Articles Posted in FINRA Regulation

social-image-logo-og-300x300
On October 16, 2023, the Securities and Exchange Commission’s Division of Examinations released its 2024 examination priorities to inform investors and registrants of the key risks, examination topics, and priorities that the Division plans to focus on in the upcoming year. This year’s examinations will prioritize areas that pose emerging risks to investors or the markets in addition to core and perennial risk areas.

“The Division of Examinations plays a critical role in protecting investors and facilitating capital formation,” said SEC Chair Gary Gensler. “In examining for compliance with our time-tested rules, the Division helps registrants understand the rules as well as ensures that markets work for investors and issuers alike. The Division’s efforts, as laid out in the 2024 priorities, enhance trust in our ever-evolving markets.”

“Continuing to make our examination priorities public increases transparency into the examination program and encourages firms to focus their compliance and surveillance efforts on areas of potentially heightened risk to retail investors,” said Division of Examinations’ Director Richard R. Best. “We hope that aligning the publication of our examination priorities with the beginning of the SEC’s fiscal year will provide earlier insight to registrants, investors, and the marketplace of adjustments in our areas of focus year to year.”

00025601-300x166
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:

00025601-300x166
FINRA recently released Regulatory Notice 22-23 providing guidance on what firms should consider when constructing succession plans for Financial Advisors (“FAs”) who will no longer service their customers do to expected or unexpected life events.

The Need for a Plan

The Notice begins by listing the various cost/benefits of having or not having a succession plan, which would seem obvious to all.  It takes no great imagination to see the benefits of a sound succession plan in the event of an FA’s sudden death or the consequent difficulties of not having such a plan.  The Notice, however, provides some interesting real-life anecdotes that FINRA Staff have witnessed of the years regarding succession failures and successes.

00025601-300x166

It has been reported that Morgan Stanley conducted a “nationwide probe” of abuses associated with its Former Advisor Program, a sun-setting plan that allows retired FAs to receive a split of fees and commissions paid by former clients.  Further to this reporting, we conducted a survey of FINRA AWCs issued in the last 12 months in which FINRA claims an FA falsely used his individual rep code on customer trades in circumvention of the appropriate joint rep code, which would have yielded lesser compensation to the FA.  The results of this survey were interesting.  First, in virtually all cases, the FA worked for Morgan Stanley.  That is interesting.  It seems doubtful that people predisposed to rig the comp system work only for Morgan Stanley.  Second, substantial disparities exist with regard to the sanction imposed by FINRA.  Although the conduct is similar in all cases, FINRA’s sanction has ranged from a wrist-slap (10-business day suspension) to potentially career-ending (six-month suspension).

 

The table below illustrates the point (with hyperlinks to the AWCs):

 

Case No. FA Employing Broker-Dealer Sanction
2021071531701 Robert Barberis Morgan Stanley ·         One-month suspension

·         $2,500 fine

2021069218401 Michael Witt Morgan Stanley ·         One-month suspension

·         $5,000 fine

2021071562601 Jeffrey Martin Morgan Stanley ·         15-business day suspension

·         $2,500 fine

2018058614301 Richard Brendza Morgan Stanley ·         Six-month suspension

·         $5,000 fine

2020068897201 Steven Romjue Morgan Stanley ·         Six-month suspension

·         $5,000 fine

2021071847701 William Beasley Morgan Stanley ·         One-month suspension

·         $2,500 fine

2021072169601 Michael Campopiano Morgan Stanley ·         One-month suspension

·         $2,500 fine

2020068936501 Jazmin Carpenter Morgan Stanley ·         10-business day suspension

·         $2,500 fine

2019061720801 Jason Stannard Morgan Stanley ·         10-business day suspension

·         $2,500 fine

2021071276801 Thomas Foster Morgan Stanley ·         One-month suspension

·         $2,500 fine

2021070570201 Michael Dmytryshyn Morgan Stanley ·         10-business day suspension

·         $2,500 fine

2020068810301 John Miller Morgan Stanley ·         15-business day suspension

·         $2,500 fine

2019063245601 Robert Norris Cambridge Investment Research ·         Two-month suspension

·         $5,000 fine

 

This trend is troubling.  According to a study by J.D. Power, the average age of a financial advisor is 57 years old and approximately one-fifth are 65 or older.  It was estimated by Cerulli Associates that 37% of financial advisors (collectively controlling 40% of total industry assets) will retire within the next 10 years.

All of the major broker-dealers offer sunset plans for retiring FAs.  Merrill Lynch offers the “Client Transition Program.”  UBS offers the “Aspiring Legacy Financial Advisor Core Program.”  Morgan Stanley offers the “Former Advisor Program.”  Wells Fargo offers the “Summit Program.”  Given the age of the workforce, and the proliferation of sunset plans, I’m wondering this:  who is protecting the retiring or retired FA?  Is FINRA proactively protecting against abuses by the inheriting FA or are they simply waiting for Form U5s to drop?  Have firms other than Morgan Stanley audited their sunset plans to ensure that production credits are properly allocated to the retired FA?

