TABLE OF CONTENTS

WEEKLY TRENDS & TAKEAWAYS. 3

Number of Cases. 3

Common Violations. 3

Week in Review.. 3

Observation. 3

CASE SUMMARIES. 4

1.       Case: Thomas G. Scheiman & Stephen M. Franko. 4

2.       Case: Robert Galloway. 6

3.       Case: Evan Von Scales. 7

4.       Case: Oakwood Capital Securities, Inc. 9

5.       Case: Barry L. Buchholz. 11

6.       Case: Luis S. Jean-Bart 12

7.       Case: Deutsche Bank Securities Inc. 14

8.       Case: James Daniel Lang. 16

9.       Case: Mark A. Carter. 18

10.    Case: Laidlaw & Company (UK) Ltd. 20

WEEKLY TRENDS & TAKEAWAYS

Number of Cases: TEN

Common Violations:

• Violations of FINRA Rule 2010 (high standards of commercial honor and just principles of trade)
• Regulation Best Interest (Reg BI) / Exchange Act Rule 15l-1(a)
• Unauthorized trading / discretionary authority violations (FINRA Rule 3260,2360)
• FINRA Rule 4511 (Recordkeeping / misreporting violation)
• Supervisory failures and deficient compliance

Week in Review:

Between November 17 and 21, 2025, FINRA took disciplinary actions against both individual registered representatives and firms for a range of violations, including unsuitable investment recommendations, undisclosed outside business activities, falsified expense reports, unauthorized trading, excessive options trading, supervisory failures, deficient disclosure in research reports, and failure to maintain net capital or proper handling of investor funds. Sanctions imposed included suspensions ranging from one to ten months, fines from $5,000 to $2.5 million, disgorgements, censure, partial restitution, and requirements for firms to implement or certify remedial supervisory measures. These cases highlight FINRA’s continued emphasis on ethical conduct, adherence to Regulation Best Interest, compliance with supervisory and reporting obligations, and maintaining robust firm-level oversight to protect investors and ensure market integrity.

Observation:

FINRA Rule 2010 remains the most frequently cited violation, reflecting FINRA’s emphasis on ethical conduct across a wide range of misconduct. Many cases also highlight failures in disclosure, supervision, or suitability obligations, showing that regulatory oversight targets both individual behaviour and firm-level compliance systems. Recurring compliance challenges for registered representatives include high-risk and unsuitable investment recommendations, unauthorized trading, and undisclosed outside activities. Large firms, such as Deutsche Bank and Laidlaw, are held accountable for systemic deficiencies, underscoring that lapses in oversight can impact thousands of transactions and a broad base of investors.

                                           CASE SUMMARIES

1.      Case: Thomas G. Scheiman & Stephen M. Franko

INTRODUCTION:

This summary reviews the disciplinary action against Thomas G. Scheiman and Stephen M. Franko, who recommended unsuitable GWG L Bonds to retail customers in violation of Reg BI and FINRA Rule 2010. The case highlights the obligation of registered representatives to make recommendations that are in the customer’s best interest, consistent with their financial profile, risk tolerance, and investment objectives.

• Date of Action: November 17, 2025
• Respondent: Thomas G. Scheiman, Stephen M. Franko
• Violations: 

A. Exchange Act Rule 15l-1(a) of Regulation BI:

This rule states brokers to act in the best interest of retail customers when making securities recommendations. The Care Obligation requires that recommendations be based on reasonable diligence and an evaluation of the customer’s investment profile, including factors such as age, risk tolerance, financial needs, liquidity needs, and investment experience.

Violation: In 2020, Scheiman recommended a $100,000 GWG L Bond to an 83-year-old customer, resulting in over 50% concentration of her liquid net worth in speculative bonds. Franko recommended GWG L Bonds to three retail customers whose investment profiles were inconsistent with the high risks, illiquidity, and speculative nature of the product. Both failed to meet Reg BI’s Care Obligation.

B. FINRA Rule 2010:

This rule states associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: By recommending high-risk, unsuitable securities to retail customers and failing to comply with Reg BI’s best-interest standards, both Scheiman and Franko violated the ethical obligations.

SUMMARY:

Scheiman and Franko recommended GWG L Bonds, speculative and high-risk corporate bonds, to retail customers despite the investments being unsuitable given the customer’s financial profiles and liquidity needs. These recommendations violated Reg BI’s Best Interest and Care Obligations and further constituted misconduct under FINRA Rule 2010. Their failures were particularly consequential given GWG’s ongoing financial losses and eventual default and bankruptcy.

SANCTIONS:

For Thomas G. Scheiman

• Two-month suspension.
• A fine of $5,000.
• $2,600 disgorgement + interest

For Thomas G. Scheiman

• Three-month suspension
• $5,000 fine
• Partial restitution $5,640 + interest

AWC Document:

2022074289901 Thomas G. Scheiman CRD 1508288_Stephen M. Franko CRD 2157707 AWC ks.pdf    

CONCLUSION:
This case reinforces FINRA’s mandate that registered representatives must evaluate the risk, liquidity, and suitability of investment products and ensure recommendations meet Reg BI’s best-interest standards. Recommending highly speculative securities without proper diligence or regard for a customer’s financial profile violates both regulatory obligations and fundamental ethical standards.

2.      Case: Robert Galloway

INTRODUCTION:

This summary reviews a FINRA disciplinary action against Robert Galloway, who falsified six expense reports to obtain reimbursements not permitted under firm rules. His conduct violated FINRA Rule 2010, which requires adherence to high standards of commercial honor.

• Date of Action: November 17, 2025
• Respondent: Robert Galloway
• Violations: 

A. FINRA Rule 2010:

This rule states associated persons to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.

Violation: Between January and April 2024, Galloway falsified six marketing reports for marketing expenses by claiming he had already incurred and inflated reimbursement amounts. He improperly received approximately $5,000 in reimbursements. This created false records and misled his firm.

SUMMARY:

Galloway submitted six falsified expense reports over a four-month period, seeking reimbursements for marketing expenses that were not yet incurred and overstating the amounts. This dishonest conduct violated FINRA Rule 2010 and resulted in Country Capital terminating his registration. FINRA determined that his actions demonstrated a failure to uphold required standards of commercial honor.

SANCTIONS:

Robert Galloway:

• Five-month suspension
• a $5,000 fine.

AWC Document:

2025-11-05_AWC_via_DocuSign_Robert_Galloway_2024083324501.pdf

CONCLUSION:
This action underscores FINRA’s expectation that registered representatives maintain integrity and accuracy in all business-related documentation. Falsifying expense reports constitutes unethical conduct and violates the principles of fairness and honesty that Rule 2010 is designed to protect.

3.      Case: Evan Von Scales

INTRODUCTION:

This summary reviews FINRA’s disciplinary action against Scales, who engaged in an undisclosed outside business activity (OBA) involving the promotion and sale of a foreign-exchange trading algorithm. By failing to provide required prior written notice to his member firm, Fidelity, Scales violated both FINRA Rule 3270 and FINRA Rule 2010.

• Date of Action: November 17, 2025
• Respondent: Evan Von Scales
• Violations: 

A. FINRA Rule 3270:

This rule states registered persons must obtain firm approval before engaging in outside compensated business.

Violation: From October to December 2023, Scales operated an LLC selling an automated trading algorithm. He advertised it on social media and sold the product to nine customers for $2,000 each. He earned $13,000 after refunds and fees. He did not notify or obtain approval from Fidelity and violated the Rule.

B. FINRA Rule 2010:

This rule states associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: Because a violation of Rule 3270 automatically constitutes a breach of ethical conduct, Scale’s undisclosed OBA violated Rule 2010.

SUMMARY:

Scales established and operated a foreign-exchange algorithm business without notifying or receiving approval from Fidelity, despite firm policies and FINRA rules requiring such disclosure. His failure to provide prior written notice, combined with earning compensation from the activity, violated FINRA Rules 3270 and 2010.

SANCTIONS:

• Three-month suspension
• a $5,000 fine.

AWC Document:

2024083203501 Evan Von Scales CRD 6957770 AWC ks.pdf

CONCLUSION:
Scales established and operated a foreign-exchange algorithm business without notifying or receiving approval from Fidelity, despite firm policies and FINRA rules requiring such disclosure. His failure to provide prior written notice, combined with earning compensation from the activity, violated FINRA Rules 3270 and 2010.

4.      Case: Oakwood Capital Securities, Inc.

INTRODUCTION:

This summary reviews FINRA’s disciplinary action against Oakwood Capital Securities, which, under prior management, failed to establish and maintain adequate supervisory systems and written supervisory procedures for monitoring deferred variable annuity exchange rates.

Date of Action: November 18, 2025

• Respondent: Oakwood Capital Securities, Inc.
• Violations: 

A. FINRA Rule 3110:

This rule states members must maintain systems to ensure compliance with securities laws and FINRA rules.

Violation:  Oakwood failed to establish and maintain a supervisory system, as well as written supervisory procedures, reasonably designed to supervise deferred variable annuity exchange activity. Although the firm’s procedures broadly stated that surveillance would occur, Oakwood had no actual processes or systems to track exchange rates, review trends, or identify representatives with potentially problematic activity. Its supervision consisted solely of manual transaction-by-transaction reviews, which were insufficient to detect patterns or repeated unsuitable recommendations.

B. FINRA Rule 2330:

This rule states firms must implement written supervisory procedures and surveillance to detect inappropriate annuity exchanges.

Violation:  Oakwood also failed to establish specific written supervisory procedures tailored to deferred variable annuities and by failing to implement the required surveillance mechanisms to identify inappropriate or excessive annuity exchanges. The firm did not monitor representative’s exchange activity at all, nor did it maintain any system for tracking exchange rates, which directly caused the firm to overlook a series of short-term and unsuitable variable annuity exchanges recommended by one of its representatives.

B. FINRA Rule 2010:

This rule states associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation:  Because Oakwood failed to comply with Rules 3110 and 2330(d), it also violated FINRA Rule 2010. Insufficient supervision of complex and high-risk products is considered conduct inconsistent with industry standards.

SUMMARY:

Under prior management, Oakwood Capital Securities failed for more than a year to maintain adequate supervisory systems and procedures for overseeing deferred variable annuity exchanges. The firm had no system for tracking exchange rates or patterns and conducted only basic transactional reviews. As a result, it failed to detect repeated, short-term, and unsuitable variable annuity exchanges recommended by a representative.

SANCTIONS:

• a censure and
• a $20,000 fine.

