Broker- Dealer Law Corner

Broker- Dealer Law Corner

BD Learns It’s Not Enough To Have A Supervisory Procedure For OBAs, You Actually Have To Follow It

Posted in Enforcement, FINRA, Outside business activities, Rule 3270, Uncategorized

In most Enforcement cases involving outside business activities, it is the registered rep who is named as the respondent, and the allegation is that the RR failed to provide notice (or timely notice) to his or her broker-dealer about the OBA. On occasion, however, it is the BD that gets tripped up, typically for not bothering to follow up appropriately (or at all) on an RR’s disclosed OBA.  Cetera just learned this lesson the hard way, i.e., a $200,000 AWC for violating Rules 3010/3110 and 3270.

The facts of the case are pretty straightforward. The RR in question managed to get two of his elderly customers to grant him power of attorney, broad enough for him to be able to control their financial affairs (including the securities accounts for which he was the RR of record).[1]  According to Cetera’s perfectly reasonable policy, an RR could not do so (for a non-family member) without obtaining authorization from Compliance.  Turns out that the RR never got that authorization.

But, interestingly, also turns out that the RR tried to get it.  In fact, according to the AWC, on three separate occasions, the RR disclosed to Cetera that his two customers had granted him power of attorney over their financial affairs.  Cetera, however, “did not timely review, evaluate or respond to [RR’s] disclosures.”  In fact, Cetera “did not commence a review” of the RR’s trading on behalf of the two customers until questions were raised by a third party: a “mutual fund issuer detected that some of those transactions appeared questionable and alerted” Cetera.  There’s only one thing that could have been worse than that, and that would have been if FINRA examiners discovered the problem.

There are some pretty obvious lessons to learn here. First, it is not enough to have your RRs disclose their outside business activities; you actually have to review what they disclose.  (Like Jerry Seinfeld’s complaint that it’s not enough for the car rental company to “take” the reservation if it doesn’t actually “hold” the reservation.)  Cetera had the right supervisory procedure in place, which required a timely review of disclosed OBAs; it just failed to follow it.

Second, don’t ignore the supplementary material for any FINRA rule; sometimes, that’s where the juiciest language can be found. Certainly, that’s true for Rule 3270.  On its face, the rule is rather short and seems pretty simple to comply with, especially since approval of OBAs isn’t even required; rather, all that’s needed is that an RR provide “prior written notice.”  It only gets more complicated, as I said, when you drag your eyes down to the bottom of the page and read the supplementary material.  There, you will find the requirement that upon receiving notice of an OBA, a BD must “consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person’s responsibilities to the member and/or the member’s customers or (2) be viewed by customers or the public as part of the member’s business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered.”

Once the firm considers those two questions, it “must evaluate the advisability of imposing specific conditions or limitations on a registered person’s outside business activity, including where circumstances warrant, prohibiting the activity.” That includes the need to “evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of Rule 3280.”  Finally, the firm “must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).”

In other words, the supplementary material changes the rule from merely a “notice” provision to one that actually requires “approval.” But, Cetera didn’t make any of the analyses required by the supplementary materials.  As a result, it had no defense to offer to FINRA when confronted with its omissions.

The third lesson is that when considering OBAs, firms should take an expansive view. That is, RRs should be made to disclose anything and everything that could possibly be considered to be an OBA, even if it’s not obvious.  Rule 3270 requires that an RR provide notice when he or she is “an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or ha[s] the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm.”  Based on this description, it is not entirely clear that simply being granted power of attorney over a client’s financial affairs, particularly when there is no compensation involved, technically requires an OBA notice.  But, it seemed that Cetera did require it to be disclosed here (even though it then dropped the ball by not reviewing the disclosures), which is smart.  The spirit of the rule is simple to divine: RRs should be required to disclose anything that they do away from the BD that could cause a conflict with what they do as an RR, or which could cause customers to be uncertain of the capacity – RR vs. non-RR – in which the RR is operating.  There should be no close calls.  Always err on the side of requiring disclosure.

The final lesson is the same one as always: if you actually do something to fulfill your supervisory obligations but fail to document the fact that you did it, as far as FINRA (or, sometimes, an arbitration panel) is concerned, you didn’t actually do it.  So, write  a memo.  Write yourself an email.  Make an entry on your calendar.  Do something to physically record the fact that you took some action.  From an evidentiary perspective, even a modest, unabashedly self-serving effort to memorialize an event is better than nothing.

[1] Presumably, the RR exerted some degree of undue influence to obtain the POAs in order to benefit himself, given that he entered into his own AWC with FINRA, agreeing to a permanent bar for misusing at least $75,000 from the bank account of one of the two senior customers.

FINRA’s “Massive” Discovery Failure Results In…Absolutely Nothing

Posted in Disciplinary Process, Enforcement, FINRA, Sanctions, Uncategorized

You are not going to believe this one. Here are the unadulterated facts, taken directly from the Order entered by the FINRA Hearing Officer (an Order, by the way, which FINRA elected not to publish on its website):

  • Five days into an Enforcement hearing against Respondent Steven Larson, “Enforcement disclosed that it just realized it had failed to produce certain documents in discovery.”
  • Enforcement admitted that it was unable “to represent that it knew the full extent of the non-production.”
  • The Hearing Officer adjourned the hearing to give Enforcement time to figure out the scope of its discovery failure.
  • After a week, Enforcement “announced at a status conference the extent of the non-production.”
  • “It was massive,” according to the Hearing Officer.
  • “Enforcement admitted to not producing at least 30,000 emails (plus attachments).”
  • “[T]he volume of improperly non-produced documents [was] more than double the total documents [Enforcement] had produced.”
  • “Stated differently, well into the final phase of the hearing, Enforcement had only provided [respondent] with approximately half the documents he was entitled to receive.”
  • In addition, Enforcement also admitted that it had “inadvertently omitted” from its previous discovery production “an additional 160 documents and 17 emails (plus attachments).”

In response to this astonishing development, Mr. Larson filed a motion to dismiss, essentially seeking dismissal as a sanction for Enforcement’s “massive” discovery failure.  Enforcement responded to the motion, and, according to the Order, “[w]hile conceding it should have produced the documents as part of its FINRA Rule 9251-mandated discovery, Enforcement argues that sanctions should not be imposed because its document production failure was inadvertent; it has now produced the omitted documents; [respondent] has not been prejudiced; and it did not make any representations.”

