Thursday, August 15, 2019

Self-Reporting and Other Extraordinary Assistance Can Reap Benefits


FINRA and other regulators have long purported that substantial cooperation and self-reporting are given favorable consideration during the disciplinary phase after an investigation.

For over 15 years, FINRA (and its predecessor agencies) have encouraged member firms and associated persons to cooperate with them during exams and investigations in a candid manner, promising at least some level of leniency for those who do so. In July of this year, FINRA provided yet another public notice on this topic, Regulatory Notice 19-23 (“RN 19-23”).

RN 19-23 reiterates that pursuant to FINRA Rules 4530(b), 8210, and FINRA's Sanction Guidelines, a certain level of cooperation is expected any time FINRA is performing an examination, inquiry, or investigation. FINRA recognizes “extraordinary cooperation” as cooperation that is beyond “required cooperation” and does one or more of the following:
  1. Shows an acceptance of responsibility and an acknowledgment of the misconduct at issue prior to detection and intervention by a firm or regulator,
  2. Voluntarily employees initiatives to correct the issues prior to detection and intervention by a firm or regulator,
  3. Voluntarily attempts to remedy the misconduct by restitution or another appropriate remedies prior to detection and intervention by a firm or regulator,
  4. Voluntarily provides substantial assistance to FINRA during its examination and/or investigation of the misconduct at issue.
Per FINRA's Sanction Guidelines, “Sanctions in disciplinary proceedings are intended to be remedial and to prevent the recurrence of misconduct.” To the extent that member firms and associated persons show initiative in meeting this goal, FINRA states it will consider that fact when determining what, if any, disciplinary action they issue for misconduct. RN 19-23 provides three examples of FINRA adjusting its disciplinary decision based on what it deemed to be “extraordinary cooperation.”

FINRA also announces certain initiatives from time to time to further its goals of “investor protection and market integrity.” Once example of such an initiative is their “529 Plan Share Class Initiative” where FINRA encouraged member firms to review their 529 plan sales for common supervisory issues. To encourage firms to do this and to report their findings, FINRA stated they would issue settlement agreements for misconduct with no fines to remedy any identified and reported misconduct.

While there is always a risk when self-reporting, there is also a substantial risk in not doing so. Reviewing FINRA's RN 19-23 with counsel versed in securities regulations would be a wise first step in determining if and how you may wish to self-report or self-audit specific activity. Both member firms and associated persons can find themselves in a position where self-reporting should be considered. Taking that step can be daunting. Cosgrove Law Group, LLC has the experience to offer guidance and representation in such matters. Please give us a call!

Wednesday, August 14, 2019

Presidential Candidate Requests Information on Proposed Amendments to FINRA’s Expungement Rules


The Central Registration Depository (“CRD”) and the publicly available online portal, BrokerCheck, comprise FINRA’s registration and licensing system.  Via BrokerCheck, customers, employers, and regulators can access information regarding customer complaints levied against an individual broker.  BrokerCheck plays a key role in allowing customers to evaluate their broker’s track record before making investment decisions.  By the same token, adverse claims can have a devastating effect on a broker’s ability to retain their clients.   

As such, FINRA has established rules for the expungement of certain adverse claims from CRD.  Currently, FINRA Rules 12805 and 2080 control customer complaint expungement proceedings.  Rule 12805 requires that a broker file a Statement of Claim requesting expungement of the customer disclosure.  The panel must:

·    hold a recorded session regarding the appropriateness of the expungement;
·   when applicable, review settlement documents and consider the amount of payments made to any party;
·    provide a written explanation which indicates which of the grounds for expungement under Rule 2080 is the basis for the order; and
·    assess all fees for the hearing against the party requesting expungement.[1] 

Under Rule 2080, grounds for expungement include:

·    the claim, allegation or information is factually impossible or clearly erroneous;
·  the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
·    the claim, allegation or information is false.[2] 

Following an arbitration award recommending an expungement, the broker must then file a petition in a court of competent jurisdiction to obtain an order confirming the award and directing such expungement.

