Disciplinary Process

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The day after Christmas, FINRA issued a press release announcing that five big firms – Citigroup, J.P. Morgan Chase, LPL, Morgan Stanley and Merrill Lynch – had each entered into a settlement, collectively agreeing to pay a $1.4 million fine.  Their offense?  They each violated FINRA’s supervisory rules because for a number of years, dating…

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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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:…
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FINRA loves to tout its supposed intent to bring meaningful cases, cases that matter to the investing public, rather than enforcing “foot faults,” as it has been accused of doing over the years. My own experience with FINRA suggests that while it talks a big game, in reality, we all still live in foot-fault city.

I stumbled across this decision recently, and it serves as a good example of two problems that FINRA has. First, FINRA is, at times, maybe most times, hardly the model of efficiency when it comes to promptly bringing cases against perceived bad guys. Second, it reflects how FINRA is still willing to spend its finite resources, in terms of time, manpower, and money, on an utterly fruitless pursuit, resources that anyone would agree – including the FINRA lawyers who brought the case and the Hearing Officer who had to consider the evidence – would have been better spent on something else.

The case started out normally, with FINRA filing an Enforcement action against the broker-dealer in 2017, alleging a number of nasty sounding historical sales practice violations. According to the decision, however, and for reasons that went unexplained, the complaint was filed five years after the exam of the matter was started, and fully four years after the matter was referred to Enforcement. From the defense perspective, that is a long time. A long time for documents to be preserved, for witnesses’ memories to remain intact. Remember: FINRA is not restricted by statutes of limitations (like the SEC, or like civil litigants), but it is still supposed to be procedurally fair to respondents, and one aspect of that fairness is not waiting too long to file a complaint.…
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While I feel I have enjoyed as much success defending respondents in FINRA Enforcement matters as anyone, I am still careful to caution clients who are unwilling to consider any settlement that going toe-to-toe with FINRA at a hearing is always a difficult proposition, even though they are presumed innocent and FINRA bears the burden…

Reading Reg Notice 19-17 makes me think of the legal arguments that I’ve recently read regarding whether a president can be found guilty of obstructing justice if the actions in question were taken out in the open, for everyone to see. Here, FINRA’s proposed power grab is simply outrageous, but, you got to give them…

I have written before about the troubling lack of clarity regarding the tangible benefit of self-reporting rule violations to FINRA. While FINRA purports to provide some potential advantage for doing so, it is so awfully loosy-goosy that it remains a relatively uncommon occurrence. That’s why when a case comes down that provides some clear indication…