Articles Posted in FINRA AWC

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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

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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:

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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.

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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.

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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.

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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

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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?

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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.

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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”?

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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
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