Alan focuses his practice exclusively on defending regulatory investigations and enforcement actions brought by the Financial Industry Regulatory Authority (FINRA), the United States Securities & Exchange Commission (SEC), and state securities commissioners against brokers, broker-dealers, and investment auditors. He was previously Director of the National Association of Securities Dealers (NASD) Atlanta District Office, where he oversaw nearly 600 member firms and thousands of branch offices. Alan also served as a member of the NASD's Department of Enforcement, where he had the primary responsibility for prosecuting hundreds of formal disciplinary actions.

This post is about Reg BI, but if you really want to learn about it, as opposed simply to listening to me gripe, I urge you to register for the webcast that my partners Heidi VonderHeide and Rob Betman will present on Wednesday, December 11, 2019, at 2:00 PM EST.  It is just one of

In December, Ulmer & Berne is hosting four financial services webcasts, the first of which I will be presenting along with my partner, Michael Gross:  FINRA 2019: A Look Back, and Thoughts About What Lies Ahead (Wednesday, December 04, 2019, 2:00 PM EST).  The others are The Anatomy of a Whistleblower Action: Procedure, Practice Pointers

In the past week, I ran across two discrete instances in which FINRA acts as a secret gatekeeper of sorts, exercising its own subjective judgment, without anyone knowing what, exactly, it is doing or why, employing unarticulated standards, and without providing any avenue for redress.  And I find that really frightening.

The first involves CRD,

Selflessly, Blaine Doyle recently attended a presentation here in Chicago by the SEC and CFTC, so you didn’t have to do it yourself.  Here is his recount of the highlights. – Alan

Anyone who has sat through a talk by financial regulators is undoubtedly familiar with the refrain from the individuals that they do not speak for the Commission and that the opinions offered are their own.  Even with that disclosure (and they ALWAYS make that disclosure), regulators are still notoriously tight lipped when it comes to just about anything, but especially if it relates to Enforcement.  However, when two high ranking officials from the CFTC and SEC decided to present, as the star attractions, at the Chicago Bar Association, they had no choice but to spill the beans.  While nobody would accuse them of having given up state secrets, they did offer some insights into where their respective Commissions are and, more importantly, where they are going.  With that in mind, here is what they had to say (with special emphasis on the securities side):

While the government shutdown of early 2019 is ancient history to most of us, the speakers from both the CFTC and SEC emphasized the disruption that the break caused to their respective organizations and personnel.  Moreover, on the issue of government funding, they both noted that their organizations are understaffed from past hiring freezes and are trying to backfill positions that have been open for some time.  The speaker from the CFTC mentioned that in some respects his organization had been in “triage” mode due to personnel shortages and that he was hoping that the additional hires will help ease the work load.  So why does this matter to the reader?  If you work in the industry, it would be reasonable to expect that as both organizations hire additional staff, scrutiny on registrants and, possibly, the number of enforcement actions will increase in the coming years.
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I was catching up on my reading and came across a column in Investment News by Mark Schoeff  that described the results of a recent FINRA arbitration, results which I found a bit alarming.  I caution you: reading too much into any arbitration award can be dangerous and/or foolhardy since they don’t always follow – or, occasionally, even slightly resemble – the rule of law.  Indeed, screwy arbitration awards abound, and sometimes all you can say is dang, glad it wasn’t me.  That’s why, in the eyes of the law, anyway, arbitration awards, even those that are well reasoned and sensible, do not constitute binding legal precedent.

Nevertheless, this award serves as a nice cautionary tale for firms that are willing to open accounts for advisory customers but not serve as the actual advisor, which is an altogether common practice in the securities industry.  Remember: investment advisors can recommend securities transactions, but they cannot actually effect any trades.  To make a securities trade that was recommended by an IA, the customer must have a securities account at some broker-dealer.  Some advisors are dually registered, and work for a BD, and that’s where the account is generally opened.  Many other advisors, however, are not associated with a BD, so their advisory clients need a brokerage account somewhere.  Often, that somewhere is a discount BD that charges low commissions, like TD Ameritrade, the respondent in this particular arbitration.
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I have written a few times about FINRA’s ceaseless interest in bringing cases against registered reps who fail to update their Form U-4 in a timely manner to disclose the fact that a tax lien has been filed against them.  Or several tax liens.  The problem with these cases is not so much the sanctions that FINRA imposes, as they tend to be fairly modest, e.g., a fine of $5,000 or less plus a suspension, maybe of 30 or 60 days in length.  No, the problem is that FINRA often likes to characterize these failures as “willful,” which results in the registered rep being statutorily disqualified from continuing to work in the securities industry, necessitating the filing of a MC-400 application to seek FINRA’s approval to remain a registered rep notwithstanding the modest nature of the rule violation.

Well, this week, FINRA accepted a very interesting AWC from J.P. Morgan Chase, which included a $1.1 million fine, as a result of the fact that JPMC failed to update the Forms U-5 of 89 former registered representatives, over a six-year period, to disclose the fact that these RRs were the subject of an internal review concerning allegations that they had misappropriated or transmitted “proprietary Firm information,” took customer information in connection with the transfer to another broker-dealer, or violated some “investment-related banking industry standard of conduct.”[1]  A repeat violation for the firm, too.
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Once again – twice again, actually – FINRA has used Rule 8210 as a cudgel, beating the poor unfortunate recipients of the “request” for documents and information into submission, or worse.  This has got to stop.

The first case is a repeat of one I blogged about earlier this year, and it involves the use of 8210 to demand that a computer be produced to FINRA so it can make a complete copy of the hard-drive.  Here’s what happened.  At 8:45 am on Wednesday, I received by email an 8210 letter, telling me that my client had to provide “immediate access to FINRA staff to inspect and copy” “[h]ard drive(s), Google drive(s), and USB thumb drive(s).”  The letter also included this threat/promise; note that the use of bold and underlining appears in the original, just to ensure these words are not skipped:

If your client fails to provide immediate access to FINRA staff of the requested information, they may be subject to the institution of an expedited or formal disciplinary proceeding leading to sanctions, including a bar from the securities industry.

At 9:00 – 15 minutes later – the examiners showed up at my client’s office and demanded that they be provided the computers so the hard drives could be copied, in their entirety.  Now remember from my previous blog post that I have been down this very road before with FINRA.  The last time this happened, in the face of essentially the same 8210 letter, my other client elected to produce the computer rather than face an Enforcement action.  Despite that, sadly, the matter still eventually ended up as an Enforcement case.  At the hearing in that case, I objected to the 8210 request as being unlawful, as it exceeded the scope of the rule (which does not permit computers to be seized and imaged).  The Hearing Officer asked me if an objection had been lodged at the time the initial 8210 request was served, and I had to say no.  Well, then, ruled the Hearing Officer, you waived your right to object here by not objecting sooner.
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I read an article this week in Investment News with the following headline: “Brokerage Customers Winning More FINRA Arbitration Cases.” As a guy who defends customer cases, I was naturally intriguied by this. According to the article, “brokerage customers who do file claims against their registered representative or firm are faring better in the process this year. So far in 2019, 176 cases have been decided, and 44%, or 78 cases, resulted in the customer being awarded damages. That’s an uptick compared to recent history.” Wow, I thought, this could be a troubling trend.

But, then I looked at the statistics that FINRA Dispute Resolution publishes, and quickly realized that this headline, and this story, oversells the point in a big way.

The story correctly reports that customers have been awarded money in 44% of cases that went to hearing this year, and that this reflects an upwards trend. But, really, it’s hardly a significant increase. The percent of cases that result in something being awarded to customers look like this since 2014:
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