In December 2017, FINRA published Regulatory Notice 17-42, a proposed amendment relating to requests to expunge customer dispute information.  Regulatory Notice 17-42 would create a roster of arbitrators with specific training and experience to handle all expungement requests.  It would also require:

·       the broker to appear at his or her expungement hearing;
·       unanimous agreement of the three person arbitration panel;
·      expungement requests to be brought within one year of the dispute; and
·       minimum fees for filing expungement requests.[3] 

Since publishing Regulatory Notice 17-42 for public comment, FINRA has not submitted it to the SEC.  As such, the proposed expungement rules are not currently in effect.  In a March 2019 letter to FINRA President and CEO Robert Cook, Senator Elizabeth Warren requested an update on FINRA’s proposed rule changes to its customer dispute information expungement process.[4]  If eventually submitted and finalized, the new process for removing customer dispute information from a broker’s CRD will be more onerous on the broker and likely decrease the frequency with which expungement requests are granted.  Senator Warren’s letter requests, among other things, a timeline for when FINRA will submit Regulatory Notice 17-42 to the SEC for approval.

It is unclear if or when the new CRD expungement rules will be submitted to the SEC and put into effect.  FINRA spokespersons have declined to comment on the substance of Senator Warren’s letter, stating, “We have received the senator’s letter and are working to respond accordingly.”[5] 

Given the uncertainty of the status of FINRA’s expungement rules, it is important that brokers seeking CRD expungement select an attorney capable of guiding them through expungement proceedings under the current and any potential future FINRA rules.  Cosgrove Law Group, LLC has represented numerous individuals in CRD expungement proceedings under the current rules and stands ready to represent brokers in proceedings governed by the proposed amended rules.  If you are seeking expungement of customer complaints from your CRD/BrokerCheck, you may wish to consult with experienced counsel at Cosgrove Law Group.

BY: Max Simpson




[1] FINRA Rule 12805, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=7229
[2] FINRA Rule 2080, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=8468
[4]Letter, Sen. Warren to Cook, March 21, 2019, https://www.warren.senate.gov/imo/media/doc/2019.03.21%20Letter%20to%20FINRA%20re%20Broker%20Expungement%20Data.pdf
[5] Financial-Planning.com, Warren presses FINRA for answers on expungement reform, https://www.financial-planning.com/news/elizabeth-warren-presses-finra-for-answers-on-expungement-reform

Thursday, August 8, 2019

OBTAINING WHISTLEBLOWER STATUS THROUGH YOUR BROKER-DEALER’S COMPLIANCE DEPARTMENT

A financial adviser that provided a tip through his broker-dealer’s compliance department recently received a whistleblower award of $4.5 million.  In late May, the SEC accepted the Claims Review Staff’s Preliminary Determination recommending that hefty award.  

The SEC’s analysis hinged on the application of Exchange Act Rule 21F-4: whether “original information submitted by a whistleblower led to the successful enforcement of a judicial or administrative action.”  Rule 21F-4(c)(3) even allows for whistleblower status if you “reported [the] original information through [your broker-dealer’s] internal whistle blower, legal or compliance procedures for reporting allegations of possible violations of house before or at the same time of law before or at the same time to reported them to the Commission . . . You must also submit the information the Commission . . . within 120 days of providing it to the entity.  (Emphasis Added). 


This last clause is your key takeaway from this blog.  If you provide original information to your compliance department but fail to follow through with the Commission, you might lose out on millions of dollars!  It is also important to understand that 1) you are taking a risk, 2) the compliance or legal department might not investigate and report to the SEC without a push, and 3) Rule 240 is an extensive fine-print maze of definitions and procedures.  In sum, you should obtain legal counsel to help you evaluate your “original information” and guide you through a complicated process that can take years to run its course. 


There are many attorneys out there claiming on their websites that they represent whistleblowers. But if you are a financial advisor or investment adviser what you need is an attorney that has experience representing whistleblowers in the financial industry. Food for thought.

Monday, August 5, 2019

Steps To Take Upon Termination by a Broker Dealer


So the unimaginable happens. You receive a call and are told to report to HR. There you are handed a letter stating you have been terminated for cause and that the broker-dealer has terminated your registrations with the firm.