AWC Document:

2020065145802 Oakwood Capital Securities, Inc. fka Gardner Financial Services, Inc. CRD 21000 AWC ks.pdf

CONCLUSION:
This action underscores FINRA’s expectation that firms maintain effective supervisory systems especially when overseeing complex products such as variable annuities. A failure to monitor exchange activity exposes investors to unsuitable transactions and violates core supervisory and ethical obligations.

5.      Case: Barry L. Buchholz

INTRODUCTION:

This summary reviews the disciplinary action against Barry L. Buchholz for executing unauthorized trades in four customer accounts, violating FINRA Rule 2010. The case highlights the requirement for written or oral customer authorization before placing trades in non-discretionary accounts.

• Date of Action: November 18, 2025
• Respondent: Barry L. Buchholz.
• Violations: 

A. FINRA Rule 2010:

This rule states associated persons, in the conduct of their business, to “observe high standards of commercial honor and just and equitable principles of trade.

Violation: Between September and October 2023, Buchholz executed 10 unauthorized trades totalling $590,795 in the accounts of four beneficiaries of a deceased customer. He generated $16,245.63 in commissions. Two customers suffered losses from liquidating the unauthorized positions.

SUMMARY:

Buchholz executed a series of unauthorized trades in four customer accounts shortly after the accounts were funded from their father’s estate. By placing trades without any written or oral approval and later liquidating one customer’s holdings without consent, he violated FINRA Rule 2010. His actions generated significant commissions for himself and resulted in losses for certain customers, prompting formal complaints and regulatory action.

SANCTIONS:

• One-month suspension.
• $7,500 fine.
• $7,480 disgorgement + interest.

AWC Document:

2024081242701 Barry L. Buchholz CRD 1583582 AWC lp.pdf

CONCLUSION:
This case underscores FINRA’s strict prohibition against unauthorized trading in non-discretionary accounts. Registered representatives must obtain explicit customer authorization before executing any transactions. Failure to do so violates the ethical and professional standards embedded in FINRA Rule 2010 and exposes customers to unauthorized risk and financial harm.

6.      Case: Luis S. Jean-Bart

INTRODUCTION:

This summary reviews FINRA’s action against former registered representative Jean-Bart, who failed to timely respond to multiple FINRA Rule 8210 requests for information over a prolonged period, violating FINRA’s investigative requirements and conduct standards.

• Date of Action: November 19, 2025
• Respondent: Luis S. Jean-Bart
• Violations: 

A. FINRA Rule 8210:

This rule states associated persons to provide information, documents, and records necessary to an investigation, and prohibits failing to comply with such requests.

Violation: Jean-Bart failed to provide complete and timely responses to multiple FINRA Rule 8210 requests issued between October 19, 2023, and January 24, 2025. Despite extensions and repeated follow-up requests, he did not provide all required documents by the established deadlines. Some documents were not produced until more than 15 months after the initial due date. His prolonged lack of cooperation impeded FINRA’s investigation into alleged off-platform crypto-asset activity.

B. FINRA Rule 2010:

This rule requires associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: By failing to timely respond to FINRA Rule 8210 requests, Jean-Bart violated FINRA Rule 2010. An untimely or incomplete response to an 8210 request constitutes a breach of the standards of conduct required of registered persons.

SUMMARY:

Jean-Bart repeatedly failed to comply with FINRA’s Rule 8210 information requests over an extended period, delaying and hindering an active investigation. His failure to timely provide the required documents and information resulted in violations of both FINRA Rules.

SANCTIONS:

• Ten-month suspension.
• $5000 fine.

AWC Document:

2023080015803 Luis S. Jean-Bart CRD 5472965 AWC ks.pdf

CONCLUSION:
FINRA’s action highlights the critical importance of full and timely compliance with Rule 8210 requests. Failure to cooperate with regulatory investigations undermines FINRA’s ability to protect investors and enforce industry standards, and such conduct constitutes a serious violation of FINRA rules.

7.      Case: Deutsche Bank Securities Inc.

INTRODUCTION:

This summary reviews FINRA’s action against Deutsche Bank for longstanding failures to include required conflicts-of-interest disclosures in equity and debt research reports and for failing to maintain supervisory systems designed to ensure compliance with research disclosure rules. These failures occurred over an extended period and affected approximately 110,000 research reports.

Date of Action: November 19, 2025

• Respondent: Deutsche Bank Securities Inc.
• Violations: 

A. FINRA Rule 2241:

This rule governs equity research reports and requires member firms to ensure that such reports include complete and accurate conflicts-of-interest disclosures, such as whether the firm or its affiliates expect to receive investment banking compensation from the subject company, whether the subject company is or has been a client of the firm, and whether the research analyst or household members have a financial interest in the securities discussed..

Violation: Deutsche Bank violated FINRA Rule 2241 by publishing approximately 99,000 equity research reports that omitted required disclosures relating to expected investment banking compensation and thousands more that failed to disclose client relationships and analyst ownership interests. The missing disclosures resulted from flawed data feeds, incomplete client information, and inadequate monitoring of analyst trading. These failures spanned from January 2007 through May 2025 and reflect the firm’s inability to ensure that its equity research reports contained accurate, comprehensive, and compliant conflict-of-interest disclosures.

B. FINRA Rule 2242:

This rule governs debt research reports and requires firms to disclose expected investment banking compensation, client relationships, analyst financial interests, and other conflicts that may affect the objectivity of debt research.

Violation: Deutsche Bank violated FINRA Rule 2242 by publishing approximately 9,000 debt research reports containing incomplete or missing conflicts-of-interest disclosures, including failures to disclose expected investment banking compensation, client relationships, and analyst ownership. The firm also released 172 compendium debt research reports lacking the required hyperlink-accessible disclosures due to an incomplete online search tool. These violations, occurring from July 16, 2016, through May 2025, resulted from the firm’s long-standing failure to maintain adequate data systems and supervisory controls to ensure compliance with debt research disclosure requirements.

C. FINRA rule 3110:

This rule states member firms to establish, maintain, and enforce a supervisory system and written supervisory procedures designed to ensure compliance with applicable securities laws and FINRA rules.

Violation: From January 2007 to the present, Deutsche Bank failed to maintain a supervisory system reasonably designed to ensure that its research disclosures were accurate and complete. The firm did not verify the integrity of data feeds used for disclosure triggers and lacked adequate procedures to monitor and restrict research analyst trading in covered securities, including trades in third-party managed accounts. These deficiencies resulted in widespread disclosure omissions and violations of supervision rules.

D. FINRA Rule 2010:

This rule states member firms to observe high standards of commercial honor and just and equitable principles of trade.

Violation: Deutsche Bank’s systemic failures to comply with research disclosure obligations and supervisory requirements constitute violations of Rule 2010, as the firm failed to ensure transparency in areas critical to investor protection and market integrity.

SUMMARY:

For more than a decade, Deutsche Bank operated with defective data systems, inadequate oversight, and incomplete supervisory procedures, resulting in inaccurate or missing conflict-of-interest disclosures in approximately 110,000 research reports. These failures violated multiple research and supervision rules, undermining investor transparency and market integrity.

SANCTIONS:

• a censure.
• $2.5 million fine.
• An undertaking requiring senior management to certify, within 180 days, that Deutsche Bank has remediated the failures and implemented a supervisory system reasonably designed to comply with FINRA Rules.

AWC Document:

2022073416601 Deutsche Bank Securities Inc. CRD 2525 AWC ks.pdf

CONCLUSION:
This action underscores FINRA’s expectation that firms maintain rigorous systems ensuring complete and accurate research disclosures. Effective supervisory controls and transparent conflict-of-interest reporting are essential for investor protection and the integrity of the research process.

8.      Case: James Daniel Lang

INTRODUCTION:

This summary reviews FINRA’s action against Lang, who engaged in multiple outside business activities (OBAs) without providing the required prior written notice to his member firms. His failure to disclose compensated trustee and executor roles over several years resulted in violations of FINRA’s OBA and conduct rules.

• Date of Action: November 19, 2025
• Respondent: James Daniel Lang
• Violations: 

A. FINRA Rule 3270:

This rule prohibits registered persons from engaging in outside business activities or receiving compensation from any business outside their member firm unless they provide prior written notice to the firm.

Violation: Between October 2016 and December 2022, Lang failed to disclose multiple compensated fiduciary roles, including serving as trustee for two customer trusts and as executor of a customer’s estate. Despite being required to disclose all OBAs through LPL’s electronic system, Lang failed to report his trustee roles until after they were discovered during a branch audit, and even after being instructed to relinquish the positions, he continued acting as trustee. After joining IFG in October 2020, Lang again failed to disclose his ongoing trustee activity until December 2022. He also did not disclose his executor role to either firm. Lang repeatedly certified inaccurately on compliance questionnaires that he had no undisclosed outside activities and no fiduciary roles, rendering his conduct a clear violation of Rule 3270.

B. FINRA Rule 2010:

This rule states associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: By knowingly failing to disclose required OBAs, inaccurately completing compliance questionnaires, continuing fiduciary activities after direct firm instructions to cease, and withholding material information from both LPL and IFG, Lang violated FINRA Rule 2010, as nondisclosure of OBAs constitutes misconduct inconsistent with ethical industry standards.

SUMMARY:

Lang engaged for years in undisclosed outside business activities, including compensated trustee and executor roles for a long-time customer, despite firm requirements to report all external activities. His failure to disclose these roles and his inaccurate compliance certifications violated FINRA Rules 3270 and 2010.

SANCTIONS:

• Four-month suspension.
• $5000 fine.

AWC Document:

2020067065101 James Daniel Lang CRD 2959057 AWC lp.pdf

CONCLUSION:
This action reaffirms FINRA’s expectation that registered persons fully and accurately disclose all outside business activities. Failure to provide prior written notice undermines firm oversight, introduces undisclosed conflicts, and violates fundamental conduct standards.

9.      Case: Mark A. Carter

INTRODUCTION:

This summary reviews FINRA’s action against Carter, who engaged in excessive and unsuitable options trading, exercised discretion without authorization, and mismarked trades in two retail customer accounts while associated with Pruco Securities. His actions resulted in violations of Regulation Best Interest (Reg BI) and multiple FINRA rules.

• Date of Action: November 19, 2025
• Respondent: Mark A. Carter
• Violations: 

A. Exchange Act Rule 15l-1(a) of Regulation BI:

This rule states brokers to act in the best interest of retail customers when making recommendations, without placing their own interests ahead of the customer’s. It requires reasonable diligence to ensure the recommendation is suitable and not excessive in light of the customer’s investment profile.

