What is it with big firms and fingerprints? You may recall back in October 2017, J.P. Morgan entered into an AWC with FINRA in which it agreed to pay a $1.25 million fine for the following, as described in FINRA’s press release about the case:
FINRA found that for more than eight years, J.P. Morgan did not fingerprint approximately 2,000 of its non-registered associated persons in a timely manner, preventing the firm from determining whether those persons might be disqualified from working at the firm. In addition, the firm fingerprinted other non-registered associated persons but limited its screening to criminal convictions specified in federal banking laws and an internally created list. In total, the firm did not appropriately screen 8,600 individuals for all felony convictions or for disciplinary actions by financial regulators. FINRA also found that four individuals who were subject to a statutory disqualification because of a criminal conviction were allowed to associate, or remain associated, with the firm during the relevant time period. One of the four individuals was associated with the firm for 10 years; and another for eight years.
Ok, now compare that description to this one, from a press release that FINRA issued just two days ago to announce an AWC that Citigroup entered into, and in which it, too, agreed to pay a $1.25 million fine:
FINRA found that from January 2010 through May 2017, CGMI failed to conduct timely or adequate background checks on approximately 10,400 of its non-registered associated persons. Also, the firm did not fingerprint at least 520 of the 10,400 non-registered associated persons until after they began their association with CGMI, thus preventing the firm from determining whether any individuals were subject to statutory disqualification from associating with a FINRA member firm. In addition, the firm was unable to determine whether it timely fingerprinted at least an additional 520 non-registered persons. While CGMI fingerprinted other non-registered associated persons, it failed to screen them as required by federal securities laws, instead limiting its screening to what was required by federal banking laws. FINRA found that because of these failures, three individuals who were subject to statutory disqualification because of criminal convictions were allowed to associate, or remain associated, with the firm during the relevant period. This arose from its failure to maintain a reasonable supervisory system and procedures to identify and properly screen all individuals who became associated with the firm in a non-registered capacity.
There is an uncanny similarity between these two cases, no? I mean, down to the amount of the fines imposed. There are few things that I’m trying to figure out about these two settlements. First, is this a problem unique to really, really big firms? I think the answer is that is has to be. No small, or even medium firm, deals with this many “non-registered associated persons,” about 10,000 each. It seems to me that it was the sheer size of the task, of doing the background check on this many people, that caused this problem. I am hardly conceding, however, that this is a legitimate excuse. FINRA remains a one-size-fits-all regulator when it comes to most of its rules. Including rules about checking the backgrounds of all associated persons. And FINRA has hardly been silent on this subject, having issued several public announcements in recent years. See, for instance, this press release and this Information Notice, both from 2018. Thus, it is incumbent on all BDs to take all necessary steps to meet their regulatory requirements, no matter how arduous the volume of work may render that task.
Second, did they get off easy? This one is debatable. Face it, in an absolute sense, a $1.25 million fine is nothing to sneeze at. Of course, for firms of this size, even a fine that large is likely to be fairly modest relative to overall revenue. But let’s remember, too, that FINRA fines are not meant to be punitive; rather, they are designed to be remedial. Thus, FINRA fines are not computed as a percentage of a respondent’s revenues (as might an award of punitive damages in a civil action or arbitration), so they are not intended to “sting” like punitive damages are.
The other issue that makes me question the sanctions is the fact that it appears both firms, as a result of failing to conduct the necessary background checks, managed to associate with a handful of individuals who were statutorily disqualified due to their criminal backgrounds. You may say, so what, it’s just a few SD’d people, so who cares? The problem is that the rule has no exceptions: when a BD associates with someone who is SD’d, it then renders the firm SD’d, too (thus triggering the need for the filing of an MC-400A application). Even if that association wasn’t done knowingly, the firm is still SD’d. The AWCs here don’t say how much of the fines were allocated to this issue, but if it wasn’t a lot, there is, arguably, a problem with the sanctions.
For me, on balance, I’d say it’s hard to argue that they got off easy, despite how long the problems continued (over eight years for J.P. Morgan, over seven for Citigroup), despite the huge number of people whose records were not properly reviewed, and despite the SD issue. The fines aren’t just big, they’re huge.
My third question is, where is the credit for self-reporting? I know that it’s supposed to be in the the J.P. Morgan AWC because it contains explicit language to that effect: “In determining the appropriate monetary sanction, FINRA staff considered the Firm’s cooperation in self-reporting and undertaking to remedy its violations.” To that language, FINRA dropped a footnote referencing Reg Notice 08-70, which, until just a week or so ago, was the latest word from FINRA on credit for self-reporting. (Now, of course, we have Reg Notice 19-23, which “restate[s] and supplement[s] prior guidance” from 08-70.) The point is, while we cannot quantify how much of a discount J.P. Morgan got for cooperating, we absolutely know that it got something.
According to Citigroup’s AWC, it also “self-reported this matter to FINRA and commenced a remedial review and screening process of non-registered associated persons across Citi.” But, there is no mention of any consideration accorded bythe FINRA staff for such cooperation, and no mention of 08-70. Thus, I am left to guess whether Citigroup actually got any credit for doing this.
The good news is that 19-23 will elimate this guesswork. How? By providing that, going forward, when a respondent receives “credit for extraordinary cooperation, FINRA will include in the Letter of Acceptance, Waiver and Consent (AWC) memorializing the settlement a new section titled, ‘Credit for Extraordinary Cooperation.’ FINRA will describe the factors that resulted in credit being given, as well as the type of credit.” As an aside: If you have not yet studied 19-23, or read one of the many articles it has generated, you ought to do so. It will enable you to join the fun by trying to calculate for yourself what may constitute the difference between “extraordinary cooperation,” which not could result in a lowered fine but could actually “result in FINRA electing to proceed without formal action, and mere “required cooperation,” which will get you squat.
Big firms paying big fines always tend to draw attention to their cases. Indeed, it is hardly a shock that in both matters FINRA elected to issue a press release. I suppose I am still wrestling with why FINRA does so. Part of me says, well, heck, the fines were $1.25 million, and since that doesn’t happen every day, it makes sense to publicize the settlements for that fact alone. But, part of me wonders if this isn’t simply a transparent effort by FINRA to address the persistent whispers that it is in the pocket of the big firms by saying, see how we tagged these two wirehouses for such huge fines (but which are still immaterial to the bottom line)? All you complainers who say that FINRA only goes after small firms, see how even-handed our justice is? Until FINRA nominates me to sit on its Board, I guess I’ll never know for sure.