Wolper

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…

Here is how PIABA’s one-track mind operates: in a Report it just issued, PIABA laments the frequency with which registered reps are able to get customer complaints expunged from their records. The sole reason for this, PIABA concludes, is that the expungement process is broken, and/or is being gamed by brokers. It does not even…

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,…

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.
Continue Reading TD Ameritrade Latest Victim Of Head-Scratching Arbitration Award

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.
Continue Reading It Is Not Possible To Predict When FINRA Will Charge Something As Willful. Or Is It?

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.
Continue Reading Two (More) Scary Tales Of FINRA’s Abuse Of Rule 8210

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:
Continue Reading All-Public Arbitration Panels Are Paying Out Money At An Unprecedented Rate…Just As PIABA Intended

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:
Continue Reading Big Firms Paying Big Fines: A Discussion Of Two FINRA Settlements

Rightly or wrongly, I don’t know much about cryptocurrencies or digital coins. But that’s ok. What is worrisome, on the other hand, is that I am increasingly concerned that FINRA doesn’t either. And while my own ignorance will have exactly zero impact on your day, that is most certainly not the case with FINRA.

I came to this conclusion after reading Reg Notice 19-24, released last week. On its face, the Notice seems fairly benign. What it does is extend by one year FINRA’s “request” that “each member keep its Regulatory Coordinator informed of new activities or plans regarding digital assets, including cryptocurrencies and other virtual coins and tokens.” You may recall that last year, in Reg Notice 18-23, FINRA issued its initial request for this sort of information through the end of July 2019. Now, FINRA is “encouraging” its member firms to keep this up for another year, through July 2020.

I don’t have any real problem with this “request,” apart from my usual cynicism when FINRA uses this particular word. Remember: FINRA characterizes its use of Rule 8210 as “requests” for documents and information, as if the recipient has a choice whether or not to respond, when, in fact, the failure to respond to the “request” can result in a permanent bar from the industry. No, my problem is that as FINRA attempts to gets its head around digital assets, as a result of the fact that it doesn’t necessarily understand the regulatory issues that such products will ultimately generate, it is asking for information beyond that which it is entitled to receive.
Continue Reading Why Is FINRA So Interested In Your Non-Securities Business?