Violation: From January to December 2023, Carter recommended more than 2,200 options trades to two retail customers whose profiles reflected long-term, capital-appreciation objectives making highly active and risky options strategies deeply unsuitable. His trading caused over $600,000 in losses, representing more than 99% of the customers’ account value, while generating commissions of $6,773 for himself. Annualized cost-to-equity ratios averaged 42%, demonstrating excessive trading far outside the customer’s best interest. Carter therefore wilfully violated Reg BI’s Best Interest Obligation and FINRA Rule.

B. FINRA Rule 3260:

This rule prohibits the exercise of discretionary trading authority in a customer’s account unless the customer provides prior written authorization and the member firm approves the discretionary arrangement in writing.

Violation: Carter exercised discretion in the customer’s accounts without obtaining any written authorization. Over the course of twelve months, he placed 2,314 options trades without speaking to the customers, violating the rule and exceeding both customer and firm authority.

C. FINRA Rule 2360:

This rule prohibits discretionary trading in options accounts unless it complies with Rule 3260 and specifically authorizes options trading.

Violation: Because Carter lacked written discretionary authority for options transactions, each discretionary trade he placed in the customers’ accounts constituted a separate violation of Rule 2360(b)(18)(A)(i). His extensive pattern of unauthorized discretionary options trades violated this rule repeatedly.

D. FINRA Rule 4511:

This Rule states members and associated persons to maintain accurate books and records, including properly marking whether trades are solicited or unsolicited.

Violation: Carter mismarked all 2,314 solicited options trades as unsolicited. These false markings caused the firm to maintain inaccurate books and records and concealed the magnitude of his excessive trading activity, constituting a direct violation of Rule 4511.

D. FINRA Rule 2010:

This Rule states associated persons to observe high standards of commercial honor and just and equitable principles of trade.

Violation: Because Carter engaged in unsuitable trading, exercised unauthorized discretion, and mismarked order tickets, he failed to meet the high standards of conduct required under Rule 2010. Each underlying violation independently supports a violation of this rule.

SUMMARY:

Carter’s trading activity was excessive, unsuitable, and unauthorized. He breached Regulation Best Interest, FINRA’s suitability rules, discretionary trading rules, and books-and-records requirements. His conduct resulted in severe customer harm and violated multiple FINRA rules.

SANCTIONS:

• Nine-month suspension.
• $20,000 fine.
• Disgorgement of $6,773 plus interest.

AWC Document:

2024081675801 Mark A. Carter CRD 6387371 AWC vr.pdf

CONCLUSION:
Carter’s misconduct demonstrates serious breaches of both suitability and supervisory standards. By recommending excessive and high-risk options trades that were not in the best interest of his retail customers, exercising discretion without proper authorization, and creating inaccurate trade records, Carter violated multiple FINRA rules and Regulation Best Interest. These actions caused significant financial harm to the customers and undermined the integrity of the brokerage process. FINRA’s sanctions including suspension, fines, and disgorgement underscore the critical importance of adhering to suitability obligations, obtaining proper authorizations, and maintaining accurate records to protect investors and uphold market integrity.

10.  Case: Laidlaw & Company (UK) Ltd.

INTRODUCTION:

This summary reviews FINRA’s actions against Laidlaw, which involved failures to maintain minimum net capital, deficient supervisory procedures, and improper handling of investor funds in a contingency offering. These deficiencies violated multiple SEC and FINRA rules, posing risks to investors and the integrity of the securities market.

• Date of Action: November 20, 2025
• Respondent: Laidlaw & Company (UK) Ltd.
• Violations: 

A. Exchange Act §§ 15(c)(3), Exchange Act Rule 15c3-1:

This rule states the minimum net capital standard that must be continuously met by all registered broker-dealers.

Violation: Between September 2022 and March 2023, Laidlaw operated while undercapitalized on at least 108 days, with deficiencies ranging from $53,000 to $1.26 million, sometimes exceeding $1 million. These deficiencies occurred because the firm failed to reconcile bank statements and general ledger entries consistently. By conducting business while undercapitalized, Laidlaw violated the minimum net capital requirements set forth in Exchange Act § 15(c)(3) and Rule 15c3-1.

B. Exchange Act § 17(a) and Exchange Act Rule 17a-11:

This rule states firms to notify FINRA and the SEC immediately if net capital falls below required minimums.

Violation: Laidlaw filed two inaccurate deficiency notices in December 2022 and January 2023, misreporting the start and end dates of net capital deficiencies. Additionally, an April 2023 notice overstated compliance. By failing to provide accurate and timely net capital deficiency notices, Laidlaw violated Exchange Act § 17(a) and Rule 17a-11.

C. FINRA Rule 4110:

This rule states a member firm to suspend all business operations during any period in which it is not in compliance with applicable net capital requirements.

Violation: Laidlaw continued to conduct securities business during the periods it was undercapitalized. By failing to suspend operations during these times.

D. FINRA Rules 3110:

This rule states member firms to establish, maintain, and enforce supervisory systems and written supervisory procedures (WSPs) reasonably designed to ensure compliance with applicable laws and rules.

Violation: Between September 2022 and June 2023, Laidlaw failed to maintain WSPs for general ledger maintenance, reconciliation, intercompany transactions, and net capital calculations. Staffing shortages exacerbated these deficiencies, and no remedial steps were taken until July 2023.

E. Exchange Act § 15(c)(2) and Rule 15c2-4(b)

This rule sates that in contingency offerings, broker-dealers either deposit investor funds into a separate account or transmit funds to an independent escrow agent when the broker is affiliated with the issuer.

Violation: Between November 2020 and January 2021, Laidlaw participated in a contingency offering for an affiliated issuer but failed to establish an independent escrow account, instructing investors to send funds directly to the issuer.

SUMMARY:

Laidlaw’s failures to maintain net capital, submit accurate deficiency notices, establish supervisory systems, and properly handle investor funds in a contingency offering violated multiple SEC and FINRA rules. These lapses created regulatory and investor risks and demonstrate significant supervisory and compliance deficiencies.

SANCTIONS:

• a censure
• $200,000 fine.

AWC Document:

2023077061201 Laidlaw & Company (UK) Ltd. CRD 119037 AWC ks.pdf

CONCLUSION:
Laidlaw’s conduct demonstrates significant failures in financial and supervisory controls. By operating while undercapitalized, submitting inaccurate net capital deficiency notices, failing to suspend business during periods of deficiency, neglecting to maintain adequate supervisory procedures, and mishandling investor funds in a contingency offering, the firm violated multiple SEC and FINRA rules. These violations exposed investors and the marketplace to risk and reflect a breakdown in both compliance and operational oversight. FINRA’s sanctions, including censure and a $200,000 fine, underscore the importance of maintaining adequate capital, accurate reporting, robust supervisory systems, and proper handling of investor funds to protect investors and uphold market integrity.

      I.            Background

First Trust has operated as a wholesale distributor of securities issued mainly by affiliated investment companies since 1991. It employs approximately 700 registered representatives across four branch offices nationwide.

   II.            The Violations: What Went Wrong?

A.    Unauthorized and Excessive Gifts

First Trust wholesalers routinely provided lavish perks that far exceeded FINRA’s annual $100 per person non-cash gift limit. These included:

• Multiple instances of courtside basketball tickets valued at around $3,200 per pair, given without an accompanying First Trust employee.
• Tickets to a Broadway musical costing more than $1,800, again without firm accompaniment.
• Bottles of alcohol priced at $400 or higher, given repeatedly to client representatives.
• Luxury suite tickets for NBA and NHL playoff and professional football games worth tens of thousands of dollars.

Additionally, one representative received over $31,000 in tickets and entertainment within 18 months, such as NBA All-Star game luxury suite access. Another was given more than $50,000 in gifts and entertainment over a four-year period, including meals, concerts, and golf outings, with seventeen events exceeding $21,000 in one year.

Furthermore, six wholesalers explicitly linked gifts to sales targets, such as promising hockey game tickets contingent on a broker selling $1 million in Unit Investment Trusts (UITs) or offering to pay for future events if sales goal of $1 million to $10 million were achieved.

These actions violate FINRA Rules 2341(l)(5) and 2010, which prohibit excessive gifts and sales-based inducements.

B.     Falsification of Expense Reports and Records

More than 40 expense reports were falsified involving more than $650,000. Violations included:

• Listing deceased or inactive individuals as attendees.
• Omitting actual attendees from reports to lower apparent costs.
• Coordinating false reports through private texts, evading firm surveillance.

Supervisors occasionally advised wholesalers on how to disguise true expenses, violating FINRA Rules 4511 and 2010, Section 17(a) of the Securities Exchange Act of 1934, and Exchange Act Rule 17a-3.

C.    Failure to Accurately Report to Client Firms

First Trust submitted at least 25 quarterly reports to client firms, understating or omitting non-cash perks benefits over $500,000, including a failure to report luxury suite tickets costing $20,000 for football games in late 2019. Despite improvements after October 2021, some omissions continued, violating FINRA Rule 2010.

D.    Lack of Adequate Supervision Supervisory Failures

Despite having written policies, First Trust failed to supervise the provision and reporting of non-cash compensation properly. The supervisory system relied on wholesalers’ unverified self-reporting and permitted modifying approved reports without internal checks. Notably, the firm failed to supervise Firm-paid tickets prior to October 2021, significantly compounding compliance failures.

These supervisory failures violated FINRA Rules 3110(a), 3110(b), and 2010.

III.            Remedial Actions Taken by First Trust

To address these issues, First Trust implemented several corrective measures, including:

• Establishing a dedicated compliance audit function reporting directly to executive management focused on non-cash compensation and sales practices.
• Enhancing tracking systems for event ticket distributions.
• Disciplining employees through suspensions without pay, fines, and increased supervision.

IV.            Sanctions and Undertakings

First Trust agreed to:

• A censure.
• A $10 million fine.
• An undertaking mandating the firm’s senior management, identified as a registered principal, to certify annually for three years that it complies with FINRA Rules 2010, 2341, 3110, and 4511 as well as Exchange Act 17(a) and Exchange Act Rule 17a-3.

The firm voluntarily waived any right to claim an inability to pay, now or at any time after the execution of this AWC, the monetary sanction imposed in this matter.

   V.            Why This Matters?

This case underscores the importance of ethical practices and cautious supervision in brokerage operations. It reflects FINRA’s dedication to protecting investors by holding firms accountable for improper gift and entertainment practices that may skew financial advice.