In other words, according to FINRA, hey, we messed up but it wasn’t intentional, and anyway, no harm no foul, so let’s just let bygones be bygones.

The Hearing Officer considered FINRA’s argument.  He labeled FINRA’s discovery failure to be “disconcerting in a number of respects.”  First, FINRA not only failed to timely comply with its discovery obligations under Rule 9251, but it “also violated the Case Management and Scheduling Order.”  Second, “the period of non-compliance was lengthy.”  Eight months late and, indeed, five days into the actual hearing.  Third, “the volume of documents that Enforcement failed to produced is staggering.”  Fourth, “the non-production did not result from a single cause, but from a combination of miscommunication, misunderstandings, and other errors.”  Fifth, “the discovery failure resulted in a four-month delay in the completion of the hearing.”  Finally, “while it is unclear whether any of the additional documents contain material exculpatory evidence, some of these documents may at least be relevant to [respondent’s] defense.”

All of these facts seemed to dictate that dismissal was appropriate.  Against those facts, however, the Hearing Officer weighed the following:  First, the record did not show that Enforcement “engaged in willful misconduct, bad faith, or that it otherwise acted contemptuously.”  Second, “Enforcement admitted it made a mistake.”  Third, “Enforcement has made substantial remediation efforts.”  Fourth, “any prejudice resulting from Enforcement’s failure to timely produce the documents has been eliminated, or at least substantially mitigated, because” the Hearing Officer continued the hearing for four months.  Finally, and most alarming (at least to me), “dismissing this proceeding” at what the Order calls “this late stage” “would undermine the public policy favoring the disposition of cases on their merits.”

Can you guess what the Hearing Officer decided to do?  Not only did he deny the motion to dismiss, he concluded that “the imposition of lesser sanctions [was] unwarranted.”  In other words, he did nothing.

All because, basically, he determined that FINRA didn’t intentionally screw up.

Eventually, months later, the hearing continued and – shockingly!! – FINRA prevailed.  In the final Decision, all the hubbub about FINRA’s “massive” discovery failure was reduced to a single mention.  In one measly footnote.  Nothing to see here, move along, apparently.

Just imagine what FINRA would have done to a respondent who failed to produce 30,000 emails in response to an 8210 request.  Even a respondent who admitted his failure, and whose failure was inadvertent, would, in my experience, be staring at nothing less than a permanent bar as a sanction.  The double-standard that the Hearing Officer employed here is staggeringly obvious and, frankly, outrageous.  It was not enough that he gave respondent a four-month break in the middle of the hearing to deal with the giant, late production by Enforcement.  To suggest that doing so “eliminated, or at least substantially mitigated” any prejudice to the respondent is sheer fantasy, a dream that, I suppose, helps FINRA management sleep at night.

I have complained before about the fact that FINRA does not hold itself to the same standards as the individuals and firms that it regulates.  So, this sort of thing isn’t new.  But, this case may take that concept to a new height (or depth), unrivaled for the patently inequitable way respondent was treated.  I harbored some hope that under its (relatively) new stewardship, FINRA Enforcement might start to demonstrate a greater degree of fairness, but such hope was dashed by this case.

You want more proof, more reason to remain a cynic?  How about this:  it was not enough, apparently, that the respondent’s rights under the Code of Procedure were so thoroughly trampled.  On top of all that, Enforcement has now filed an appeal.  Yes, that’s right, even though Enforcement prevailed on some of the charges it brought, other charges, including, notably, the fraud charge, were dismissed (in a 2 – 1 decision, prompting a dissent from the Hearing Officer).  So, despite the fact respondent was suspended for 18 months “for submitting materially misleading Continuing Membership Applications to FINRA,” fined $37,000 and suspended for two years “for failing to provide complete and timely responses to FINRA document and information requests,” and suspended for 18 months “for falsifying firm records by backdating supervisory documents and then submitting some of them to FINRA,” I guess that’s not enough sanctions for Enforcement.  Because the two industry members of the hearing panel concluded that “Enforcement failed to prove by a preponderance of the evidence that Respondent made fraudulent misrepresentations and omissions to customers about their church bond holdings and in connection with church bond cross trades he arranged” and dismissed the charges relating to these allegations, respondent was not barred.  And, like the evil clown Pennywise from Stephen King’s It, with his insatiable appetite for the children who inhabit the town of Derry, Maine, FINRA will not be cheated of its own pound of flesh from respondents like Mr. Larson here, who had the temerity somehow to avoid a bar.







Has The SEC Taken All The Mystery Out Of Filing SARs?

Posted in AML, SAR, SEC

This week, Charles Schwab consented to pay the SEC a $2.8 million civil penalty for failing to file SARs on certain transactions – suspicious transactions, namely – by a number of independent investment advisors that Schwab had terminated from its platform. This matter is noteworthy not just for the size of the civil penalty, but because it reflects the continuation of a concerning trend by the SEC to focus less on a firm’s AML processes and procedures and more on the firm’s ultimate decision whether or not to file a suspicious activity report, or SAR.

Section 356 of the USA PATRIOT Act amended the Bank Secrecy Act to require broker-dealers to monitor for and report suspicious activities when circumstances warrant. The rule requires broker-dealers to file a SAR when they know, suspect, or have reason to suspect that a transaction of at least $5,000 involves money from illegal activity, or was conducted to disguise such funds or evade the requirements of the BSA, or has no business or apparent lawful purpose, or involved the use of the broker-dealer to facilitate criminal activities.  Based on this somewhat fuzzy language, figuring out whether some set of facts requires the filing of a SAR can become the subject of intense debate.

But, here is why I find the Schwab case to be interesting. Historically, perhaps because of the fuzzy language used in the statute, the focus of regulators in their enforcement actions involving AML cases has not been on whether or not a firm actually filed a SAR; instead, the focus has been on whether the firm had proper AML procedures in place that allowed it to spot the apparently suspicious activity in a timely manner, to investigate the suspicious activity promptly and thoroughly, and to document that entire process.  The case that most people, including me, cite for this proposition is the Sterne Agee decision, a FINRA OHO decision.  The hearing panel in that case looked to guidance from bank examiners to determine what the proper focus ought to be.  It noted with approval that

[t]he Federal Financial Institutions Examination Council (“FFIEC”) has emphasized the importance of focusing on the process, rather than on whether a particular SAR was filed. In its examination manual for banks, FFIEC states, “The decision to file a SAR is an inherently subjective judgment.  Examiners should focus on whether the bank has an effective SAR decision-making process, not individual SAR decisions.”  This is not to say that the failure to file a SAR cannot be questioned, and FINRA has settled matters involving the failure to file SARs.

