for the statistical majority of subsequent disciplinary events.  In other words, it is predictable, using math, that a bad broker will continue to be bad.

[2] What are these things?  They included as new definitions in Rule 1011.  “Final criminal matters” means a criminal matter that resulted in a conviction of, or plea of guilty or nolo contendere (‘no contest’) by, a person that is disclosed, or is or was required to be disclosed, on the applicable Uniform Registration Forms.”

A “specified risk event” is:

(1) a final investment-related, consumer-initiated customer arbitration award or civil judgment against the person for a dollar amount at or above $15,000 in which the person was a named party;

(2) a final investment-related, consumer-initiated customer arbitration settlement or civil litigation settlement for a dollar amount at or above $15,000 in which the person was a named party;

(3) a final investment-related civil action – i.e., NOT consumer initiated – where:

(A) the total monetary sanctions (including civil and administrative penalties or fines, disgorgement, monetary penalties other than fines, or restitution) were ordered for a dollar amount at or above $15,000; or

(B) the sanction against the person was a bar, expulsion, revocation, or suspension; and

(4) a final regulatory action where

(A) the total monetary sanctions (including civil and administrative penalties or fines, disgorgement, monetary penalties other than fines, or restitution) were ordered for a dollar amount at or above $15,000; or

(B) the sanction against the person was a bar (permanently or temporarily), expulsion, rescission, revocation, or suspension from associating with a member.

[3] I should point out that the rule doesn’t just apply to everyday reps who a BD may want to hire, but, as well, to principals, control persons, and new owners, both direct and indirect.

[4] Just for giggles, it is worth asking what is the point of appealing to the NAC.  In its Order approving the FINRA rule changes, the SEC observed from 2013-2019, the NAC issued decisions in 131 disciplinary matters. It affirmed the hearing panel or hearing officer findings 121 times (92%), modified the findings six times (5%), and reversed or dismissed the findings a whopping four times (3%).

FINRA is often accused (mostly rightfully, and certainly by me) of being a horse-is-already-out-of-the-barn sort of regulator, jumping on an issue only after the problem has already arisen and made it to the front page of the Wall Street Journal.  But, that’s not always the case.  Indeed, there are occasions when FINRA is out ahead of the curve, providing warnings of problems that may seem remote at the time, but which later manifest themselves.

Such is the case with FINRA’s approach to BCPs, or Business Continuity Plans.  Following the horrific events of September 11, 2001, FINRA (well, NASD, at the time) created Rule 3510, now FINRA Rule 4370, to address the disruption created in the business of many broker-dealers located in Manhattan (and others, elsewhere, who did business with those downtown Manhattan firms).  According to that rule, every BD must create and maintain a written BCP that is reasonably designed to enable the firm to meet its obligations to customers, among others, during an emergency or significant business disruption.  Among the several things that must – by rule – be included in a BCP is an effort to address “[a]lternate communications between customers and the member.”  In other words, how can customers reach the firm when circumstances render ordinary means of communications unavailable.

While the rule seems to have contemplated disasters, both natural and man-made, as the cause of such disruptions (e.g., all the cell phones stop working), ultimately the particular cause doesn’t matter.  If, for whatever reason, a problem manifests itself that results in the phones/emails/faxes/instant messages being rendered useless, a BD needs to have a Plan B in place, to minimize the repercussions to investors.  FINRA has offered pretty good guidance on this rule over the years, including a Report from 2019 on examination findings relating to BCPs, some FAQs, and even a Small Firm BCP Template.

One of the specific observations in that 2019 Report is this:

Insufficient Capacity – Some larger firms did not have sufficient capacity to handle substantially increased call volumes and online activity during a business disruption, which affected customers’ ability to access their accounts.

That is, the phones and internet are still working, but so many people are calling and emailing that they get busy signals, or their calls/emails are not returned promptly.

Let’s fast-forward to 2020 and Robinhood.  Anyone who’s followed the markets even casually is aware of the multiple instances on which Robinhood’s customers were denied access to their accounts, or couldn’t reach Robinhood even to lodge complaints about their lack of access.  That has resulted in both angry customers – read that as “arbitrations” – and angry regulators.