For firms operating in the securities industry, First Trust’s penalty is a stark reminder to maintain transparent records, enforce reasonable gift limits, and foster a culture of compliance to ensure trusted client relationships and market integrity. The statements in this blog post are allegations as set forth in the AWC.

Herskovits PLLC represents broker-dealer and registered persons in defense of FINRA investigations and disciplinary actions.  Feel free to contact us for a consultation at (12) 897-5410.

Summary: FINRA Disciplinary Action – Kenneth John Malm

On May 20, 2025, FINRA released an AWC for Matter No. 2023078405601.

Background:

• Kenneth John Malm was registered as a General Securities Representative and Investment Banking Representative with Osaic Wealth, Inc. (formerly Securities America, Inc.).
• In August 2024, Malm was permitted to resign during an internal review after being named as a beneficiary of a client’s estate.
• Malm allegedly accepted and received a bequest of over $1 million from a deceased client (not an immediate family member) without notifying or obtaining approval from his firm.

Alleged Violations:

• FINRA Rule 3241:  Provides that “[a] registered person shall decline being named a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate upon learning of such status” unless: (a) the customer is an immediate family member; or (b) the representative provides written notice to firm, and the firm (after performing a reasonable assessment of the request) approves the request.
• FINRA Rule 2010: Requires high standards of commercial honor and just and equitable principles of trade.

Sanctions:

• Suspension: 7 months from associating with any FINRA member in any capacity.
• Fine: $10,000, payable upon reassociation with a member firm or before seeking relief from any statutory disqualification.

Additional Notes:

• The matter originated from a tip to the FINRA Securities Helpline for Seniors.
• Malm waived his rights to a hearing, appeal, and other procedural protections by accepting the settlement.
• This action will become part of Malm’s permanent disciplinary record and will be publicly disclosed.

Conclusion:
Malm’s case highlights FINRA’s strict stance on conflicts of interest and the importance of disclosure and firm approval when it comes to bequests from clients. Malm’s alleged failure to follow these rules led to a significant suspension and fine, serving as a warning to other brokers in similar situations.

Herskovits PLLC has a nationwide practice representing individuals and entities faced with FINRA investigations or disciplinary actions.  Feel free to contact us at (212) 897-5410.

FINRA recently published an AWC entered into with Richard L. Langer, a registered representative with Planner Securities LLC. FINRA accused Langer of violating FINRA Rules 2210 and 2220. FINRA Rule 2210 governs communications by registered representatives with the public and FINRA Rule 2220 sets forth requirements with respect to options-related communications.

The review of Langer’s communications originated with a cycle examination conducted by FINRA Member Supervision. According to FINRA, between January 2016 and November 2019, Langer maintained a public Facebook page for an investment club he operated. Langer authored 20 posts on the Facebook page regarding the performance, investment returns, industry standing, and purported successes of the investment club and a separate hedge fund at which Langer traded.

For example, on January 9, 2018, Langer posted:

Good Day to all! Hope everyone had a wonderful Holiday season and wishing everyone a healthy and happy 2018! We did it yet again! #2 top performing options hedge fund for November 2017, 1.93% return. With a year to date return on invest of 29.12% We still remain the Top performing options Hedge fund in 2017!! i can tell you that December record breaking return (to be released in 2 weeks) put us over 34% return for 2017 making [Hedge Fund A] the #1 options strategy hedge fund on the street for 2017,, That’s back to back years we took # 1 best performing options strategy hedge fund on the Planet !! interested in putting your money to work for you? Ask us.

FINRA Rule 2210(d)(l)(A) provides that:

[a]II member communications must be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service. No member may omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading.

FINRA found Langer’s Facebook posts violative of Rule 2210 because they provided only positive news about the hedge fund and the investment club and did not disclose any risks associated with these investments. As such, the posts did not, “provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service.”

Langer also published 11 Facebook posts regarding options. FINRA Rule 2220(d)(l)(A) provides that options communications regarding standardized options “must be limited to general descriptions of the options being discussed,” and “must not contain … past or projected performance figures, including annualized rates of return, or names of specific securities.” (emphasis added). Langer’s posts went beyond general descriptions and included performance of certain transactions. Langer also failed to state that options are not suitable for all investors as required by Rule 2220(d)(2)(A).

There are also two requirements to the rule that Langer failed to meet. First, retail options communications, “issued by a member concerning options shall be approved in advance by a Registered Options Principal designated by the member’s written supervisory procedures.” Second, retail options communications shall be submitted to the Advertising Regulation Department of FINRA … at least ten calendar days prior to use.” See FINRA Rule 2210(a)(5); FINRA Rule 2220(a)(l)(C).

“Retail” communications are those made to more than 25 retail investors with a 30-day period. Langer’s posts, which were made on a public Facebook page that had approximately 130 followers, are retail communications but Langer neither got approval from a Registered Options Principal before publishing nor were the communications submitted to the Advertising Regulation Department of FINRA.

For these violations, Langer agreed to a 10 business-day suspension and a $5,000 fine. Langer’s sanctions are at the very low end of the FINRA Sanctions Guidelines and arguably lenient given the number of posts, the three-year period of violative activity and the potential investor harm that could have arisen from this sort of marketing. Notably, the AWC is silent as to whether investors bought or sold securities based on the Facebook posts or whether they were subsequently harmed.

Herskovits PLLC has a nationwide practice defending against FINRA investigations and representing individuals in FINRA arbitration. Feel free to contact us at (212 897-5410.

On August 23, 2022, FINRA published an AWC reflecting a settlement with ViewTrade Securities, Inc. The AWC alleges that ViewTrade failed to establish and implement written AML policies and procedures that could reasonably detect and cause the reporting of suspicious transactions in violation of FINRA Rule 3310. FINRA Rule 3310 requires that each member firm develop and implement a written AML program reasonably designed to achieve and monitor the member’s compliance with the requirements of the Bank Secrecy Act (31 U.S.C. 5311, et seq.) (BSA). Rule 3310(a) further requires firms to, “[e]stablish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under [the BSA] . . . . ” The regulations implementing the BSA, in turn, require every broker-dealer to file a Suspicious Activity Report (“SAR”) with the Financial Crimes Enforcement Network any time they detect, “any suspicious transactions relevant to a possible violation of law or regulation.”

FINRA’s past guidance on this issue (NTM 02-21 and Regulatory Notice 19-18) advised firms to look for red flags and provided several examples:

• Customers’ mailing address is associated with multiple other accounts or business that do not appear related,
• Customers that buy and sell securities for no discernable purpose,
• Inflows or outflows of funds that are well beyond the known means of the customer, or
• Unexplained or extensive wire activity.

FINRA described a litany of failures on the part of ViewTrade to monitor for suspicious activity. While ViewTrade produced a daily transaction report to be review by a designated principal, the firm’s WSPs failed to reflect how that principal was supposed to use that report. Apparently, ViewTrade’s WSPs contained no parameters on detecting suspicious activity, no guidance on who would review the report or the frequency of the review. ViewTrade’s procedures also failed to address how personnel should document their reviews of the report and when and how to escalate potential issues. ViewTrade failed to review instances where its surveillance reports flagged potential spoofing, layering and wash trades.

FINRA also criticized ViewTrade’s surveillance reports for not being reasonably designed to detect suspicious activity. The example provided in the AWC stated that ViewTrade’s volume report was designed to detect when a customer’s trading activity surpassed a certain percentage of average daily volume, yet was unreasonably limited to low-priced securities. Remarkably, when reviewing reports for suspicious trading activity, the reviewers apparently had no automated system to determine if a particular customer’s account had previously come up on a given exception report.

According to the AWC, the failures of ViewTrade’s AML policies and procedures resulted in multiple failures to detect and investigate suspicious activity. For example, ViewTrade did not detect or investigate when purportedly unrelated foreign-based customers opened accounts on the same day with identical or near-identical mailing addresses. Similarly, ViewTrade did not detect or investigate several instances of purportedly unrelated foreign-based customers opening accounts and then using identical email addresses to submit indications of interest in an upcoming IPO. In three separate IPOs in which ViewTrade acted as underwriter, ViewTrade failed to detect multiple foreign-based customers who, on an unsolicited basis, provided identical indications of interest in the IPOs at or near the same time. After the IPOs, ViewTrade’s customers engaged in suspicious trading activity that FINRA described as, “indicative of bid support and attempts at manipulating market prices.”

ViewTrade also allegedly failed to detect inflows and outflows of assets that were not in line with the customer’s stated net worth and income. In one example, a customer listed their net worth between $50,000 and $100,000 and then proceeded to purchase over a $1,000,000 in securities in a single year, included the large amount of the IPOs discussed above.

Separately, the AWC also alleged that ViewTrade violated various rules regarding procedures required for managing the risk surrounding market access. From July 2017 through at least February 2020, ViewTrade provided its customers access to trading on multiple exchanges through use of ViewTrade’s market participant identifier. ViewTrade established credit controls for its customers, but it did not monitor on an ongoing basis whether its customer credit controls remained appropriate, and it did not have any written supervisory procedures in place requiring that it do so.

For this laundry list of rule violations, FINRA imposed a fine of $250,000 and ViewTrade is required to work with a third-party consultant (approved by FINRA) to set its house in order. In determining sanctions, the AWC does note that ViewTrade “took proactive steps and invested substantial resourced to remediate its AML program.” ViewTrade must see a $250,000 fine as a great result, particularly in light of some of the much heavier fines that other firms have paid for AML issues, such as the $15 million fine that Interactive Brokers paid in 2020.

Herskovits PLLC has a nationwide practice defending against FINRA investigations and disciplinary proceedings. Feel free to contact us at (212) 897-5410.

On May 16, 2022, FINRA published an Acceptance, Waiver and Consent (“AWC”) in which FA, Robert Bennett Zamani, accepted a 14-month suspension and a $27,500 fine for violations of FINRA Rule 3270 (Outside Business Activities), Rule 2210 (Communications with the Public), Rule 4511 (Books and Records) and, as always, Rule 2010 (Standards of Commercial Honor). The investigation of Zamani was triggered by a Form U5 filed by his former firm, Morgan Stanley.

The Rule 4511 violation was based on Zamani’s alleged use of business-related text messages that were not retained by Morgan Stanley, effectively causing Morgan Stanley to violate its obligation to maintain such communications under Rule 4511. This is an easily avoidable rule violation that many FAs fall prey to.

