Way back in 2006, NASD issued Notice to Members 06-55, which tweaked the Sanction Guidelines to allow not just the size of the firm to be taken into consideration when determining the appropriate sanctions to be meted out, but, more importantly, how well, or how poorly, the firm is doing on its income statement. Specifically, the NTM resulted in a change to the Guidelines that explicitly permitted the consideration of “the amount of the firm’s revenues” and its “financial resources.” In addition, for “violations that are neither egregious nor involve fraud of the firm,” NASD gave the greenlight to adjudicators not just to “impos[e] a sanction that is proportionately scaled to the firm’s size,” but to “reduce the level of the sanction below the minimum level otherwise recommended in the Guidelines.”
That was over a decade ago. In my experience, unfortunately, it never amounted to much in real terms. FINRA Enforcement lawyers have never paid much attention to pleas for reduced fines based on a respondent firm’s financial condition. Rather, the typical response is that the sanctions sought in a given case must be viewed relative to other cases involving similar misconduct, which means that the sanctions can’t deviate much from whatever norm already exists for that misconduct as established by prior settled or litigated cases.
Well, this week, FINRA released an AWC in which it allowed the BD respondent to avoid paying any fine whatsoever, citing NTM 06-55. This was so crazy, so out of character for FINRA, that it had to take the relatively unusual step of issuing a Press Release for an otherwise unremarkable case, I guess in anticipation of all the head-scratching that the fine waiver would undoubtedly trigger.
The case itself, as I suggested, is pretty vanilla. It concerned the failure by the firm and one of its owner/principals to exercise reasonable supervision over a couple of registered reps who reported to him. The two reps both were guilty of making unsuitable recommendations, specifically, quantitatively unsuitable recommendations. (FYI, FINRA barred both of them. Shocking.) Turns out that both of the reps were trading some of their customer accounts excessively, and one of the reps also made recommendations that resulted in accounts that were over-concentrated in certain positions. The AWC includes findings that the firm’s WSPs were deficient, and also that the firm and the supervising principal failed to detect the trading issues, or, when detected, to take any appropriate responsive action.
As a sanction, the firm was required to pay restitution to the affected customers of just over $200,000, but – here’s the punchline – there was no fine. (The individual respondent was suspended as a principal for three months, fined $20,000, and required to take some continuing education.) In a footnote, the AWC recites that no fine was imposed on the firm due to its “revenues and financial resources, as well as its agreement to pay full restitution.”
Wow! As I said, it is super common to ask FINRA to consider waiving a fine, but rare that such a request gains any traction. So rare that Susan Schroeder, the head of FINRA’s Enforcement Department, felt it necessary to offer a public comment on the case. Bear in mind that FINRA doesn’t issue that many press releases in the course of a year regarding its Enforcement actions, and, when it does, it typically reserves its comments for really big cases, involving lots of firms and big dollar sanctions. This AWC is small potatoes, sanctions-wise, yet it merited a press release. That fact alone requires that we pay close attention to this case.
So, what did Susan say about the fine waiver? Here is her quote:
In this matter, FINRA has prioritized ensuring that affected customers receive full restitution, the firm fixes its supervisory flaws, and the responsible supervisor is held accountable and receives additional training. Due to the firm’s financial condition, FINRA did not impose a fine in addition to these other sanctions – the firm’s limited resources are better spent on remedial measures designed to prevent similar misconduct in the future.
This is, um, reasonable. Not sure what else to call it. FINRA holds itself out to the world as an entity interested in “investor protection,” but too often, it seems way more interested in using its member firms as punching bags. As a guy who exclusively represents respondents in FINRA Enforcement actions, it is really, really welcome news that, perhaps at last, FINRA is paying attention to its corporate mandate.
The notion that FINRA may actually take me seriously the next time I have a small BD client with limited financial resources that doesn’t deserve to be pushed to the financial brink as the result of an Enforcement action leaves me hopeful for the future. As long, that is, as FINRA is consistent with its approach, and doesn’t treat this AWC as an aberration, a one-off case that is never to be replicated. As with many things FINRA does, I suppose only time will tell if this represents a true change in its historic approach, or whether it’s more lip service.