Schwab is now the latest in a recent line of SEC cases that turns the Sterne Agee reasoning on its head, by caring more – or at least as much – about whether a SAR was filed than whether the firm had a reasonable supervisory system in place that allowed the firm to spot the suspicious circumstances in the first place.

In November 2017, Wells Fargo Advisors, LLC agreed to pay $3.5 million to the SEC for its “failure to file or timely file”  “at least 50 SARs, a majority of which related to continuing suspicious activity occurring in accounts held at Wells Fargo Advisors’ U.S. branch offices that focused on international customers.”  In March 2018, Aegis Capital Corp. entered into a settlement with the SEC, resulting in a $750,000 civil penalty, because it

failed to file Suspicious Activity Reports (“SARs”) on hundreds of transactions when it knew, suspected, or had reason to suspect that the transactions involved the use of the broker-dealer to facilitate fraudulent activity or had no business or apparent lawful purpose. Many of the transactions involved red flags of potential market manipulation, including high trading volume in companies with little or no business activity during a time of simultaneous promotional activity.  Aegis did not file SARs on these transactions even when it specifically identified AML red flags implicated by these transactions in its written supervisory procedures.

I am hardly saying that it is not necessary to worry about your AML supervisory procedures; indeed, that remains a legitimate concern. But, what seems to be a new development is the need to worry a lot about the actual decision to file a SAR or not.  I am wondering now if my historic advice to clients not to be concerned about that as long as they make a reasoned, documented decision not to file a SAR remains valid in light of these recent cases.  Now, the lesson of these cases seems to be: if you identify something suspicious, even potentially suspicious, then file a SAR, since that will avoid the nasty call from the SEC asking for the explanation for the absence of a SAR.

But that would be a lousy development and a bad lesson. While the whole process of filings SARs often seems to be an exercise in box-checking and doing it because the rules say that I have to do it, in fact, SARs fulfill an important function in helping detect and prevent real criminal activity.  I would 100% agree, of course, that very, very few SARs reveal actual criminal activity, but that’s for FinCEN to suss out.  If BDs simply file a SAR every time they spot something even potentially suspicious, without bothering really to analyze the activity to figure out if it is truly suspicious – something that I have seen characterized as filing a “defensive” SAR, i.e., a SAR designed simply to avoid regulatory scrutiny, rather than to report of suspicious activity – then it could very well compromise FinCEN’s ability to meaningfully review and follow up on those SARs that reveal truly suspicious conduct.

I don’t advocate, therefore, that firms simply abdicate their responsibility to determine whether activity is suspicious or not and just file SARs anyway. But, I do think it’s clear that there is no point whatsoever in sweating over the decision to file a SAR.  There is no reason only to file SARs in those instances in which you are 100% convinced a filing is necessary.  If it is arguable that a SAR should be filed, then stop the internal debate and make the filing.  The SEC is not going to make an example of you if you do, but, as these cases reveal, you run a legitimate risk of being second-guessed if you don’t.

PIABA’s Efforts To Get A Law Passed To Ensure Payment Of Legal Fees Off To Rough Start

Posted in Arbitration, FINRA, PIABA

About a month ago, I posted a blog about the apparent success that PIABA had achieved in getting two US senators — a Democrat and a Republican — to sponsor a bill to require FINRA to create a fund from which unpaid arbitration awards — and, of course, unpaid claimants’ counsel fees — would be paid.  I complained about the proposed bill, and argued that it was flawed in a number of obvious ways.  But, who listens to me.

Well, I was pleased to learn today that when the bill was presented to Senate Banking Committee, it hardly received a warm reception.  To the contrary, it seems that the Committee members were less than excited about the prospect of FINRA creating this fund, even though the proposal calls for the fund to be sourced by fine revenue that FINRA collects from unfortunate respondents in Enforcement actions.  The clever Committee members recognized a couple of very troublesome things about this proposal.  First, there is no cap on the size of the fund.  So, theoretically, FINRA will have to keep adding money to it in the event that the claims made against it exceed the initial contributions.  Second, in that event, i.e., FINRA needs to put more money in than anticipated, that money will have to come from sources beyond the fine money, which means from member firms who are not respondents in Enforcement actions.  Even US senators seem capable of recognizing that it is pretty poor form to require the rule-abiding members of FINRA to pony up money to pay the debts of other, less compliant, firms and individuals.

SIFMA weighed in, too, arguing against the proposed law.  In addition to making the points outlined above, SIFMA also observed that requiring FINRA to use fines collected as the source of the fund creates “a perverse incentive for FINRA to increase both the number of enforcement actions that it brings, and the dollar amount of penalties that it imposes, in order to ensure that the recovery pool is adequately stocked.”  I like the way that SIFMA thinks.  While FINRA always denies that its decisions to bring Enforcement actions are in any way motivated by the fine dollars it might collect at the end of the case, it is undeniable that a need for additional fine money to deposit into the fund would create an actual conflict of interest.  Much like at the end of my tenure with NASD in 2004, when senior management created objective measures by which the performance of the District Offices could be determined, one of which was the number of formal disciplinary actions we filed (it needed to be at least 10% of the number of exams we conducted to “pass”).  Clearly, that criterion added incentive for NASD to file complaints, even if not merited by the evidence.  The current FINRA proposal shares the same “ick” factor.

At the end of the day, the mere fact that PIABA has thrown its weight behind this bill should be enough to make the Committee think very hard about whose interests are at issue here.  Is it really the investors, or is it their counsel?  Every lawyer who files a complaint or a statement of claim in arbitration in an effort to collect money owes it to his or her client to explain not only the likelihood of prevailing, but, as well, the prospects of collecting on the award in the event they do, in fact, prevail.  Collecting is never guaranteed.  When collection is uncertain, it may not be in the client’s best interest to file suit.  The proposed statute turns this principle on its head, essentially ensuring that claimant will collect, and that claimant’s lawyer, who has the case on a contingency fee basis, will get paid regardless of the success of collection efforts against the respondent.  Given that, it is easy to see how arbitrations will undoubtedly increase in frequency should this bill gain traction.  Let’s hope that the chilly reception it received at the Committee level is enough to put the kibosh on this proposal.