More interesting, however, are Zamani’s alleged violations of 3270 and 2210. Zamani formed a company in 2015 before becoming associated with Morgan Stanley. Without ever disclosing the company to Morgan Stanley, between January 2017 and April 2020, Zamani, through this company, offered subscription-based investment content. On its website, which was established and operated by Zamani, the company touted itself as a subscription-based platform providing investment content for aspiring day traders to “learn from professionally licensed stock traders the skills needed to become a profitable trader.” The company maintained a blog on its website, containing investment-related content, and maintained a publicly-available YouTube channel, with investment-related videos and distributed periodic newsletters to subscribers. Remarkably, during that 3-year stretch, Zamani earned $360,000 from his subscriber-based investment advice company.

FINRA Rule 2210 requires “an appropriately qualified registered principal of the member to approve each retail communication . . . .” Retail communication is defined broadly as “any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.” A retail investor is anyone other than an institutional investor “regardless of whether the person as an account with a member.”

An important exception to this review process is that it does not apply to a communication “that does not make a financial or investment recommendation or otherwise promote a product or service of the member.” Interestingly, the AWC accuses Zamani of “disseminating investment-related communications” which is significantly different from the language in the rule, which requires the recommendation of an investment or promotion of a product.

FINRA Rule 2210 not only calls for a review of communications with the public but also sets forth Content Standards and Zamani was accused of violating several of these standards. The AWC accused Zamani of disseminating communications that (a) were not fair and balanced because, among other things, he failed to explain any risk associated with investing, (b) made “promissory statements” regarding returns, (c) made projections of investment performance, (d) contained testimonials without the required disclosures, (e) contained securities recommendations without the required disclosures, (f) contained performance data without the required disclosures, and (g) failed to disclose Zamani’s association with Morgan Stanley. Each of these Content Standards are specifically addressed under Rule 2210.

As you might imagine, Zamani apparently never disclosed this activity to Morgan Stanley or asked Morgan Stanley to review and approve any of the communications he released through YouTube, his website or his newsletters. Undoubtedly, Morgan Stanley would not have permitted any of it and a profit of $360,000 over three years is likely more money than Zamani was making at Morgan Stanley.

Zamani’s alleged conduct violated FINRA Rules 3270 and 2210. This was not a close case but FA’s should be knowledgeable about the constraints of Rule 2210. It is one of FINRA’s more complicated and detailed rules and FA’s would be well advised to seek legal or compliance advice before sending any investment-related communication to more than 25 people.

Herskovits PLLC has a nationwide practice defending investigations by FINRA, the SEC and state securities regulators. Call us for a consultation at (212) 897-5410.

When settling a FINRA investigation, the Staff drafts a letter of Acceptance, Waiver and Consent (AWC) setting forth the terms of the settlement. In the AWC, FINRA routinely demands the settling party consent to the following restraint on speech:

“Respondent may not take any action or permit to be made any public statement, including in regulatory filings or otherwise, denying directly or indirectly, any finding in this AWC or create the impression that the AWC is without factual basis.”

A matter before the U.S. Supreme Court may upend FINRA’s use of a gag order.

Case In Point

On March 21, 2022, Barry Romeril filed a petition for writ of certiorari (Romeril v. Securities and Exchange Commission). Romeril asks the Court to consider whether First Amendment and due process rights are violated when the SEC forces a settling party to agree to a lifelong prior restraint barring any statement, however truthful, that even suggests that any allegation of the SEC is insupportable.

In 2003, Romeril settled an action initiated by the SEC. As part of the settlement and judgment, the SEC demanded a non-negotiable “consent” clause stating:

“Defendant agrees not take any action or permit to be made any public statement denying directly or indirectly, any allegation in the complaint or create the impression that the complaint is without factual basis.”

It is noteworthy that the SEC and CFTC systematically demand broad restraints on speech as a condition of settlement. See generally James Valvo, The CFTC and SEC Are Demanding Unconstitutional Speech Bans in their Settlement Agreements, Yale J. on Reg.: Notice & Comment Blog (Dec. 4, 2017). In so doing, settling parties are without defense in the court of public opinion.

Would FINRA Abide by an Adverse Ruling in Romeril?

If the Supreme Court accepts Romeril’s petition, the Court would determine the legality of the SEC’s gag order. Although the SEC’s gag order is identical in substance to FINRA’s gag order, FINRA is not a party to Romeril and it is unclear whether FINRA would abide by a ruling striking down the gag order.

FINRA goes to great lengths to proclaim that it is a “private entity” and not a “governmental body” bound by the U.S. Constitution. See e.g., D.L. Cromwell Inv., Inc. v. NASD Regulation, Inc. 279 F.3d 155, 162 (2d Cir. 2002). For example, in reliance upon this distinction, FINRA chooses not to recognize an individual’s right to invoke the Fifth Amendment privilege against self-incrimination in connection with on-the-record interviews. Nonetheless, FINRA does recognize certain Constitution-based rights. For example, in disciplinary proceedings, FINRA’s staff must turn over “Brady material” to the respondent (documents containing exculpatory material). See Dep’t of Enforcement v. Southeast Inv., N.C., Inc., 2019 FINRA Discip. LEXIS 23 *14 (NAC May 23, 2019) (interpreting FINRA Rule 9253).

Given that the gag order contained in an AWC mirrors the language within the SEC’s standard gag order, it would seem appropriate for FINRA to follow any guidance from the Supreme Court in Romeril.

Herskovits PLLC has a nationwide practice defending individuals and entities in FINRA investigations and disciplinary proceedings. Contact us at 212-897-5410.

An AWC issued on July 1, 2021, reflects that FINRA suspended an FA formerly registered with David A. Noyes & Company (now known as Sanctuary Securities) for three-months and imposed a deferred fine of $5,000. This AWC demonstrates FINRAs ongoing concerns around the sale of leveraged and inverse exchange traded funds to retail customers. This week’s AWC is the book-end to an AWC issued in May 2021 against Sanctuary for a variety of violations, including the failure to establish, maintain and enforce a supervisory system designed to meet FINRAs suitability standards for non-traditional ETFs. Sanctuary was fined $160,000 and ordered to pay customer restitution of $370,161.

By way of background, the broker-dealer permitted FA Stuart Pearl to resign in March 2019. According to statements on BrokerCheck, Mr. Pearl resigned while on heightened supervision and the firm alleged that Mr. Pearl had not followed the heightened supervision plan.

Product at Issue: Non-Traditional ETFs

NT-ETFs are designed to return a multiple of an underlying index or benchmark, the inverse of that benchmark, or both, over only the course of one trading session — usually a single day. NT-ETFs typically rebalance their portfolios on a daily basis (also known as the “daily reset”). Due to the effects of compounding of daily returns during the holding period, the performance of NT-ETFs over periods longer than a single trading session “can differ significantly from the performance … of their underlying index or benchmark during the same period of time.” FINRA Regulatory Notice 09-31, FINRA Reminds Firm of Sales Practice Obligations Relating to Leveraged and Inverse Exchange-Traded Funds (June 2009). Because of that feature, FINRA has stated that “inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.” FINRA Regulatory Notice 09-31 at 1. Rule at Issue: FINRA Rule 2111

To make a suitable recommendation, FINRA requires that FAs first understand the risks and rewards of a proposed investment. FINRA deems this a “reasonable-basis suitability obligation.” Thus, an FA can run afoul of Rule 2111 if the FA lacks an understanding of the product even if the product was otherwise appropriate given the investor’s wealth, willingness to bear risk, age, or other individual characteristics.

Facts at Issue

With the Pearl AWC, FINRA found that the FA failed to perform a reasonable basis suitability analysis for two reasons: (a) the customers held the NT-ETFs for periods ranging from 100 to 600 days; and (b) Pearl did not understand that losses in NT-ETFs compounded because of how valuations reset each day.

Herskovits PLLC maintains a nationwide practice defending FINRA and SEC investigations and enforcement proceedings. Please feel free to contact Robert Herskovits for a consultation at 212-897-5410.

On September 9, 2020, FINRA issued an AWC resolving an investigation with FA Patrick J. Knox. At first blush, the investigation seemed to resolve a rather straightforward Reg S-P violation. FINRA accused Knox of printing his customer list in anticipation of joining a new broker-dealer and providing the list to his prospective employer. Apparently, the list included customer names, social security numbers and birth dates. Because the customer’s did not authorize the release of this information, FINRA deemed Knox to have violated Reg S-P and slapped his wrist with a 10-day suspension and a fine of $2,500. However, a closer examination of the AWC raises some interesting questions about the viability of certain protections afforded by the Protocol for Broker Recruiting.

The Protocol for Broker Recruiting

The Protocol is an agreement designed to provide a framework for representatives to leave one firm and join another. If an FA abides by the Protocol, she can join a competitor without fear of being sued for having violated a contractual non-solicitation provision. Firms that join the Protocol do so on a voluntary basis and agree that an FA can join a competing firm and bring along a client list containing the following information: client name, address, phone number, email address, and account title of the clients.

FINRA Stakes Out a Position at Odds with Broker Protocol

FINRA’s AWC with FA Knox contains a legal analysis that seems at odds with the Protocol. FINRA claims that Reg S-P generally prohibits financial institutions from disclosing “nonpublic personal information” about a customer without customer consent. That part of the AWC cannot be debated. However, FINRA then goes on to claim that “nonpublic personal information includes, among other things, names, addresses [and] telephone numbers ….” Given that the Protocol specifically permits a departing FA to take a list containing “names, addresses and telephone numbers” it is hard to square FINRA’s AWC with the terms of the Protocol.

I have doubts about FINRA’s analysis here. Clearly, Reg S-P guards against unauthorized disclosure of information such as social security numbers, account numbers, dates of birth and the like. But a basic Google search can reveal a person’s name, address and telephone number. It certainly seems that FINRA overshot the mark by claiming this information constitutes “nonpublic personal information” as contemplated by Reg S-P.

Herskovits PLLC has a nationwide practice defending individuals and entities with FINRA and SEC investigations and enforcement proceedings. Feel free to call us for a consultation at 212-897-5410.

On May 8, 2020, FINRA published an interesting AWC in which they suspended a quantitative research analyst for breaching internal policies relating to the treatment of confidential and proprietary information. Although FINRA will aggressively pursue Reg S-P violations, in which nonpublic confidential information pertaining to a customer — such as a social security number or account number — is improperly disclosed, this AWC is somewhat unique because FINRA charged the individual with sending himself computer code seemingly unrelated to customers of the firm.