What steps should you take?

First, and before leaving HR, you should request that they not file the Form U5 until after they have been contacted by your attorney. Pursuant to FINRA rules, the broker-dealer has 30 days from the date of termination to file the Form U5 that sets forth the reasons for the termination. And, what is stated by the firm on the Form U5 will be critical in determining your ability to join another firm, have clients move with you to your new firm, and avoid a FINRA Enforcement investigation.

Experienced securities industry counsel may be successful in framing the wording on the Form U5 such that it is accurate, which would avoid the subsequent time, expense and aggravation of removing inaccurate information from your Form U5. Pursuant to the laws of some states, broker-dealers have actual immunity or qualified immunity from defamation claims for statements made on Form U5s. Therefore, it’s imperative that you have experienced securities counsel on your side to try to prevent defamatory statements from being placed on your Form U5.

Second, you need to consider the host of other legal issues that may need to be resolved. Such as whether you are going to be subject to a FINRA Enforcement investigation, what information regarding your clients you may take from the firm, or what your continuing obligations are under your broker/registered representative agreement. 


Therefore, if you are a broker agent/registered representative and you have been terminated for cause, do not delay in consulting your securities industry attorney. You should consider having counsel engage with your broker-dealer before your Form U5 is filed. If you need assistance, you may wish to consult with experienced securities industry counsel at Cosgrove Law Group.

By: Brian St. James, Cosgrove Law Group, LLC

Tuesday, February 26, 2019

FINRA Continues To Investigate Expense Reports

          There are numerous examples of FINRA cracking down on expense report violations.  Following are a few of the reported cases.

In September, 2017, a former Morgan Stanley corporate stock manager accepted an industry bar over allegations that “event attendees on employee’s expense report incorrectly included one person who did not attend event.”  The employee     said she “couldn’t afford to fight her dismissal or to take the time to work with the regulator.”  “The direct cause of the bar was [her] refusal to appear for the hearing into the matter.”  (https://www.investmentnews.com/article/20170926/FREE/170929952/finra-bars-former-morgan-stanley-manager-over-expense-reports)

In late 2017, “a 21-year veteran Merrill Lynch broker managing director…accepted a one-year suspension from the securities industry and a $10,000 fine for ‘violating high standards of commercial honor by improperly using Merrill funds in connection with expense reports’”  (http://www.shufirm.com/brokerage-firms-and-finra-crack-down-on-broker-expense-account-violations)

In early 2018, a former Merrill Lynch broker was fined and suspended over a “$524 claim for mileage and dinner expenses that he said represented two meetings with prospective clients.  He subsequently admitted to the firm that he fabricated the events in order to use up, and be reimbursed for, the Business Development Account money that was deducted pretax from his compensation.”  https://advisorhub.com/finra-suspends-another-broker-over-expense-issue/

FINRA gets its authority to investigate expense report and other similar documents from Rule 8210, Provision of Information and Testimony and Inspection and Copying of Books.  “A failure to comply with an 8210 Request often results in an immediate enforcement proceeding and a permanent bar from the industry.”  (https://www.seclaw.com/finra-rule-8210-request-response/) Rule 8210 Investigations often spring from violations of Rule 2010, the catch-all, which states that “[a] member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” 

            Cosgrove Law Group, LLC has represented numerous individuals in their FINRA investigations.  If you are the subject of a FINRA investigation and need counsel, Cosgrove Law Group may be able to help.

Friday, February 8, 2019

SANTANDER BANK HAMMERED IN REASONED AWARD IT REQUESTED


           Last month a FINRA arbitration panel in Boston issued a reasoned award in an employment matter pitting a former employee against the bank.  Ironically, both the employee and the bank requested a reasoned award.  A reasoned award is pretty rare as the FINRA member almost never requests one and both sides must request the reasoned rather than typically scant and unjustified written award. 

