Look, I get that nobody’s perfect. We all make mistakes, it’s just human nature. I told my kids when they were growing up the same thing I tell my associates: it’s ok to make mistakes, it’s just not ok to repeat them. Sadly, my broker-dealer clients live in a heavily regulated environment, so when they find themselves in a pickle, it is typically not enough just to tell an examiner, “Oops, I made a mistake.” The fact is, when dealing with FINRA, as well as the SEC and the states, there are no free bites at the apple, no do-overs. Every action a broker-dealer takes, every decision it makes, no matter how well intended, is subject to being second-guessed, and could ultimately serve as the basis for regulatory action. As a result, BDs – at least diligent BDs – learn that it is in their best interest to be über careful with what they say in documents and what they say to the public, to minimize the chance that it comes back to haunt them.
FINRA, on the other hand, sometimes displays the opposite attitude, seemingly indifferent to the quality and content of its communications. If my clients were to act as cavalierly as FINRA does in this regard, they would undoubtedly be called on the carpet for it. That is why is so galling that when confronted with its errors, FINRA just shrugs it off.
How about an example? I received an envelope in the mail addressed to me, on behalf of a broker-client. In the envelope was a Letter of Caution. That was no surprise, as I had been negotiating with FINRA, and so I expected to receive it. What was surprising was that the Letter of Caution in the envelope was not addressed to my client, but, rather, to another broker-dealer. I guess they got mixed up somehow. Of course, that meant that someone else undoubtedly received my client’s LOC. Letters of Caution are informal dispositions, and are not reported on Form U-4 or Form BD; they are private and confidential. Yet, because of FINRA’s error, I learned of another BD’s LOC, and someone else learned of mine. Imagine what FINRA would do if a BD sent non-public, confidential customer information to the wrong recipient, even if it was sent accidentally. It wouldn’t result in the death penalty, but merely saying “Oops, sorry” would likely not suffice, either.
Here’s another. Recently, I completed long and hard-fought negotiations with FINRA and ended up with an AWC that my client and I could finally live with. A critical component of the settlement was that my client would not have to pay either a fine or restitution. Although it did have to make a payment under the terms of the AWC, it was not characterized as a fine or restitution. When FINRA reported the AWC in the monthly list of disciplinary actions, however, it still somehow managed to describe the payment as restitution, which was totally contrary to the terms of the AWC.
When I brought this to FINRA’s attention, it was fixed right away. But, when I asked that FINRA go beyond that, and expressly include a recitation on the FINRA website that the initial description of the AWC had been wrong, and that it was being amended, FINRA balked, insisting that “the correction speaks for itself.” Helpfully, however, it was suggested to me that I follow up with the Ombudsman if I had any concerns about the staff’s intent! (No offense to anyone in the Ombudsman’s Office – I know people who work there and they are very kind and nice – but complaining to the Ombudsman is as pointless an endeavor as I have ever encountered.)
Again, can you imagine FINRA’s reaction if a broker-dealer made a mistake of this magnitude? I appreciate the fact that FINRA doesn’t operate according to the myriad rules that govern the conduct of broker-dealers and registered reps, so, for instance, it need not satisfy the minutia contained in the Communications with the Public rule. But, FINRA is most certainly regulated – by the SEC. It has a statutory mandate to fulfill, and if it doesn’t meet that standard, it is subject to being disciplined itself. While FINRA manages to get on the SEC’s radar screen from time-to-time, historically, the discipline is modest. In October 2011, for instance, FINRA settled with the SEC to resolve charges that it had altered documents it provided to the SEC – the third time it had done so in an eight-year period! – and yet no fine was assessed. Do you sincerely believe that FINRA would act in such a benign manner if some broker-dealer did the same thing with documents it provided to FINRA?
I do not predict a sudden moratorium on Enforcement cases as FINRA contemplates this post. All I am saying is that one of two things should happen, perhaps both. First, FINRA needs to come to understand that not every error a broker-dealer commits – particularly the unintentional kind – dictates that a formal disciplinary action ensue, or that hefty fines be meted out. Second, FINRA needs to hold itself to the same lofty standards to which it holds BDs and RRs. That will not stop FINRA from committing mistakes, but they would be much easier to swallow knowing that they happened despite tight controls and procedures. At least then, it might even be forgivable. Now, however, FINRA’s failure to own up to its own occasional errors, or at least to take them seriously, makes FINRA’s take-no-prisoners attitude towards broker-dealers that much more difficult to accept.