This is not me speculating about that last part.  Just listen to this FINRA podcast, called “Exam and Risk Monitoring Program: Responding to COVID-19 and Looking Ahead.”  It consisted of a conversation among three FINRA Senior Vice Presidents, including Bill St. Louis, SVP of the retail and capital markets firm groups (who is a certifiably nice guy).  Bill was asked about the Report on FINRA’s Examination and Risk Monitoring Program, published earlier this year:  “So, beyond Reg BI, does the report have any other priorities worth mentioning for Retail or the other firm grouping you work with, Capital Markets?”  Here is his answer:

[T]here are a number of different priority areas in there that are relevant to Retail and Capital Markets firms.  I’ll just touch on two very briefly.

One, I just want to remind everyone that there’s an intersection between cyber events and AML. So, account intrusions, takeovers, data breaches likely will be SAR reportable. So, I just wanted to remind firms of that. And that’s something that we pay quite a bit of attention to.

On tech governance, there are a number of firms that have platform outages in 2020, some of which related to market volatility. And the headline on outages, and like a lot of things on tech governance, is testing, testing, testing, capacity testing, vendor management, ongoing maintenance and testing of changes, new patches, scripts, new software, new hardware. Testing to see whether or not the linkages between systems are going to operate as expected when there are patches or changes to one part of the system.

And then the other thing about outages is we’re very focused on customer service during outages. Can firms handle the incoming calls from customers? Are there ways for customers to access and make transactions through other entry points if, for example, an app is down?

There’s actually a lot there, and I will break it down some, but let’s focus on the bit I highlighted.  This is precisely the circumstance that FINRA previously cautioned its members to be aware of, and to prepare for.  Look, I get that it’s more than a bit ironic for FINRA, of all people, to accuse others of not providing adequate customer service.  But, at least in this one instance you cannot reasonably argue that FINRA was late to the party.  It accurately anticipated a situation like those that Robinhood experienced, and gave fair warning.  (I guess I ought not to pick on Robinhood, but it did garner the most headlines, and it has been reported that it may be fined as much as $26 million for, among other things, not providing its customers with access to their accounts.)  That, ladies and gentlemen, is what FINRA is supposed to do, and when it manages actually to do it, it deserves the credit.

As for the other things Bill said, I think the most notable is his admonition that account intrusions and the like “likely will be SAR reportable.”  That’s a big deal, as I see it, and here’s why:  FINRA has made it clear that, historically, it is less interested in whether or not a SAR is actually filed than in whether or not a BD has a robust AML supervisory system, one that spots red flags, responds to them promptly, and takes appropriate action.  That action may or may not be the filing of a SAR, depending on the firm’s analysis of the circumstances.  But, as long as the firm DID spot the red flag, and DID respond, it is ok if the firm concludes that no SAR need be filed, as long as the decision not to file it was reasoned and supported by the facts.

Bill’s comment here, however, seems to suggest that contrary to FINRA’s prior guidance, they now seem willing – and maybe even looking forward to – second-guessing even a reasoned decision not to file a SAR.  And that’s troubling.  Filing a SAR is serious business, with potentially serious consequences.  If FINRA is going to start holding against even firms with excellent AML supervisory systems the fact that they elected, after careful deliberation, not to file a SAR, then all that will accomplish is to cause firms simply to file SARs, period, regardless whether they’re truly mandated.  If you know that no one gets in trouble for filing a SAR, or even too many SARs, then why not err on the side of over-disclosure, just to avoid becoming the subject of a FINRA exam?

Indeed, this phenomenon – called “defensive” filing, when a firm files a SAR simply to avoid being questioned why it didn’t – has been observed by many, and may account for the crazy number of SARs being filed.  I came across an article that stated that in the first 11 months of 2020, 2.5 million SARs were filed with FinCEN.  I am no expert on how FinCEN triages the SARs it receives, but I would venture go guess that there’s no way for it to be nearly as effective as it might be at its job if SARs were only filed when circumstances truly mandate such, not just as a matter of being cautious.  I fear that if Bill meant what he said, things will only get worse.