Beyond Lucia: The Supreme Court’s Decision Is Just the Beginning

Posted in Administrative Proceedings, appeal, Defenses, SEC

Here is an important post by my partner, Ken Berg, regarding SEC administrative proceedings, and what we can expect following the Supreme Court’s recent decision in Lucia. – Alan

By now everyone knows the US Supreme Court declared the SEC’s administrative proceedings unconstitutional because the ALJs were improperly hired by the SEC staff instead of being appointed by the Commissioners. All respondents who raised this constitutional issue before the SEC, who have not settled, and whose cases are not yet final, are entitled to a new evidentiary hearing before a different ALJ.  But, here are a couple of questions the Supreme Court did not address in Lucia v. SEC and that decision may be just the beginning of the SEC’s troubles.

First. What about respondents who did not raise the issue before the SEC?  If they did not settle and their cases are not final, are they entitled to a new hearing before a different ALJ?  Looks good.  This issue is currently pending before the Tenth Circuit in a case argued by Ulmer and awaiting decision, Malouf v. SEC.  Ulmer argued even though Malouf’s former attorney did not raise the Appointment Clause issue before the SEC, the Court of Appeals can reverse because there were “reasonable grounds” for not doing so.  At oral argument, at least two of the three judges were openly skeptical of the SEC’s position that the Court of Appeals could not reverse.  Judge Hartz said to the lawyer representing the SEC, “Help me get comfortable with your position.”  The Judge was troubled because even if the constitutional issue had been raised before the SEC, the agency “almost certainly would have ignored it.”  Judge Bacharach challenged the SEC’s attorney, saying “I can’t think of a new argument that could be more futile to make than that everything [the SEC has] before [it] is invalid ….”  This bodes well for respondents getting a new hearing before a different ALJ even if they did not assert the Appointments Clause defense at the SEC.

Second. Did the SEC fix the constitutional problems when it appointed the sitting ALJs in November 2017?  Probably not.  In addition to being appointed incorrectly, there are other constitutional problems with the way SEC ALJs can be removed.  The Supreme Court did not address this issue.  (See Judge Breyer’s separate opinion.)  The Appointments Clause not only requires ALJs to be appointed by the President or the Commissioners, it also requires that the President be able to remove ALJs.  However, ALJs can only be removed “for cause” (meaning they are not doing their job) and ALJs are entitled to a hearing at the Merit Systems Protection Board before they can be removed.  These multiple levels of protection from removal violate the Appointments Clause.  Unlike the defect in appointing ALJs, the fix for the removal problem may not be within the SEC’s power and may require an act of Congress amending the Administrative Procedure Act.  Until that happens, all administrative proceedings at the SEC go forward at the risk of having to be redone.  Accordingly, all respondents should assert an appointments clause defense as early in the proceedings as possible even after Lucia.

Third. Does the five-year statute of limitations applicable to SEC enforcement proceedings bar retrying a case before a different ALJ?  Worth arguing.  SEC proceedings are commenced by the Commissioners issuing an Order Instituting Proceedings (“OIP”).  The OIP must be issued within five years of the allegedly unlawful conduct and it determines whether the case will proceed administratively or in district court.  The Appointments Clause “invalidates actions taken pursuant to defective title.” Ryder v. US, 515 US 177, 185 (1995).  An OIP issued before November 2017, when there were no constitutionally appointed ALJs, is void and did not commence an action.  Retrying a respondent before a different ALJ requires issuance of a new OIP.  But if the new OIP is issued more than five years after the allegedly unlawful conduct, then the proceedings are barred by the statute of limitations.  Accordingly, an unintended consequence of the Supreme Court’s decision in Lucia is that he and others similarly situated may be completely off-the-hook.


PIABA Lawyers Convince Congress Of The Importance Of Them Collecting Their Attorneys’ Fees

Posted in Arbitration, FINRA, PIABA

I have written before of the ferocious effort by PIABA lawyers to fight for their ability to collect attorneys’ fees on contingency matters – FINRA arbitrations – that they manage to win but which never get satisfied because the respondent broker-dealer has the temerity to go out of business rather than paying the award. PIABA members are clever enough not to make themselves the focus of the campaign, however; rather, they highlight the claimants, whom they characterize as being victimized twice, once by the bad broker and then a second time when the award is not satisfied.  As I have said before, I am not sure why people who choose to sue broker-dealers should be put into a special category of plaintiffs who are assured of collecting if they prevail, whereas anyone else in America runs the risk that judgments they obtain may go unsatisfied.

Well, apparently, at least two US Senators have been convinced by PIABA that this is a scourge that must be addressed. Forget immigration.  Forget tariffs.  Forget Russia.  It was reported this week that Elizabeth Warren (D-Mass) has been joined by John Kennedy (R-La) in a rare bipartisan agreement to co-sponsor a bill that would make PIABA’s dream come true, a law requiring FINRA to create a fund that could be tapped when respondents fail to pay adverse arbitration awards.

I won’t bother to comment on why Congress is dealing with this, given the host of other issues that it ought to be addressing. So, let’s look at the real problem.  According to the proposed bill, the fund would be created using money that FINRA collects in fines from respondents in Enforcement actions.  PIABA says that’s a winning formula, since the money will be coming not from taxpayers but from “bad guys” who violate FINRA rules.

But that’s just half the story. The money that FINRA metes out in fines is not just sitting around Robert Cook’s office in an envelope used to pay for the cakes and ice cream for his office’s monthly birthday celebration.  It is millions of dollars.  Last year, it was $73 million; in 2016, it was $176 million.  Granted, not all of that is collected, but that which is received is used by FINRA to accomplish very real and (hopefully) very important things.  According to FINRA’s Fines Policy, fine monies are used for “capital expenditures and specified regulatory projects that promote compliance and improve markets.”

In its 2018 Budget Summary, FINRA identified some of those projects that it paid for with collected fines, including “a successful multi-year effort to migrate FINRA’s technology environment from a data center structure to a cloudbased architecture, reducing expenses and increasing surveillance speeds,” moving its “continuing education program online in order to provide representatives with more flexibility to satisfy their requirements,” and the launching of “TRACE for Treasuries initiative to provide increased understanding and enhanced surveillance of the Treasury market through the reporting of secondary-market transactions in Treasury securities.”  In addition, fine monies were also earmarked “to transform the technological infrastructure of the registration systems for member firms and individuals, providing a significant upgrade to a core tool that is used by FINRA, the SEC, state regulators, the industry and – through BrokerCheck – the investing public.  The enhancements will transform the legacy registration systems to modern systems using open-source architecture and cloud-based infrastructure to deliver increased usefulness and efficiency.”