The matter at hand concerns Sune Gaulsh, FINRA Matter No. 2018058804301, an individual who was formerly employed by Barclays Capital. According to his LinkedIn profile, Gaulsh was “part of a collaborating team within equities and research that researched and developed systematic trading strategies (volatility, global macro/CTA, L/S equity, event driven), constructed cross asset risk premia and factor portfolios, and evaluated data sets for alpha.” Although Gaulsh voluntarily resigned from Barclays, the firm filed a Form U5 disclosing an internal investigation “to determine if the registered representative sent the firm’s proprietary business information to his personal email address.”

Underlying Conduct

According to FINRA, Barclays maintained an internal policy to guard against the improper disclosure of confidential and proprietary information. Additionally, FINRA alleges that Gaulsh signed an agreement which likewise contained one or more provisions designed to protect Barclay’s confidential and proprietary information.

On March 27, 2018, in anticipation of leaving Barclay’s for another job, FINRA alleged that Gaulsh used his work email to send himself approximately 70 documents related to computer code, approximately 25 documents relating to third party vendor data and 9 documents related to indices data. FINRA claims that the dissemination of these documents “could have exposed the Firm to legal liability and had other negative consequences.”

Apparently, Barclay’s found out about Gaulsh’s conduct and chose not to fire him; instead, admonishing him not to do it again. Nonetheless, according to FINRA, within days of the admonishment Gaulsh’s conduct continued as he attempted to send himself approximately 20 additional confidential and proprietary documents in 13 separate emails. These documents mostly related to third party vendor data. Apparently, Gaulsh took steps to conceal his behavior by placing the documents “in zip archives and changing the archive file extensions in an effort to conceal the number and nature of the files being attached.” Nonetheless, Barclay’s automated email filter system detected and blocked all 13 emails from being transmitted.

Penalty Assessed by FINRA

Clearly, FINRA was troubled by the conduct described in the AWC and charged him with violating Rule 2010, which FINRA claims “applies to all business-related misconduct.” Gaulsh was suspended in all capacities for 9 months and fined $10,000.

Herskovits PLLC represents individuals and entities in regulatory investigations and disciplinary proceedings brought by FINRA, the SEC and CFTC. Feel free to contact us at 212-897-5410 for a confidential consultation.

This week’s FINRA settlements report AWC’s in which FINRA hit two FAs for some misguided efforts toward good customer service.

In the Matter of Sandra Gose Stevens, FINRA Matter No. 2018058123701

Stevens was formerly registered with MML Investors Services, LLC, which terminated her in April 2018 concerning an alleged “signature irregularity.” FINRA thereafter initiated an investigation and made the following findings in the AWC:

“[A]s an accommodation to her customers, Stevens falsified documents, including IRA Distribution Forms, IRA Designation of Beneficiary Forms, and Variable Annuity Replacement or Insurance Change Forms, by copying, cutting, and then pasting customers’ signatures on documents. Stevens also had customers sign documents required to open accounts or effect variable annuity or insurance transactions in blank, so that Stevens could complete them at a later time.”

FINRA deemed the action of “cutting & pasting” a signature to be a Rule 2010 violation “even if done without fraudulent intent and ostensibly to assist a customer.” FINRA likewise found a Rule 2010 violation for maintaining blank signed forms, even if the purpose was “to accommodate possible future requests to open accounts or effect [future] variable annuity or insurance transactions …”

As a result of the violations, Stevens consents to a three-month suspension and a $5,000 fine.

In the Matter of James Lee, FINRA Matter No. 2019064508201

Lee was formerly registered with Pruco Securities LLC, which terminated his registration in October 2019. According to Pruco, Lee “impersonated two Prudential clients to obtain information regarding their accounts; one client verbally authorized his action.” Pruco’s Form U5 also suggested an unauthorized transaction but FINRA made no findings with regard to that allegation.

According to FINRAs AWC, with the customer’s permission: “Lee impersonated a customer on three telephone calls to an insurance company affiliated with the Firm. During these calls, Lee obtained information about how the customer could repay a loan that the customer had taken from his retirement account and Lee discussed a potential rollover from the customer’s retirement account.” Additionally, “Lee also impersonated a second customer on three telephone calls to the insurance affiliate. During these calls, Lee obtained information about the customer’s ability to withdraw funds from a retirement account. Lee also requested that the insurance affiliate cancel a rollover check that the customer previously requested, but which had not yet arrived in the mail, and reissue the check on an expedited basis. Although the customer gave Lee permission to request the cancellation and reissuance of the check, the customer did not authorize Lee to impersonate him.”

FINRA found Lee’s impersonations to have violated Rule 2010 and imposed a suspension of 15 business days and a $5,000 fine.

Herskovits PLLC has a nationwide practice defending individuals and companies subject to FINRA investigations and disciplinary proceedings. Feel free to call us at 212-897-5410 for a confidential consultation.

Maybe it’s just me, but it feels like FINRA has ramped up its caseload for undisclosed outside business activities and unapproved private securities transactions. This week alone, FINRA resolved two such cases in FINRA Matter No. 2018058026701, Alexander Jon James and FINRA Matter No. 2019061490801, Barry Robert Bode. Before analyzing the cases, it’s worth re-visiting the scope of these rules:

FINRA Rule 3270 (Outside Business Activities)

The rule is designed to prevent FAs from engaging in outside business activities absent written approval from the member firm. Generally speaking, the rule does not apply to the registered person’s personal passive investments (e.g., buying away) and activities conducted on behalf of a member firm’s affiliate (e.g., work for an affiliated investment advisory firm or insurance arm). Examples of reportable outside business activities could include providing accounting or consulting services, working for a start-up or sitting on a board of directors, acting as a real estate broker, and serving on the board of a religious or civic organization, among other things.

FINRA Rule 3280 (Private Securities Transactions)

Private securities transactions are transactions outside the regular scope of the FAs employment. Excluded from this broad rule are transactions subject to FINRA Rule 3210 (meaning, accounts at other broker-dealers and financial institutions), transactions among immediate family members without any selling compensation, and personal transactions in investment company and variable annuity securities. For those transaction covered by this rule, the FA is required to provide written notice to his employer and indicate his role in the transaction and he has received or may receive compensation. “Selling away” violations are typically covered by this rule.

Alexander Jon James — FINRA Matter No. 2018058026701

Alexander James was formerly associated with Voya Financial Advisors, Inc. According to FINRA, from January 2013 through July 2016, James engaged in an undisclosed outside business activity by forming and incorporating a company that charged users a monthly subscription fee for access to a website that could be used to seek funding for ventures. Apparently, James helped run the day-to-day operations and was paid $16,000 for his services. James’ arguably more serious violation was his decision to solicit 2 customers to invest a total of $667,000 in his company. This conduct causes obvious litigation risk for a broker-dealer since the customer may have believed the investment was vetted by the firm. According to BrokerCheck, one of James’ customers complained about an “unapproved, outside investment” which resulted in a $75,000 settlement. As a result of FINRAs alleged violations, James consented to a 1 year suspension and a fine of $10,000.

Barry Robert Bode — FINRA Matter No. 201906140801

Barry Bode was formerly registered with The O.N. Equity Sales Company. He was discharged by the firm in early 2019 for allegedly engaging “in an unapproved outside business activity related to the negotiation and sale of mineral rights on behalf of a client for compensation.”

According to FINRA, Bode violated Rule 3270 (outside business activity rule) by (a) forming an LLC and servicing as managing partner without notice to the member firm; (b) performing business consulting services that resulted in $7,000 of consulting fees; (c) contracting with an individual to market the mineral rights associated with property in Colorado; and (d) soliciting offers to purchase the mineral rights from energy and mineral companies. Although, according to FINRA, Bode ultimately submitted an outside business activity disclosure form, Bode failed to disclose the existence of the LLC or his role in it, or that he entered into contract to market, or that he, in fact, marketed the mineral rights. According to FINRA, Bode misled his employer failing to acknowledge that he had been a fee of $12,000 for his work in connection with the mineral rights. As a result of FINRAs alleged violations, Bode consented to a 2 month suspension and a fine of $5,000

Herskovits PLLC has a nationwide practice defending against FINRA investigations and disciplinary proceedings. Feel free to call us for a consultation at 212-897-5410.

On March 18, 2020, FINRA barred FA James Daughtry for his refusal to appear for an on-the-record interview, which is akin to a deposition. Daughtry consented to the bar from the securities industry by executing the Letter of Acceptance, Waiver and Consent (AWC) in Department of Enforcement v. James Blake Daughtry, Matter No. 2020065293201.

Background According to BrokerCheck, Daughtry entered the securities industry in 1999. He registered with Kestra Investment Services, LLC in February 2015 and remained with Kestra until his termination in March 2020. James Daughtry worked from a branch located in Dothan, Alabama.

FINRA’s Investigation

According to the AWC, “on February 21, 2020, in connection with an investigation into potentially fraudulent and unauthorized transactions in several of Daughtry’s customers’ accounts, FINRA sent a request to Daughtry for an on-the-record interview pursuant to FINRA Rule 8210.” Apparently, Daughtry’s attorney informed FINRA of Daughtry’s refusal to appear for the OTR.

Herskovits PLLC Herskovits PLLC has decades of experience representing defrauded investors as well as securities industry participants. Our firm has handled hundreds of FINRA arbitration claims and our principal attorney is a FINRA arbitrator and former in-house counsel for an investment bank. Feel free to call us for a consultation at 212-897-5410.

This is a classic case of buyer’s remorse. In the case at hand, FA Jeffrey Mohlman settled with FINRA by executing a letter of Acceptance, Waiver and Consent (called an AWC) and, in so doing, agreed to a bar from the securities industry. Apparently displeased with his decision, he filed an action in court seeking almost $900,000 in damages by claiming that FINRA “committed fraud by inducing Plaintiff to fail to testify at a second disciplinary interview, thus allegedly fraudulently avoiding an alleged requirement that Defendants consider mitigating factors in the Plaintiff’s disciplinary case…” Mohlman’s claims received a chilly reception by the U.S. District Court for the Southern District of Ohio (Mohlman v. FINRA, et al., Case No. 19-cv-154), which granted FINRA’s motion to dismiss on February 24, 2020.