            Beyond issuing an extremely incriminating award, the panel gave the Claimant every penny he requested - - over $1.3 million.  The Claimant was a former Senior Vice President in the bank’s regulated broker-dealer division.  The reasoned award set forth the facts that justified the award as follows:

            Claimant was responsible for the activities of approximately twenty-two sales representatives who, among other things, sold and recommended the sale of regulated securities products.  Within one month to six weeks after commencing his employment with Respondent Santander, Claimant became aware that one of the sales representatives reporting to him did not have the appropriate licensure to recommend and sell products in that the particular representative had repeatedly failed the Series 65/66 examination and had, in fact, ceased taking it.  That person is referred to as “employee”.  At the time Claimant discovered this, the employee had a book of business of approximately $50 million, approximately 35% of which was products requiring the Series 65/66 license. 

            Claimant reported this matter to the compensation staff at Santander inquiring as to why it was the employee was being paid commissions on the sale of products requiring the Series 65/55 license when he did not have one. 

            Claimant was told that the employee was one of the approximately nineteen individuals in Respondent Santander’s employment who were “grandfathered” under an unidentified loophole in Massachusetts law which allowed unlicensed individuals to sell managed products.  Respondent Santander’s compensation staff agreed the “loophole” was no longer applicable and that Respondent Santander had to do something about the issue. Respondent Santander never provided any documentation of the “loophole” or any indication as to what period of time that “loophole” would have provided authority for unlicensed individuals to sell managed products.  The employee was employed by Respondent Santander since 2012. 

            Respondent Santander had created and continued to maintain a series of internal “partnerships” where a licensed individual recorded transactions in products requiring the Series 65/66 license for the customers of unlicensed individuals in order to ensure that the transactions would occur and that any automated reporting system to prevent transactions in products requiring the Series 65/66 license by unlicensed individuals would not be triggered.  The employee’s “partner” was a regulated individual who is still employed by Respondent Santander. 

            The “partnerships” and the circumvention of automated exception monitoring in the regulated product trading software was augmented by Respondent Santander’s maintenance of a manual system of splitting commissions on regulated product sales where unlicensed individuals were involved in the transactions.  In the particular “partnership” between the employee his partner, commissions on managed product transactions were manually split 50/50 between the two of them by Respondent Santander. 

            Claimant followed up with Respondent Santander’s management and compliance staff and the employee was a subject of monthly conversations with the compliance department.  As a result, just before Christmas 2014 Respondent Santander ended the practice of manually splitting the commissions on managed product transactions the employee was involved in.

            Despite the termination of the payment of commissions to the employee on managed product transactions, his customers were never advised and he continued to counsel customers on transactions requiring the Series 65/66 license through the end of his association with Respondent Santander. 

            For several months beginning in November 2014 there was a series of meetings, telephone conference calls and electronic mail communications regarding the employee’s attitude and performance.  In spite of months of communications including learning that the employee had posted pictures on the Internet of him posing in aggressive stances with automated weapons, Respondent Santander did nothing but record copious notes of these issues to no avail.

            Finally, the Customer Complaint & Disciplinary Committee determined in an August 2015 meeting that for this and a series of other reasons, the employee’s employment be terminated. Meanwhile, Claimant continued to discuss the fact that the employee maintained a book of business including transactions in managed products and that his customers were unaware they were being counseled by an unlicensed person.

            On September 21, 2015, nearly 11 months after conversations about the employee’s performance issues commenced and after a meeting where the termination decision arrived at by the Customer Complaint & Disciplinary Committee in August was to be delivered to the employee, the meeting was cancelled by Respondent Santander.  The employee was instead sent a letter by Respondent Santander indicating that his failure to report to work since September 2, 2015 and his failure to log into his computer and any of the “securities systems” since July 9, 2015 was considered to be job abandonment and a voluntary resignation of employment.  This determination allowed Respondent Santander to report the employee’s separation from Respondent Santander on the U-5 as a resignation to FINRA and his customers thus avoiding any implication arising from his lack of licensure.[1]

            On September 23, 2015, Claimant was called in a meeting at which his employment was terminated without prior notice, warning or any explanation.  No letter stating the reasons for Claimant’s termination was provided.  And yet, Respondent Santander’s disciplinary policy contains five potential steps of warnings, notices and progressive discipline.  With regard to the employee all of these steps were followed, in many cases, repeatedly.  With regard to Claimant none of these steps were followed. 