If fine monies are diverted from those intended uses and, instead, used to pay unsatisfied arbitration awards, then FINRA is going to have to come up with the money for its “capital expenditures” and “regulatory projects” from another source. And what source will that be?  According to the 2018 Budget Summary, “[i]f fine monies are not collected in amounts sufficient to fully fund these projects, the Board authorized the use of reserves.”  Well, how does FINRA replenish its reserves?  Unfortunately, there is no significant source other than the member firms.

Members represent the principal source of nearly all the revenues that FINRA generates. The 2018 Budget Summary includes statistics that reveal that fully 88% of FINRA’s “operating revenues” come from the members in the form of “Regulatory Fees” – defined to “primarily include the Gross Income Assessment, Personnel Assessment and Trading Activity Fee,” all of which come from member firms – and “User Fees” – defined to “primarily include Registration Fees, Transparency Services Fees, Dispute Resolution Fees, Qualification Fees, Continuing Education Fees, Corporate Financing Fees and Advertising Fees,” again, all derived from members.  Ultimately, if FINRA runs out of money to accomplish its goals, then necessarily it will be the members who pay through increased fees.  But, I guess that’s not PIABA’s problem.

And, to close, let’s play a little “what if” game, to demonstrate that this proposed Congressionally mandated FINRA fund may dry up rather quickly. Say you are a PIABA member, and say you are aware of a BD that’s been hit with so many arbitrations that it’s teetering on the verge of bankruptcy, and is unable even to pay to defend itself.  In the real world, an ethical attorney may have to dissuade a client from bringing such a case against that BD, notwithstanding the merits of the claim, and even though the BD might not even mount a defense, out of realization that any award obtained could not be satisfied.  But, what if you knew that unpaid arbitration awards are simply resolved by dipping into FINRA’s shiny new fund?  Why, then you would undoubtedly file your arbitration and ask for the most money imaginable.  Even if the BD defaulted, you could rest easy that FINRA would step in to satisfy the award.  Easy peasy money.  And there would be an onslaught of new cases being filed to get some of it before it’s all gone.

This proposal, apparently in danger of actually becoming a law, needs to be tossed out.

The Demise Of FINRA’s District Committees…And Self Regulation, Too?

Posted in District Committees, FINRA

Many people, myself included, are of the view that FINRA today remains a self-regulatory organization in name only. For years now, FINRA has taken a series of actions decried by its member firms – new rules, new interpretations of old rules, zealous enforcement of rules, the imposition of punitive sanctions – who correctly complain that FINRA has lost sight of the fact that it is, at its roots, a membership organization run by and for its constituents, i.e., broker-dealers.  Instead, FINRA principally acts as an enforcer, aggressively pursuing even the most modest of rule violations (despite what its senior management has said to the contrary in recent public pronouncements).

Even with that said, there has remained one last bastion of self-regulation: the District Committees. FINRA is comprised of 12 Districts, and each District has its own District Committee, elected by the membership.  Unlike the NAC, i.e., the National Adjudicatory Council, and the Board of Governors – the two levels of governance directly above the District Committees – all members of the District Committees are people currently registered with broker-dealers.  The NAC and the Board, by comparison, are comprised of a majority of non-industry members.  This was done at the SEC’s specific direction, to dilute the ability of the member firms to dictate FINRA’s ideological direction, I suppose to try to ensure that the inmates don’t somehow take over the asylum.  I mean, how can actual members of the securities industry possibly know what’s best for the industry, right?  Better bring in some CEOs and college professors.

But not at the District Committee level. There, all you see are branch office managers, chief compliance officers, firm presidents, and the like.  Everyone is registered, and everyone has skin in the game.  These are people who, almost universally, know what’s going on, how difficult it can be to run a clean shop, and how hard, at times, it can be to deal with FINRA.

The District Committee used to be a pretty powerful group of people. As I presume all readers of this blog understand, the role of District Committees changed in the late 1990s, as part of the SEC’s 21(a) Report on NASD, and not necessarily for the better.  As a result of the concerns that the SEC noted in that Report, the power of District Committees to authorize the issuance of Enforcement complaints and to review and approve settlement offers was removed and given, instead, to Enforcement itself  (subject to oversight by the Office of Disciplinary Affairs).  The only roles left to members of the District Committees following that power shift were to (1) sit on the occasional Enforcement hearing panel, and (2) attend quarterly meetings, where members of FINRA’s senior management flew in to describe all the new, cool initiatives that they’d conjured up in Rockville, DC and New York.

While those meetings were designed to be a give-and-take between the membership and management, it was clear from the outset that the collective voice of the District Committee members was faint, at best. Indeed, their job was never to approve of new proposed initiatives, since, in fact, senior management didn’t need their imprimatur to pass new rules, so their views on the subject were, ultimately, meaningless.  Simply put, the District Committee members were there to provide a degree of window dressing, to make it appear that FINRA management actually cared what the members thought.

This charade has, sadly, become obvious. What was once considered to be a position of note, a feather in the cap of anyone fortunate enough to be selected to sit on a District Committee, in short, an honor, has become something decidedly less worthy of celebration.  It has gotten to the point where instead of contested elections between multiple qualified candidates vying to win a seat on a District Committee, now, there aren’t enough people with sufficient interest in the job to bother with the process.  How do I know this?  FINRA itself told me.

Just a couple of days ago, FINRA filed a rule proposal with the SEC designed essentially to do away with the District Committees and replace them with Regional Committees.  Included in that proposal is this telling sentence: “FINRA has noted the membership’s general lack of interest in District Committee service.”  On what does it base that observation?  According to FINRA,

[t]he number of District Committee seat vacancies is the primary indicator of the membership’s declining interest in District Committee service. For the past six years, there has been an average of 29 vacant District Committee seats per year.  Of this 29-seat average, 13 (approximately 45%) have been contested seats (two or more candidates), eight (approximately 28%) have been seats with only one candidate, and eight (approximately 28%) have been seats without any candidates, thus requiring FINRA to find an eligible person to appoint to the seat.

The idea that over half the open District Committee seats attract either only one candidate or, worse, no candidates at all, speaks volumes about the superficial role that the District Committee plays in today’s FINRA, not to mention the fact that the membership correctly understands this sad truth.