Background

Mohlman entered the securities industry in 2001. In March 2015, Mohlman’s then-employer, Questar Capital Corporation, terminated his registration and filed a Form U5 claiming that Mohlman “resigned while under internal review for failure to follow firm policies and procedures regarding his participation in private securities transactions.” FINRA then launched an investigation and requested his appearance at an on-the-record interview (OTR) on September 11, 2015. On September 9, 2015, Mohlman’s lawyer informed FINRA that Mohlman received the OTR request but would be declining to appear. On September 17, 2015, Mohlman signed an AWC in which he agreed to a bar from the securities industry and waived various procedural rights.

Court Challenge

The essence of Mohlman’s claims against FINRA were summarized by the Court:

“Plaintiff complains that in entering into the AWC, FINRA allegedly failed to consider mitigating factors such as the death of a friend, the suicide of his brother-in-law and his own medications and medical history. He argues that the failure to consider these factors somehow led FINRA to fraudulently induce him to accept a bar from the securities industry. As result, Plaintiff seeks $891,000 in damages (legal fees, residual fees for lost business opportunities, reputational rehabilitation specialist fees, therapy fees, and punitive damages) against FINRA and Defendants Schroeder and Brown.”

The judge was not impressed by Mohlman’s arguments. The court held that Mohlman should have exhausted his administrative remedies (meaning, Mohlman should have rejected FINRA’s settlement offer and asserted his defenses before FINRA’s Office of Hearing Officers) instead of settling with FINRA and then later complaining about the settlement. According to the court:

“Plaintiff had the opportunity to litigate a FINRA disciplinary complaint and subsequently seek administrative review of any result at the SEC and thereafter in a United States Court of Appeals, which were the administrative remedies available to him under the Exchange Act. Instead, he accepted a settlement resulting in a bar from the securities industry, and he expressly waived his right to administrative review. Plaintiff cannot now ask this Court to reconsider the decision he made, while represented by counsel, several years ago.”

This case highlights the finality associated with a decision to sign an AWC. Before doing so, FA’s would be wise to carefully consider their rights upon consultation with experienced counsel.

Herskovits PLLC has a nationwide practice representing individuals and entities under investigation by FINRA, the SEC and the CFTC. Feel free to call us at 212-897-5410 for a consultation.

Courts call a lifetime bar “the securities industry equivalent of capital punishment.” PAZ Sec. Inc. v. SEC, 494 F.3d 1059, 1065 (D.C. Cir. 2007). It is a draconian measure which not only permanently removes you from the securities industry but also subjects you to “statutory disqualification” under Section 3(a)(39)(A) of the Securities Exchange Act of 1934 and all the collateral consequences that come with it.

Given the seriousness of a lifetime bar, a recently released AWC presents an alarming fact pattern in which a supervisor was barred due to the transgressions of an FA he failed to properly supervise. Let’s consider the case of Michael Leahy, FINRA Case No. 2019063631802. The question is, why did FINRA go after the supervisor with guns blazing?

The Applicable Rule: FINRA Rule 3110

FINRA appropriately demands that each member establish and maintain a system to supervise the activities of each associated person. Importantly, Rule 3110 requires that the supervisory system be “reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.” FINRA takes violations of Rule 3110 very seriously but rarely seeks a bar. According to FINRA’s Sanction Guidelines, violations of Rule 3110 would typically call for a monetary sanction of $5,000 to $77,000 and a suspension of up to 30 business days. Of course, in “egregious cases,” the Sanction Guidelines does call for suspensions of up to 2 years or even a bar.

Ok, so clearly FINRA thought Leahy’s conduct was “egregious.” The question is: why?

Underlying Facts

Interestingly, the underlying violations all occurred within a very short period of time: September 18, 2019 through October 9, 2019. During that period of time, according to FINRA, Leahy failed to reasonably supervisor an individual FINRA calls “PS.” According to FINRA, PS engaged in unauthorized trading, unauthorized use of margin, recommended excessive and unsuitable transactions, and charging excessive commissions.

According to FINRA, Leahy was aware of multiple “red flags” but failed to investigate those red flags or take action. The red flags highlighted by FINRA were:

• Leahy knew of PS from a prior firm and was aware of prior allegations of misconduct;
• Numerous customers complained to Leahy about PS’s supposed unauthorized trading;
• The broker-dealer’s clearing firm informed Leahy that it too received complaints of PS’s supposed unauthorized trading;
• A review of the trade blotter would have provided indicia of unauthorized trading;
• PS recommended inconsistent trading strategies. On the same day, PS would recommend that some customers buy “Security X” and other customers sell “Security X.”
• The firm’s trade blotter reflected a pattern of in-and-out trading by PS;
• PS was charging commissions that came near 5% or exceeded 5% (one time PS even charged a whopping commission of 11.8%).

Who is the Mysterious “PS”?

FINRA drops a hint by stating that the NJ Bureau of Securities issued a Summary Penalty and Revocation Order against PS. So, I did a little digging and here it is. Apparently, PS is Philip J. Sparacino, and Mr. Sparacino was apparently a very busy man at his old firm. According to the State of New Jersey, Sparacino engaged in a pattern of unauthorized and excessive trading starting in June 2019. And the numbers seem to support the Bureau’s allegation. From April 2019 through May 2019, Sparacino’s production totaled $24,258. However, once he inherited accounts in June 2019, his production skyrocketed to $1,452,514 from June 2019 through October 4, 2019. Incredibly, in the last 2 weeks of September 2019 alone, Sparacino generated production in excess of $450,000.

Not surprisingly, when FINRA reached out Sparacino he refused to respond to FINRA’s request for documents and information. As a result, Sparacino signed an AWC consenting to a bar.

Upshot

This case sends a warning to any supervisor who adopts the head-in-the-sand approach to supervisor. Clearly, FINRA will seek a bar when the facts warrant it.

Herskovits PLLC has a nationwide practice defending individuals and institutions with FINRA regulatory investigations. Feel free to call us for a consultation: 212-897-5410.

On January 3, 2020, FINRA released an AWC for Robert James D’Andria, Case No. 2017056579502. At first blush the AWC seems rather plain vanilla. The FA recommended high-risk products, in this case leveraged and inverse exchange-traded notes and funds, to retail investors and FINRA deemed those recommendations to be unsuitable. FINRA suspended the FA for 2 months and fined him $5,000.

In a typical suitability case, FINRA would claim that the account was over-concentrated in a given sector, or the position was too large relative to the portfolio as a whole, or the account was over-traded, or the investment was inconsistent with the investor’s stated investment objectives. And, in a typical case, FINRA would claim that the customer suffered meaningful losses.

In this AWC, however, FINRA does not claim that the investments were inconsistent with the customers’ investment objectives. Nor does FINRA claim that the investors were unsophisticated or otherwise lacked the ability to assess the merits of these investments. So, this begs the question: where’s the violation?

FINRA tips their hand by stating: “a representative may violate the suitability if he or she has no reasonable basis to make the recommendation to any customer, regardless of the investor’s wealth, willingness to bear risk, age, or other individual characteristics.”

Ok, so FINRA believes this guy didn’t have a “reasonable basis” for recommending the products he sold. And why is that? Well, here’s where things get interesting.

FINRA Rule 2111 has a reasonable-basis suitability obligation which requires, among other things, “associates person’s familiarity with the security or investment strategy.” Ah, so here’s where FINRA dinged the FA. They claimed he failed to do his homework before recommending the product. According to FINRA, the FA failed “to understand the unique features and specific risks associated with these products before offering them to his customers.”

So, what’s the takeaway lesson here: you better understand the product you are recommending and be able to explain the rationale for your recommendations to your firm and your regulator. Because if you can’t explain why you did what you did, an otherwise suitable recommendation can morph into an unsuitable recommendation in the land of FINRA.

The sanction assessed against the FA in this case was essentially middle-of-the-road for a suitability violation. For a Rule 2111 violation, FINRA’s Sanction Guidelines call for a fine of between $2,500 and $116,000 and a suspension of 10 days to 2 years. Given that FINRA suspended D’Andria for 2 months, the Enforcement attorneys must have concluded that some aggravating factors existed.

Herskovits PLLC has a nationwide practice representing individuals and firm facing a FINRA inquiry or disciplinary action. For a consultation, feel free to call us at 212-897-5410.

On December 20, 2019, FINRA announced a settlement with John Carneglia. According to the AWC, Carneglia violated FINRA Rule 3210 for failing to notify his member firm of a brokerage account and violated FINRA Rule 3270 for failing to timely disclose an outside business activity.

Underlying Facts

Carenglia was registered with BNP Paribas from June 2006 through July 2017. According to FINRA, Carneglia didn’t inform BNP of his wife’s brokerage account and likewise failed to inform the firm that maintained his wife’s account of his association with BNP. Further, FINRA alleges that Carneglia was a member of an LLC that owned an income-generating rental property (ski-resort condominium), yet failed to timely notify BNP of that outside business activity.

Relevant Rules FINRA Rule 3210

This rule is called “Accounts At Other Broker-Dealers and Financial Institutions.” The basic requirements of this rule are:

• You need written permission from your member firm to open or maintain an account at another institution in which securities transaction can be effected.
• You need to inform the executing member of your association with an employing member.
• This rule applies to any account “in which the associated person has a beneficial interest.” Beneficial ownership is presumed for accounts of the FA held by:
  • The spouse of the FA;
  • The children of the FA;
  • Any other related individual over whose accounts the FA has control; or
  • Any other individual over whose account the FA control and to whom the FA offers material financial support.

FINRA Rule 3270

This rule is called “Outside Business Activities of Registered Persons.” The basic requirements of this rule are:

• You need to give your employer prior written notice of any business activity outside the scope of the relationship with your firm.
• This includes being an employee, independent contractor, sole proprietor, officer, director or partner of any business from which you receive compensation or expect to receive compensation.
• EXEMPTED from this rule are passive investments and activities subject to the requirements of Rule 3280 (private securities transactions of an associated person).

Sanction Guidelines

According to FINRA’s Sanction Guidelines, failing to comply with Rule 3210 can result in a fine between $1,000 and $39,000 and “in egregious cases” a suspension up to 2 years or a bar. For undisclosed outside business activities, the Sanction Guidelines provide for a fine between $2,500 and $77,000 and a suspension of 10 days to 3 months.

Upshot of Carneglia’s Alleged Violations

FINRA suspended Carneglia for 2 months and fined him $15,000.

Herskovits PLLC

Herskovits PLLC has a nationwide practice defending individuals and institutions that are subject to regulatory investigations (including FINRA investigations) and disciplinary proceeding. Please feel free to call us for a consultation 212-897-5410. Also feel free to view our practice area page.