            The Panel noted further that, at the time Claimant was hired by Respondent Santander, the sales group he was hired to manage had the third lowest performance level of Respondent Santander’s groups in the comparison.  At the time Claimant was terminated by Respondent Santander, the sales group he was hired to manage had the third highest performance level of the groups in comparison. 

            During Claimant’s employment, Respondent Santander faced a series of FINRA complaints and investigations for failure to supervise its sales staff in connection with Puerto Rico public debt.  Those matters ended with fines of several million dollars. 

            The fact that Respondent Santander’s records contain none of the documentation its disciplinary policy mandates be created and which its witnesses stated was normal business practice, creates an inference that Claimant’s employment was terminated for an illegal reason.  According to the Panel, this inference was bolstered by the lack of credibility of most of Respondent Santander’s witnesses and the amazing lack of candor of its witnesses. 

            The Panel determined that the termination of Claimant’s employment was principally motivated by retaliation for his reporting the violation of FINRA rules to Respondent Santander’s management and his pressing for their resolution in the face of Respondent Santander’s determination to avoid exposing the fact that it was managing a process of subverting its securities software package and allowing unlicensed individuals to effect transactions which required licensure. 

            Ouch!  And thus my dear Reader, you now know why FINRA members almost never ask for a reasoned Award, and why FINRA should change its rules to require one when requested by either party.  Food for thought.


[1] Several years ago I represented a financial advisor in a U-5 defamation case in Louisville that was in a situation similar to the employee’s, and he won millions for having been told about the same non-existent loophole.  He was terminated after the regulators challenged his lack of sufficient registration.  My client had taken but failed the 65 before he was terminated, but after the regulators made their challenge. 
          

Friday, January 25, 2019

2018 FINRA Exam Report: Does Your Investment Portfolio Need a Legal Audit?

The Financial Industry Regulatory Authority (“FINRA”) released its 2018 Examination Findings Report on December 7, 2018.  This examination report recounts specific areas in which FINRA members are not measuring up to industry standards.  So, if your investment advisers just sent to you statements for your investment portfolio and you think perhaps it’s not what you expected, then it may be because they engaged in some of the substandard practices as identified by FINRA in this report. And if you have those concerns, then it may be advisable to have a legal audit of your investment portfolio performed by experienced securities industry attorneys.

Two significant areas that require better accountability in the industry as highlighted by FINRA in its 2018 report are (1) product suitability and (2) abuse of authority.  Product suitability is just what it sounds like.  FINRA observed that investment representatives continue to make unsuitable recommendations to retail investors based on a number of factors, including the customer’s financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives and perhaps most importantly liquidity needs.  And there are legal standards that apply to these factors. Time and time again, for example, investment advisers put their clients into long-term investments that makes them unavailable for their customer’s short-term needs.  If you think this applies to you, then you should have a legal audit conducted on your investment portfolio.

Abuse of authority is also just what it sounds like, namely customers give registered representatives authority to act on their behalf and these advisers exceed that authority.  This is usually seen in the form of unsuitable or excessive trading, which FINRA observed in its report   as a problem that continues in the industry.  For example, FINRA found “situations where some firms or registered representatives exposed investors to unnecessary risks and firms had not established controls – including those to comply with obligations under FINRA Rule 2510 (Discretionary Accounts) – to mitigate those risks.” Those risks included some registered representatives exercising discretion in their customer accounts without the customer’s prior written authorization, exercising discretion after the authority to do so had expired, and having customer’s sign blank suitability or new account forms.  And, even if you provide authorization for your representative to engage in discretionary trading, you should still have your accounts reviewed at frequent intervals.  Again, if you think this may apply to you, a legal audit conducted on your investment portfolio may uncover abuse of authority by your investment adviser.

If you need a legal audit conducted on your investment portfolio, then you may wish to consult with experienced counsel at Cosgrove Law Group.

Author: Brian St. James