For some reason, a bunch of noteworthy events all happened around the same time this week, so please bear with me as I vent a little about them. Individually, they are irritating; in the aggregate, they are borderline alarming.
First, the FINRA Wells process. I have blogged about this before, and how, in a couple of recent matters, FINRA refused to provide settlement proposals prior to issuing a Wells letter. This is about something else. As you are likely aware, FINRA issues a Wells letter when it has, theoretically, completed its examination, and concluded, after a thorough and sifting review of the facts, that a formal disciplinary action is necessary. The recipient of the Wells letter has one last chance to try and convince FINRA that it’s wrong, and that no formal action is necessary (or that the supposed charges are unprovable, or that the proposed respondent should not be included in the case, etc.) Anyway, the point is, by the time the Wells letter is sent, FINRA should already have a thorough grasp of the facts, so its decision to proceed with a formal action is well founded.
Or so you would think. This week, I participated in a Wells call on behalf of a BD client in which FINRA advised of its intent to recommend a formal disciplinary action against the firm for AML violations, among other things, following a “short” four-year exam. One of the specific allegations is that my client did not do enough to understand the supposedly questionable nature of the background of some of its customers. In other words, it missed an AML red flag. We asked FINRA to identify the customers at issue, and the Staff complied. We were astounded to learn that one of the customers they listed was, in fact, a disclosed Schedule B indirect owner of the BD, someone that my client had known, and known well, for 20 years. Even more astounding, however, is the fact that FINRA Staff was unaware that this customer was an owner of the firm! When we pointed this out, and argued that it was just silly to believe that my client could possibly have been unaware of the customer’s background, given the very close and lengthy relationship between the firm and the customer, Staff acknowledged we might be right.
The question is, after a four-year exam with multiple OTRs and countless 8210 requests, how could this possibly get to the point where FINRA is making a Wells call, where it is literally on the precipice of issuing a complaint, without being aware of such an obvious and important fact as the customer being an owner of the BD? Seems that FINRA should do a better job of making sure it is aware of all material facts before it launches the Wells missile, given the damage that necessarily causes.
Second, examiner misconduct. FINRA can compel a BD and an RR to jump through hoops all day long, and there’s very little they, or I, can do about it. But, the rest of the free world is not subject to FINRA’s jurisdiction. That includes customers. Frequently, FINRA contacts customers as part of its examination, both in writing and over the phone. Unfortunately, FINRA does an awful job of explaining to customers who FINRA is. Indeed, FINRA seems perfectly content when customers it contacts labor under the misapprehension that FINRA is the government, and that they must, therefore, cooperate with FINRA. If you have ever seen a letter that FINRA sends to customers, it does not say anywhere that the customer has the right simply to tear the letter up and ignore it. Moreover, FINRA does not volunteer that fact when it calls customers, either, or advise them that they can just hang up.
This week, one of my clients got a call from a longstanding customer to report that she had been contacted repeatedly by a FINRA examiner to ask about trading in her account. She said that the FINRA examiner told her he was with the federal government, and that she had to respond to him. She went on to say that he was rude, and that he kept pushing her to lodge a complaint against the broker-dealer. Finally, she said that he ignored her instruction to stop calling her, and that he kept at it, badgering her about my client.
Obviously, I was not on the phone, and I don’t know what was actually said here. But, I have heard from enough customers over the years about similar calls received from FINRA examiners to suspect that much of what she said likely did happen. There needs to be some meaningful way of governing the conduct of FINRA examiners when they interact with customers, to ensure that the customers are expressly made aware of what FINRA is, what its role is, and, more importantly, what it is not, i.e., that it is not the government, and therefore cannot compel any customer to cooperate with them. Also, FINRA needs to do a much better job of making crystal clear that the subjects of their calls, the brokers and BDs, are not guilty of anything, and that customer should not infer anything to the contrary.
Finally, Rick Ketchum, FINRA’s outgoing Chairman. Last week in front of the Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance and Investments, he was confronted by Senator Elizabeth Warren about a couple of things, one of which was the subject of a recent blog post here: PIABA’s whiny “report” that sometimes when customers win arbitrations, they cannot collect because the BD goes out of business. I wrote that this is really more a complaint about the PIABA lawyers’ inability to collect their fees, and questioned why broker-dealers, among all businesses in America, should be required to keep enough money on hand to ensure that all their creditors get paid. Anyway, one might think that Mr. Ketchum would make these same, or at least similar, pro-industry observations to the Subcommittee, right?
Wrong. To the contrary, Mr. Ketchum agreed with the Senator’s remarks that this was a real problem and said, “Something should be done about it. . . . This is an issue we want to be part of, we want to work with the SEC on, and it is a real concern.” In light of FINRA’s long history of kowtowing to PIABA, this should come as no surprise to anyone. It is just painful to see it play out before your own eyes.
Senator Warren also grilled Mr. Ketchum on a recent paper by the University of Chicago and the University of Minnesota highlighting the relatively large number of registered representatives working in the industry with a record the authors deemed to be “indicative of . . . misconduct.” The Senator was upset about this, and Mr. Ketchum echoed her concerns. Strongly. In light of Mr. Ketchum’s remarks, I just cannot believe that there is anyone out there still crazy enough to hold on to the fanciful notion that the enforcement pendulum can’t go any further in the “aggressive” direction. Instead, it seems that what we should expect are more exams, more cases, higher fines, longer suspensions and more permanent bars. Batten down the hatches.
 The Staff did not immediately agree, however, to drop all potential claims involving that customer; instead, they merely agreed to “consider it.”
 Start around 51:00 in the Senate webcast to see the pertinent exchange between Mr. Ketchum and Senator Warren.
 Start around 45:00 in the webcast to see this exchange.