To address this, FINRA has proposed several changes. First, it will eliminate the District Committees and replace them with Regional Committees.  Perhaps that’s not a big deal, inasmuch as the District Committees have already been meeting on a regional basis for years and years.  Second, it will alter the current composition of the District Committees, which is derived by a specific formula.  Now, each District Committee reflects “a configuration of three small, one mid-size and three large firm representatives.”  According to FINRA, this “three-one-three composition is intended to align District Committee representation more closely with the industry representation on the FINRA Board.”  But, FINRA maintains that this “configuration does not necessarily reflect the industry composition within the regions as each region differs regarding firm number, size and business lines.”  As a result, it wants to throw away the formula, which would make all seats on the District Committee at-large seats.  In addition, the requirement that only small firms could vote for the small firm seat, only mid-size firms could vote for the mid-size seat, etc., would be eliminated, and any member firm could vote for any vacant seat.  There are some other small tweaks, but these are the big changes.[1]


I have no idea if these changes will actually work to increase interest in District Committee membership. I hope that they do, because it is sad and disturbing that FINRA has watered down the role of the District Committees to the point that firms apparently no longer care about getting their best and brightest people to sit on them, as firms once did.  But I understand why they don’t.  I understand why people don’t want to waste their time simply being props in FINRA’s stage-managed productions where senior management pretends to be interested in what the District Committees have to say and then does what it wants anyway.

If the securities industry is ever going to get serious about fixing things, about taking back control of how FINRA acts towards its members, it must embrace that fact that changes need to start locally – at the District Committee level (or Regional Committee level, if this rule proposal is passed). Qualified individuals who feel strongly about what’s wrong with FINRA should actively participate in the FINRA committee system and make sure that their voices are heard.  If not, if the industry continues to abdicate its responsibility to ensure that self regulation survives, then it loses its right to complain about things, and, ultimately, member firms will get what they deserve.

[1] There is a very interesting throw-away line in the rule proposal regarding the role of District Committee members to comprise Enforcement hearing panels.  It states that “FINRA also is exploring options to enlarge the pool of panelists.”  I wonder what that could possibly mean?  It is incredible to consider that FINRA can’t attract enough people interested enough in the Enforcement process to volunteer to sit on hearing panels.

FINRA’s Attempt To Change Well-Established Federal Law On Churning

Posted in Churning, Enforcement, FINRA

When Michael called me to tell me about the subject of this post, I frankly thought he was making it up.  The notion that FINRA was seriously suggesting deleting one of the historically recognized essential elements of a churning claim — principally because otherwise it was too difficult for FINRA to prove churning — seemed ridiculous.  Then I read the Reg Notice.  Cleverly, FINRA tries to make it seem like the amendment isn’t necessary, arguing — incorrectly, in my view — that “[b]ecause FINRA must show that the broker recommended the transactions in order to prove a Rule 2111 violation, culpability for excessive trading will still rest with the appropriate party even absent the control element.”  But, that is wrong, unless, as FINRA seems to be suggesting, you want to split hairs and call one thing “churning” and the other “excessive trading.”  Please, even if you have never before commented on a rule proposal, now is the time to speak up.  FINRA cannot be permitted to get away with something like this, that is, simply ignoring legal precedent, because that precedent makes FINRA’s Enforcement efforts harder. 

Also, I just wanted to put in a plug for Ulmer & Berne’s Financial Services Seminar in Chicago on May 23.  If interested in attending, click here to reserve your spot. – Alan


FINRA has been busy lately issuing Reg Notices on proposed changes to its Rules. Several of the proposed changes seek to give FINRA more discretion and authority over its members and associated persons. I get that. Who wouldn’t like more control and power? But FINRA’s Reg Notice 18-13, issued on 4-20-18 of all days, makes me wonder what FINRA was smoking on this one. In that Notice, FINRA seeks to change decades-old federal securities law on churning in order for it to more easily prove that a customer’s account has been churned. That is bold.

Under well-established federal law, an investor must prove the following three elements to prevail on a churning claim: (1) the trading in the account was excessive in light of her investment objectives; (2) the FA exercised control over her account; and (3) the FA acted with scienter – intent to defraud or reckless disregard for the investor’s rights. One of the most frequently cited cases on the elements of churning is Rolf v. Blyth, Eastman, Dillon & Company, Inc., a decision issued by the Southern District of New York in the 1970s. Churning constitutes a violation of federal securities laws, specifically, Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 thereunder.

Consistent with federal securities laws on churning, FINRA Rule 2111.05(c) currently provides that a quantitative suitability violation (i.e., churning) occurs when FINRA can establish the same three elements, namely, excessive activity, control, and scienter:  “Quantitative suitability requires a member or associated person who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile, as delineated in Rule 2111(a).”

In Reg Notice 18-13, FINRA even acknowledged that Rule 2111.05(c) “codified the line of cases on excessive trading (sometimes referred to as ‘churning’).” The proposed change to Rule 2111, however, seeks to break from that line of cases by eliminating one of the elements of a churning claim: control. In other words, FINRA seeks to change well-established federal securities law by changing the definition of what does and does not constitute churning.

Remarkably, one of the reasons that FINRA cites for the proposed change is “its experience with the rule.” This negative experience for FINRA is presumably based on a series of unsuccessful attempts to pursue churning charges in settlements and hearings (e.g., 2009 Medeck NAC Decision). In other words, the proposed change is borne out of FINRA’s attempts to fit a square peg in a round hole by pursuing churning charges where it cannot satisfy the control element of the claim.

In the Notice, FINRA goes on to say that the control element “places[s] a heavy and unnecessary burden on customers [and FINRA] by, in effect, asking them to admit that they lack sophistication or the ability to evaluate a broker’s recommendation.” (Apparently, those at FINRA responsible for the proposed Rule have never seen a customer testify at an arbitration hearing as if he just had a frontal lobotomy.) The real “control” problem here lies with FINRA, and its lack of control over customers. FINRA does not possess jurisdiction over customers. Therefore, FINRA cannot force customers to testify or even cooperate, hindering its ability to prove that a customer lacks the ability to evaluate an FA’s recommendation, or, in many instances, to rebut a letter signed by the customer acknowledging that he possess that ability.