On December 16, 2019, FINRA released the AWC in Matter No. 2018060843801 (In re Molteni) [click here to read the AWC]. At first blush, the AWC seems to concern a garden variety violation in which the FA failed to amend his Form U4 to disclose two federal tax liens. This doesn’t seem to be the violation of the century, right? Even FINRA’s Sanction Guidelines suggest a regulatory slap on the wrist of a modest fine and 10 day suspension.

So here is where things get interesting. FINRA more or less sanctioned Molteni in accordance with the Sanction Guidelines. They hit him with a $5,000 fine and a 3 month suspension. However, FINRA also found that he “willfully” failed to disclose the federal tax liens. In the world of FINRA regulation, the word “willful” carries an awful lot of weight.

What does it mean to act “willfully”?

According to FINRA, a willful violation of the securities laws means simply that “the person charged with the duty knows what he is doing” and does not require that he also “be aware that he is violating one of the Rules or Acts.” Wonsover v. SEC, 205 F3d 408, 414 (D.C. Cir. 2000). A failure to disclose information on a Form U4 is willful “if the respondent of his own volition provides false answers on his Form U4.” Robert D. Tucker, Exchange Act Release No. 68210, 2012 SEC LEXIS 3496, at *41 (Nov. 9, 2012).

What are the implications of acting “willfully?

Here’s where FINRA drops the hammer. Under Section 3(a)(39)(F) of the Securities Exchange Act of 1934, a person is subject to statutory disqualification if, among other things, he “has willfully made or caused to be made in any application … to become associated with a member of a self-regulatory organization … any statement which at the time, and in light of the circumstances under which it was made, false or misleading with respect to any material fact, or has omitted to state … any material fact which is required to be stated therein.” 15 U.S.C. § 78c(a)(39)(F). Article III, Section 3 of FINRA’s By-Laws provides that a person subject to a statutory disqualification cannot become or remain associated with a FINRA member unless the disqualified person’s member firm applies for, and is granted by FINRA, relief from the statutory disqualification.

What are the implications of statutory disqualification?

So, although FINRA ostensibly suspended Molteni for 3 months, practically speaking, they barred him for life. Once an individual is subject to “statutory disqualification” that person cannot become or remain associated with a brokerage firm absent special permission from FINRA. You may ask, is it difficult to get “special permission from FINRA? If you asked that question, the answer would be “hell yes.”

If a brokerage firm wants to hire an individual subject to statutory disqualification, FINRA requires the member firm to complete a Membership Continuance Application (called an MC-400 application). If you’ve never seem one of those, click here. Basically, FINRA asks for a ton of information about the disqualifying event, information about how the firm will supervise the individual, and a lot of information about the firm itself. At the end of the day, firms don’t want a headache like this and I don’t blame them. Not only does the firm need to satisfy FINRAs demands in the MC-400 application but the firm also needs to participate in an “eligibility proceeding.”

Very few firms are willing to deal with the road-blocks associated with hiring a disqualified individual. For that reason, Molteni wasn’t suspended for 3 months. In reality, he was barred for life. And that is all because of the word “willful.”

Herskovits PLLC represents individuals and firms in defense of FINRA investigations and disciplinary proceedings. Feel free to view our practice area page here, or simply call us at 212-897-5410.

FINRA wants a member firm to enforce its written supervisory procedures. And FINRA wants a member firm to recommend securities that fit within the customer’s investment objectives. And certainly FINRA wants a member firm to avoid falsification of business records. So what happens when a member firm doesn’t quite live up to FINRA’s expectations? Let’s play the over / under game and try to guess the size of the FINRA sanction when a member engages in the following misconduct:

• Failure to enforce WSPs governing the sale of high-risk mutual funds subject to significant volatility
• Failure to reallocate portfolios to reduce risk or otherwise update investment objectives to correspond with the assumption of additional risk
• Failure to properly investigate exception report alerts
• And here’s the real ugly one: “adjustment” of customers’ risk tolerances and investment objectives without first seeking the customers’ input. Rest assured, it was clever lawyering that got FINRA to delete the word “falsification” and instead use the word “adjustment.”

Well, if the respondent were an individual, as opposed to NY Life, and the broker sold unsuitable securities, disregarded firm policy, and falsified new account forms, what would FINRA do? According to FINRA’s Sanction Guidelines: (a) “recordkeeping violations” can lead to a bar if aggravating factors predominate; and (b) unsuitable recommendations will likely lead to a bar if aggravating factors predominate.

Given that FINRA would wallop an individual, surely they’ll do the same with an institution that can readily pay a sizable fine….right?? Given FINRA’s allegations, we must be talking about a significant seven-figure fine, right?

Well….read on.

Case In Point

In the Matter of NYLIFE Securities LLC, FINRA Matter No. 2016050685102 (click here to read the AWC) Sanctions

• A fine of $250,000
• Restitution and rescission to 28 customers. The restitution amount equals $76,643. The rescission offer pertains to customers with unrealized losses totaling approximately $250,000.
• Censure

Hmmm….it looks to me like NYLIFE cut a sweetheart deal with FINRA.

Underlying Facts

From September 2014 to December 2016, NYLIFE had procedures for supervising the sale of higher-risk mutual funds as measured by volatility. The procedures, as one would expect, required such sales to align with the customers’ risk tolerances and investment objectives. During this time period, NYLIFE’s automated surveillance system flagged potentially unsuitable trades. For example, an alert was generated if a customer with an investment objective of “income with moderate growth” and a risk tolerance of “moderately conservative” sought to purchase a higher-risk mutual fund in an amount that exceeded 30% of the customer’s overall portfolio.

The alerts were reviewed by a group of “reviewers” who, in conjunction with registered persons, offered customers a choice: reallocate the portfolio to reduce risk, or change your investment profile to reflect a higher risk tolerance and more aggressive investment objective.

All of that was well enough; however, NYLIFE apparently didn’t allocate sufficient resources to the “reviewer” department and un-reviewed alerts began to pile up. To rectify this:

“Respondent’s reviewers adjusted customers’ investment profiles to accommodate a sale of higher-risk mutual funds without determining whether a representative had discussed the option of reallocation with the customer and typically without first contacting the customer. In fact, some customers’ investment profiles were changed before Respondent obtained information about the customers’ true risk tolerance and investment objective.”

The upshot of this was that the portfolio for a number of customers (approximately “four dozen” according to FINRA) with relatively conservative investment objectives was excessively weighted with high-risk mutual funds.

Analysis

I get that a $250,000 is not chump change. And I also recognize that the BD has to offer restitution and restitution, and apparently settled other customer complaints prior to FINRA’s intervention. Nonetheless, the allegations present a fairly damning fact pattern. FINRA alleges a complete breakdown of the system of supervision. And brazenly mismarking a customer’s investment objectives is conduct one expects from a bucket shop, not from a highly regarded financial institution.

Based on the facts alleged, along with the guidance in FINRAs Sanction Guidelines, it really seems like NYLIFE got off easily. According to the Sanction Guidelines:

Failure to Supervise – for systemic supervisory failures, the adjudicator should consider imposing an undertaking, such as engaging an independent consultant to revamp the supervisory systems. Where aggravating factors predominate, the adjudicator should consider suspending or even barring the firm. Additionally, the adjudicator should consider a fine of up to $310,000, or higher if aggravating factors predominate.

Suitability – the adjudicator should consider a monetary sanction of up $116,000 and consider suspecting a firm with respect to a set of activities for up to 90 days.

Herskovits PLLC

Herskovits PLLC has a robust practice defending individuals and entities against regulatory investigations and disciplinary proceedings brought by FINRA and other regulators. Click here for our landing page on FINRA investigations.

FINRA is on the look-out for violations of Rule 3280, which prohibits an FA from participating in a private securities transactions without giving written notice to the broker-dealer and receiving written approval. A “private securities transaction” is any securities transaction outside the scope of the FA’s employment with the broker-dealer. Private securities transactions remain a regulatory focus for FINRA. As noted by FINRAs CEO, Robert Cook, in the 2019 Risk Monitoring and Examination Priorities Letter: “we are particularly concerned about fundraising activities for entities that the associated persons control or in which they have an interest…”

Case In Point

In the Matter of Michael Jason Collins, FINRA Matter No. 2017056104801 (see the AWC itself)

Sanctions

• A 5 month suspension from association with any FINRA member in all capacities

• A fine of $10,000

Underlying Facts

Collins was terminated Robert W. Baird & Co. in October 2017. According to the Form U5 filed by the Firm, Collins was terminated because he “introduced [a] client to a private investment without Firm approval.”

According to FINRA, between February 2014 and December 2015, Collins participated in private securities transactions totaling approximately $200,000 without prior notice to Baird. Specifically, FINRA alleged that Collins solicited 15 individuals to invest in membership units of an LLC organized to operate a restaurant in Chicago. Although Baird approved Collins to invest in the LLC, the firm prohibited him from soliciting other investors. Nonetheless, FINRA found that Collins:

• Participated in the sale of membership interests
• Introduced investors to the restaurant’s business partners
• Discussed his own investment in the LLC with investors
• Attended networking events with the investors where the investment was discussed

Importantly, FINRA also found that 7 of the investors solicited by Collins were customers of Baird.

Analysis

The facts here make out a slam dunk case for FINRA. It certainly appears that Collins engaged in some serious no no’s. According to the facts presented by FINRA, Collins directly flouted his employer’s admonition not to solicit investments in the restaurant. To compound the problem, he apparently went to customers of the Firm to solicit investments. In so doing, Collins exposed Baird to litigation risk (it is possible that the customers thought the restaurant was a firm-sponsored investment, when it clearly wasn’t). Furthermore, by circumventing Baird’s system of supervision, he deprived Baird’s customers of the supervisory oversight they were entitled to.

FINRAs Sanction Guidelines provide guidance on proposed sanctions for selling away (private securities transactions). The Sanction Guidelines call for a monetary sanction of between $5,000 and $77,000, as well as a suspension of 10 days to 3 months for sales up to $100,000; 3 to 6 months for sales of $100,000 to $500,000; 6 to 12 months for sales of $500,000 to $1 million; and 12 months to a bar for sales over $1 million.

Given the facts of the case, Collins is fortunate that FINRA was willing to resolve the case within the sanction guidelines range.

Herskovits PLLC

Herskovits PLLC has a robust practice defending individuals and entities against regulatory investigations and disciplinary proceedings brought by FINRA and other regulators. Click here to see our landing page for FINRA regulatory defense.

Feel free to contact us to discuss your matter. 212-897-5410.