I may have said this before in another post, but in my opinion, whether a baseball umpire is good or bad is not a matter of whether he has a low strikezone, a high strikezone, or a wide one.  What matters is that whatever that umpire deems to be a strike vs. a ball is consistent from inning to inning, pitcher to pitcher, game to game.  Because that provides predictability.  When a pitcher and batter know what to expect, they can react accordingly.  It is no different with regulators.  If you know what they want from you, and how they will react, then compliance becomes an easier world to manage.

With these prefatory words in mind, I want to commend Jessica Hopper, the head of FINRA Enforcement, for actually doing what she says she wants to do (not necessarily a common event with securities regulators).  Here is what I mean.

In a recent FINRA podcast called “FINRA Enforcement: Protecting Investors and Markets in Good Times and Bad,” Jessica was the principal guest, and she spent a half-hour or so talking about her priorities for her department.  Happily, FINRA published the transcript of that podcast, so you don’t have to listen to it.  And according to the transcript, Jessica stated that her “first priority is obtaining restitution for harmed customers. When a customer has been financially harmed through whatever misconduct we identify, we want to get the money back to them quickly.”  Consistent with that, last week, in a webcast by SIFMA that I attended, she repeated the very same, very clear sentiment.

To begin, however, let’s put aside any discussion of whether this priority is correct or not.  I mean, one could make a pretty compelling argument that the appropriate venue for aggrieved customers to get their money back is the arbitration process (administered by FINRA Dispute Resolution Services, its relatively new name), not an Enforcement action.  Indeed, FINRA’s own website says that filing an arbitration – rather than a complaint with Enforcement – is the way to go “if you want to recover . . . money”:

Dispute Resolution is not the same as filing an investor complaint.  Some investors are confused about the differences between resolving monetary disputes through arbitration or mediation, and filing an investor complaint.  These are unrelated.  If you want to make FINRA aware of any potentially fraudulent or suspicious activities by brokerage firms or brokers, then the best course of action is to use FINRA’s Investor Complaint Center.

However, if you want to recover damages, such as money or securities, filing an arbitration or mediation case offers you a way to seek damages. Importantly, investors can file an investor complaint and file for arbitration; investors are not limited to one or the other option.

But, as I said, that’s not the point here, for this blog, anyway.  The point is that Jessica says she is all about getting customers their money back.  To show that she means what she says – and make no mistake, that’s a commendable quality, as it provides the predictability I mentioned above – check out this AWC just published last week involving SunTrust Investment Services, out of Atlanta, my old stomping ground.  According to the AWC, for three years, from January 2015 until January 2018, the firm

failed to establish, maintain and enforce a supervisory system, including written supervisory procedures (“WSPs”) that were reasonably designed to ensure compliance with FINRA Rule 2111 in relation to solicited sales of non-traditional exchange traded funds (“NTETFs”) by its registered representatives.  These supervisory failures resulted in losses during the Relevant Period of $584,466.

What, exactly, did SunTrust do wrong?  It boils down to a few things:

  • While its WSPs recognized that NT-ETFs “c[ould] be inefficient and problematic long-term investments” and required the positions be monitored by the representative, supervising principal and the Central Supervision Group (CSG), the firm lacked reasonable procedures or guidance to representatives or supervisors regarding how to determine whether an NTETF was suitable for customers given the unique features and risks of those products.
  • The Firm did not have any systems in place, such as an alert or exception report, to assist in monitoring the holding periods for NT-ETFs.
  • No one at the Firm conducted a customer-specific suitability analysis for NT-ETF positions held for periods longer than one day, nor did the WSPs require such an analysis.
  • Although SunTrust required its representatives to complete an online training course prior to recommending transactions involving NT-ETFs, the training did not describe how to monitor ongoing holding periods and the related impact on suitability.

As a result of these various failures, 95 customer accounts held positions in NT-ETFs for extended periods of time.

Where this AWC gets interesting, however, is in the sanctions.  FINRA only fined the firm $50,000, but, significantly, that seems to because SunTrust paid back to the affected customer accounts whatever they lost as a result of the supervisory failures.  Indeed, the AWC imposed a restitution obligation of $584,466.13, but noted that even before the AWC was finalized, the firm had already “voluntarily paid restitution [of] $445,836.27 to 30 customers that it identified through its own investigation based on a broad-based methodology prior to the opening of an Enforcement investigation.”

So, there you go.  Jessica tells the world that what she cares about is restitution.  And, bam!, here is an AWC with a big firm, with serious supervisory lapses over an extended period of time, and a not-insignificant disciplinary history, but with a relatively modest fine. Wait, you say.  Fifty-Thousand isn’t modest!  Ah, but I said “relatively modest.”  And by that, I mean it is modest compared to the fines that SunTrust has previously paid.  According to BrokerCheck, in 2017, the firm paid the SEC a civil monetary penalty of $1.1 million.  In 2014, it paid FINRA a fine of $80,000.  In 2011, it paid FINRA a fine of $400,000.  In 2010, it paid FINRA a $900,000 fine.  In 2008, it paid FINRA a $700,000 fine.  And way back in 2006, it paid FINRA a $150,000 fine.  As you can see, $50,000 is, in dramatic fact, a drop in the bucket compared to what SunTrust is used to paying.

Now, the AWC does not specifically state that the fine was deliberately minimized because of the restitution, but it does say that “[i]n determining the appropriate sanctions,” FINRA took the restitution into consideration.  Reading between the lines here, I’d say it’s pretty easy to deduce that Jessica’s stated desire to obtain restitution must have had a real, demonstrable impact on the fine imposed on SunTrust.  Now that you know that, now that you know the voluntary payment of restitution can result in a dramatically smaller fine, you would be silly to ignore this.

As I said, kudos to Jessica for actually walking the walk.  I would much prefer to deal with a regulator whose word means something than someone whose goals are mere lip service.

Update 5/28/2020:  FINRA released another AWC today that reinforces the conclusion that I reached in this post.  Stifel, Nicolaus signed an AWC for supervisory failures relating to the sale of UITs (dating waaaay back to 2012!).  In addition to a $1.75 million fine, Stifel also agreed to pay almost $1.9 million in restitution — plus over four years of interest! — to customers who purchased UITs from the firm.  Unlike SunTrust, there is no indication in the AWC that Stifel paid any restitution voluntarily, prior to the settlement.  Indeed, the AWC requires that when Stifel writes its checks out to the affected customers, they be notified that “the payment is being made pursuant to a settlement with FINRA and as a term of this AWC.”  In other words, with a gun to its head, held by FINRA.  In any event, that could explain why the fine is so high, and certainly so much more than SunTrust agreed to pay.  Finally, if you have any doubts that the restitution component of the sanctions is what makes FINRA happiest, consider the Press Release that FINRA issued to announce the AWC.  In it, Jessica is quoted, as follows: ““Firms must have an adequate supervisory system in place to detect potentially unsuitable UIT rollovers, and also provide customers with accurate information so they can make informed decisions about those rollover recommendations. We are pleased that customers will receive restitution for sales charges incurred as a result of the recommendations.”  Note that she specifically touted the restitution, and makes no mention of the fine, despite the fact it is nearly $2 million. 

Update 6/2/2020:  FINRA released another AWC today, with more of the same.  This time, the case involved an individual, who was found to have made unsuitable recommendations.  Notably, while FINRA agreed to waive the fine that would otherwise have been imposed (due to the respondent’s inability to pay it), it still required him to pay restitution to the customer of $50,000.  So, no money to pay the fine, but enough to pay the customer back.