There are several other issues with FINRA’s position. First, the control element is not an unnecessary burden. It is a burden imposed by federal securities laws and the federal courts that have interpreted those laws. If a customer has an issue with how his account is being invested, then he should say or do something about it, and not sit idly by; investing is not a heads I win (trading strategy is profitable), tails you lose (firms reimburse trading losses) endeavor. An experienced, sophisticated, or even moderately intelligent person should not be able to prevail on a churning claim if he could and should have put an end to activity that he doesn’t like; the failure to do so reflects that the investor had no issues with how his account was being handled.

Second, the burden to establish churning is heavy because the consequences for violating federal securities laws are stiff. The FINRA Sanction Guidelines on churning recommend that adjudicators “[s]trongly consider barring an individual for reckless or intentional misconduct (e.g., churning).” This, of course, makes sense. An FA should be sanctioned severely for taking advantage of a customer who lacks the sophistication or ability to evaluate his recommendations. There is no mention in the Notice of reducing the specific guideline for churning if the term is redefined, which leads me to believe that no such commensurate change will be forthcoming.

Third, the proposed change to the definition of churning presents interesting charging and legal questions. Willful violations of certain federal securities laws, including Rule 10b-5, result in an FA being subject to statutory disqualification, which is quite consequential. If the Rule change passes, it will be interesting to see if FINRA charges churning claims as violations of Rule 10b-5 under its new definition or under the actual legal definition. If it is the former, then the FA should not be subject to statutory disqualification based on existing federal case law interpreting Rule 10b-5. Notably, there is no mention of Rule 10b-5 in the Notice.

Fourth, the proposed Rule change would be a real gift to PIABA and attorneys who represent investors in FINRA arbitrations. Despite existing federal case law, these attorneys will undoubtedly argue that their clients need not prove one of the most challenging elements of a churning in order to get a payday.

Instead of closing with a clever quip, I’ll let you know that the comment period for this abomination is June 19, 2018. Here is the email address to which to send your comments:




FINRA Knows Best – At Least According To FINRA – When It Comes To Hiring Decisions

Posted in FINRA, Hiring practices, Rule 1017

I don’t know how many times I’ve written about FINRA’s efforts over the years to address “rogue brokers,” or what it refers to nowadays more politically correctly as “high-risk brokers.” It doesn’t really matter what blog post you read, or when I wrote it, as they all tell essentially the same story:  FINRA is just aghast – AGHAST! – to learn that there are actually registered reps out there with disclosures on their Form U-4 regarding customer complaints.  And so, to protect the unsuspecting investing public from having their hard-earned dollars swindled by these miscreants, from time-to-time, FINRA makes a big show of addressing the issue.

Such is the case now. Indeed, in the 2018 Exam Priorities letter, FINRA stated that “[b]uilding on our work in 2017, a top priority for FINRA will continue to be identifying high-risk firms and individual brokers and mitigating the potential risks that they can pose to investors.”  To that end, FINRA just released Reg Notice 18-16, which contains a number of proposals designed to crack down on these high-risk brokers.  I have no issue with some of the ideas, to be honest.  For instance, under current FINRA rules, if a broker loses an Enforcement case and appeals that decision to the NAC, i.e., the National Adjudicatory Council, all sanctions imposed by the hearing panel are stayed pending the disposition of the appeal.  This includes the ultimate sanction of a permanent bar from the industry.  What this means is that a truly bad guy,[1] someone bad enough to justify the imposition of a bar, can continue to work in the industry during the entire time the appeal is pending, which can take a year or more, during which time he can, at least theoretically, continue to wreak havoc on customers.

Under the proposed rule amendment, two things could happen to change that. First, when a hearing panel in an Enforcement action determines that FINRA has established liability and metes out sanctions, it will also have the ability to “impose such conditions or restrictions on the activities of a respondent as the Hearing Panel or Hearing Officer considers reasonably necessary for the purpose of preventing customer harm,” pending the disposition of the appeal.  In other words, FINRA can prevent someone who’s been barred from continuing to work while his appeal to the NAC is pending.  Second, in addition to that, the rule would require that the BD that employs the respondent who lost before the Hearing Panel to subject him or her to heightened supervision pending the disposition of the appeal.

Perhaps the most interesting feature of the proposed rule is that the first of these new powers, i.e., the hearing panel’s ability to impose “conditions or restrictions” on a respondent, is expressly tempered by the right of the affected party to obtain an extremely prompt – within 30 days of the date of filing – review of that decision. Granted, the entity that would entertain that review is the NAC, the very entity that will decide the appeal itself, and that is hardly an ideal situation, but, unlike a lot of what FINRA does, at least this provides a small semblance of fairness and due process.  A step in the right direction, let’s call it.

But, that is clearly not the case with regard to the part of the proposed rule that causes me great difficulty, and that is the amendment that provides FINRA the unilateral ability to decide, basically, who is permitted to associate with a firm.

Under existing Membership Rules, many broker-dealers are allowed to add registered representatives without having to file for permission to do so. This is a result of one of two things:  either their Membership Agreement includes a stated maximum number of reps they are permitted to hire (and even with the addition of the new reps the firm would remain below that maximum number), or the firms are subject to the safe harbor provisions found within IM-1011-1 (which allow firms without a provision in their Membership Agreement regarding the permissible maximum number of reps to add annually a modest number of reps without that addition being deemed material, thus eliminating the need to file an application under Rule 1017).  Under the proposed amendment, however, even if a firm seeks to add even a single rep – an addition that under current rules would not trigger the need for a 1017 application, or permission from FINRA – the firm would be required to request and obtain permission from FINRA to do so if that single rep, in the prior five-year, has “one or more final criminal matters or two or more specified risk events.”

The proposed rule is a little more nuanced than that, if you want to dig into the details. What a firm would have to do is obtain a “materiality consultation,” or MatCon, as we like to call it, from FINRA. Essentially, that is a determination that FINRA makes whether some anticipated change in the member firm’s business would be deemed “material,” and, therefore, requiring a full-blown 1017 application.  If the MatCon results in the conclusion that the change is not material, no 1017 is required; but, if the MatCon states that the change is material, then the 1017 must be filed, and approved, before the change can be effected.

Clearly, this proposal would give much broader powers to FINRA than it presently has to dictate to BDs who they can hire and how many. Given the high priority that FINRA has given to its high-risk broker project, it is easy to imagine that FINRA will conclude on a knee-jerk basis that any attempt to add a rep with “two or more specified risk events” will be material, requiring a 1017.  And understand this: a 1017 application is not cheap to prepare, or easy, and the outcome is never a sure thing.  The MAP group of FINRA guards the gates to FINRA membership like angry Dobermans, carefully and thoroughly sifting through the applications, looking for any reason that would support a denial.  I am not saying that they go out of their way to deny applications; I am just saying that when presented with the opportunity to do so, they’re not shy about taking advantage of it.