So, you see?  I still got to take a shot at FINRA, even in the same post that I complimented them on their prescience when it comes to BCPs.  All is right with the world.


I have always operated with the understanding that, per FINRA rules, one cannot supervise him- or herself.  Hardly an outrageous proposition.  Today, however, that fundamental, bedrock understanding was so shaken, it has left me wondering whether anything is what it seems (especially when coupled with Loyola’s win this weekend over Illinois, which, really, can only have occurred in some bizarro alternative universe).

It all stems from an AWC submitted by The Logan Group Securities, a modest little matter resolving a modest rule violation.  But, there is more here than a quick read reveals.

According to the AWC, Logan Group is a sole proprietorship, and Mr. Logan, the firm’s owner, is its sole registered person.

Let’s stop right there.  Doesn’t that HAVE to mean that Mr. Logan – by necessity – supervises himself?  Metaphysically speaking, I just don’t see a way around that.  I mean, he can only be supervised by another registered person.  And, if there is no such person, who does that leave to supervise Mr. Logan?  [Insert “brain exploding” sound effect here.]

Ok, moving forward.  So Mr. Logan does everything at his firm, it seems.  He’s the salesman.  He’s the CEO.  He’s the CCO.  He’s the supervisor.  Heck, he probably brews the coffee and hangs the office decorations around Christmas time.  He is responsible for the WSPs, that is, creating and maintaining them, and then following them.  Given that, unlike an RR at an ordinary firm, when confronted with an apparent sales practice issue, he cannot defend himself by arguing that he lacks culpability because he did everything the WSPs required (suggesting to FINRA that the problem isn’t with the RR, but, rather, the BD, for having inadequate procedures), since to do so would simply mean he was pointing the finger at himself.

So, according the AWC, Mr. Logan sold a bunch of variable annuities.  FINRA seems to have had some concerns with the share classes that Mr. Logan recommended to his customers for a period of about one year, from October 2017 to September 2018.  Sometimes he used B shares, typically with a seven-year surrender period, other times he used L shares, with a shorter surrender period of three to four years but with higher annual fees.  Oddly, even though the AWC includes a finding that there was a violation of Rule 2330, which is the suitability rule for variable annuities, FINRA never flat out finds that the recommendations were unsuitable.

Instead, what FINRA concludes is that the supervisory procedures that Mr. Logan created to deal with the “recommendation and sale of different variable annuity share classes, specifically L shares sales,” were inadequate.

Let’s stop again.  So the issue isn’t that Mr. Logan made unsuitable recommendations to his annuity customers.  Rather, it is that the supervisory procedures he created to supervise his own sales of annuities were not reasonable because they didn’t work well enough to pick up any potential issues created by his choice of share class.

Wait, what?  The procedures that Mr. Logan created were not robust enough to allow him, as supervisor, to detect that the recommendations he himself made, as registered rep, were potentially problematic?  You can see how this AWC and its Möbius strip of an analysis has left me confounded.

There were some additional supervisory violations – the firm failed to fulfill a promise it made to FINRA to document its review of variable annuity options with customers; it failed to update its WSPs to reflect a new form it was using to highlight the features of the annuities it was selling; and it failed to collect the investment objective and risk tolerance information for three L-share contract customers – but none was particularly outrageous.  The whole case basically boiled down to the fact that Mr. Logan didn’t do a good enough job of supervising (and documenting that supervision of) Mr. Logan’s own sales of annuities.

Which, I suppose, brings me to this question:  why, for heaven’s sake, did FINRA charge this as a supervisory claim against a one-man firm, rather than charging that one man with the underlying violations themselves?  If FINRA didn’t like the share class that Mr. Logan utilized, why not simply charge him with making unsuitable recommendations?  I have devoted blog after blog to complaining about the fact that FINRA is quick to name individuals at small firms as respondents in supervisory cases, while it is loath to do the same with big firms.  Yet, here is the smallest possible firm, and rather than doing what it always does, FINRA, instead, elects not to name an individual, but, rather, only the firm.

As long as I do this, I will never understand what makes FINRA tick.