All this fuss is still about the same thing: there are lots of reps in the industry who are fantastic, who provide a wonderful service to their clients, but who have to deal with the fact that they live in a day and age in which it is ridiculously easy for a customer to lodge a complaint and exact a nuisance settlement from the BD, resulting in a permanent mark on the reps’ U-4. Granted, there are also reps with marks on their U4s who are bad apples, true recidivists who don’t care about rules or fiduciary duty or suitability or whatever.  But, the problem is that FINRA cannot distinguish between these two groups, so its solution is to treat them all the same, which is, in essence, to presume everyone is a bad apple.  Moreover, and worse, BDs, it seems, can no longer be trusted to figure it out for themselves as part of the exacting due diligence process that FINRA rules dictate that they undertake when they seek to hire new reps; now, apparently, FINRA has determined that only it is capable of deciding who should be hired and who should not.  Such arrogance.  The notion that FINRA is any way, shape or form still a “self-regulatory” organization has simply become a fantasy.  It is, in fact, the judge, jury and executioner, dictating to member firms what used to be permissible business judgments.


[1] I say “truly” here because, sadly, FINRA often bars people that simply don’t deserve that sanction.  Despite whatever Robert Cook and Susan Schroeder have been quoted as saying regarding the supposedly kinder, gentler FINRA when it comes to Enforcement actions and the imposition of sanctions, in reality, that’s, well, just not reality.  In reality, FINRA is still just a big bully, pushing around small firms and the reps associated with those firms.

FINRA’s Revolving Door: Much Ado About Nothing

Posted in Board of Governors, FINRA

As loyal readers are undoubtedly already aware, I used to work for NASD, and Michael more recently came to Ulmer from FINRA.  That hardly means we win every FINRA Enforcement case we are engaged to defend.  To suggest that because we came through the “revolving door,” FINRA does whatever we suggest is, frankly, absurd.  I only wish it was true!  – Alan 


This week, FINRA named the CEO of Janney Montgomery Scott to its Board of Governors. Last week, FINRA hired the CCO of Charles Schwab to head its Member Regulation department. A few weeks ago, the former head of Member Regulation joined Merrill Lynch as its Chief Supervisory Officer. And the ill-informed, politically-motivated, and unsubstantiated cries of the supposed perils of the revolving door have followed.

In an article about the new Board member, one critic of the revolving door, who hails from investor advocacy group Public Citizen, was quoted as saying: “The revolving door means the cops on the beat and the perps can be confused in the blur.” This statement is ridiculous. First, there is no confusion over who works for who. Those who work in the securities industry know when they receive a call or letter from FINRA, and those who work for FINRA know who works in the industry, with or without the aid of CRD records.

Second, to refer to FINRA as “cops” and the industry as “perps” is ignorant, offensive, and wrong. While there may be a few bad apples in the securities industry – as there are in any bunch, industry, or profession – the overwhelming majority of FAs try to do right by their customers. It is hard to succeed in the securities industry or any other service business for that matter without referrals from satisfied customers. I’ll also add that I was surprised to see someone from a group that touts itself as a champion of democracy and citizen’s interests ascribing malicious intent to an entire group of people.

Third, FINRA is a self-regulatory organization authorized by federal law, and registered with the SEC. The Securities Exchange Act of 1934, as amended by the Maloney Act, requires that FINRA’s rules “assure a fair representation of its members in the selection of its directors and administration of its affairs.”[1] FINRA’s Board consists of 24 persons – ten seats for industry members, thirteen seats for public members, and one seat for its CEO. Therefore, it should come as no surprise that the CEO of a FINRA member was appointed to FINRA’s Board. In fact, he took the seat previously occupied by the former head of another firm.

The President of the Public Investors Arbitration Bar Association (PIABA) was recently quoted in an article saying: “If you want true stringent regulations, a compelling argument can be made that these people shouldn’t come from the securities industry.” Setting aside the issue of whether stringent regulations and enforcement, as opposed to principles-based standards and reasonable enforcement, do not make sense in many cases, a more compelling case can be made that those running, and working at, FINRA should come from the industry.

The securities industry is a complex one. To successfully work at a firm, represent a firm in many legal matters, or regulate a firm, you need to have more than just a basic understanding of how stocks and bonds work. You cannot properly regulate that which you do not understand. That is precisely why FINRA hires executives and managers with securities industry experience. FINRA is not alone in this regard. Most companies prefer to hire executives and managers with relevant experience, and to keep their executives and employees with that experience from working at competitors, through non-competition and non-solicitation agreements. I can’t really imagine a company hiring only people who have no relevant experience, but I suppose the conversation would go something like this: “I know that we are a healthcare company, and that you have twenty years of experience and proven success in the healthcare industry, but we really are looking for someone who knows nothing about the healthcare industry to run the company.” That’s absurd. People with relevant experience bring their knowledge and experience to the table, and companies pay for, and benefit from, that knowledge and experience. Indeed, it makes perfect sense that FINRA would hire the CCO of a reputable firm to run its examinations program. She presumably is familiar with securities rules and regulations, and the policies, procedures, and systems that firms implement to comply with those rules and regulations.

Another problem with the arguments made by critics of the so-called revolving door is the reality of living and working in this country. Once you gain experience in an industry or field, you are free to use that experience to leverage a better paying or otherwise more desirable job. Simply because you worked as a securities regulator does not mean that you are confined to working in the securities industry only as a regulator for the rest of your life. And conversely, because you worked at or for a firm does not mean that you cannot work for a securities regulator. FINRA presumably has internal rules that govern conflicts of interests, such as prohibitions on working on a matter involving a friend, family member, former employer, or former client. FINRA Rule 9141 prohibits its former officers from appearing on behalf of a client in a FINRA disciplinary proceeding for a year after leaving the company.

My final problem with the critics is that they assume the worst in people. In other words, they assume that people who have worked at or for a firm, or who may do so at a later date, can’t function appropriately as regulators because of some hidden agenda or inherent bias. Critics cite no empirical or statistical data to support their proposition. There are, however, many lawyers and compliance consultants who have track records of success working both at FINRA and on behalf of firms.

The revolving door is much ado about nothing.

[1] 15 U.S.C. § 78-o-3(b)(4).