The cynic in me believes nothing is being done to protect the interests of participants in the various sunset plans.

Herskovits PLLC represents financial advisors nationwide.  Feel free to call us at (212) 897-5410 to discuss your case.

00025601-300x166
FINRA’s Office of Hearing Officers recently rendered a decision on an issue of first impression in Dep’t of Enforcement v. NYPPEX, LLC, et al., (Disc. Proc. No. 2019064813801).  Enforcement charged FINRA member firm, NYPPEX, LLC, its former CEO, Laurence Allen, and its CCO, Michael Schunk, with numerous violations of FINRA rules. The charges stemmed from Respondents’ conduct in the wake of a temporary restraining order issued by a New York state court against Allen.  Among other things, the order, obtained at the behest of the Office of the Attorney General for the State of New York (“NYAG”), enjoined Allen from engaging in securities fraud and violating New York’s securities laws. Enforcement took the position that the TRO rendered Allen statutorily disqualified from continued association with a FINRA member firm.  Allen could have remained associated with the Firm if it applied for, and received, FINRA’s permission pursuant to FINRA Rule 9520.  Allen’s supervisor, Schunk, however, purportedly let Allen continue as an associated person at NYPPEX for over a year without seeking a waiver from FINRA.

FINRA’s disciplinary proceeding was triggered by the ex parte TRO.  After a two-year investigation, in December 2018, the NYAG commenced an action under Article 23-A of New York’s General Business Law, known as the Martin Act, against Allen and certain others.  The NYAG applied on an ex parte basis for preliminary injunctive relief against Allen, NYPPEX Holdings, and others under Section 354 of New York’s General Business Law.  The NYAG stated that a preliminary injunction was warranted because of the allegations of fraud and fraudulent practices by Allen and his refusal to produce documents or appear for testimony.  In December 2018, the Supreme Court of the State of New York granted the NYAG the relief it sought and issued the TRO without hearing from Allen or NYPPEX.  Allan was served with the Order in January 2019 and Schunk learned about it that month as well.

On December 4, 2019, the NYAG filed a complaint in the New York Supreme Court against NYPPEX, Allen and others (Index No. 452378/2019).  In February 2020, the New York Supreme Court concluded a five-day hearing and issued a preliminary injunction prohibiting Allen and NYPPEX from, among other things, violating the Martin Act and from “facilitating, allowing or participating in the purchase, sale or transfer of any limited partnership interest in [the fund].”  At this point in time, NYPPEX filed an MC-400 Application seeking permission for NYPPEX to remain associated with a disqualified person, Allen.  FINRA Enforcement, however, argued that Allen became statutorily disqualified when the TRO was issued in 2018, more than a year before NYPPEX filed the MC-400 Application.

00025601-300x166
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,

00025601-300x166
FINRA recently released Regulatory Notice 22-18, reminding firms about their obligation to supervise registered representatives to prevent falsification of digital signatures.  FINRA’s guidance comes on the heels of multiple investigations concerning instances when registered representatives forged or falsified client signatures on account transfer documentation or on disclosure forms, “acknowledging a products alignment with the customer’s investment objective and risk tolerance . . . .”

FINRA’s notice explains the varied methods used to forge or falsify electronic signatures and how firms can thwart such forgeries or detect them after the fact.  Generally, electronic signatures have an audit trail with identifying information such as the recipient’s IP address and e-mail address.  Financial advisors have been admonished for sending documents to their personal e-mail addresses or to an assistant to sign the documents themselves.  Firms also found instances where documents were sent to an IP address that was the same as the registered representative or that was inconsistent with the customer address on file.  Sometimes representatives sent e-mails to the e-mail address associated with an outside business activity.  FINRA’s guidance recommends that firms review correspondence to look for these red flags.

FINRA reports that, in some cases, administrative staff raised issues to management about pressure by representatives to manipulate the digital signature process.  FINRA encourages training for such staff to encourage them to resists such pressure.

00025601-300x166
Practitioners are familiar with the fact that a failure to respond to a FINRA Rule 8210 request almost automatically results in an industry bar.  Except when it doesn’t.  The Office of Hearing Officers (the “OHO”) recently published a decision in which it discussed what the Hearing Officer referred to as a “partial but incomplete response” to FINRA’s requests for testimony.

In March, the OHO rendered a decision against Jason DiPaola who was accused by FINRA Enforcement of taking discretion in his mother’s E-trade account without written instructions and without disclosing the account to his employer Chardan Capital Markets, LLC (“Chardan”) in violation of NASD Rule 3050.   Dep’t of Enforcement v. DiPaola, Discip. Proc. No. 2018057274302 (OHO Mar. 25, 2022).  The OHO, however, claimed that the “most serious allegation” was DiPaola’s failure to appear and provide on-the-record (“OTR”) testimony.

DiPaola was not a trader at Chardan and had no retail customers.  DiPaola worked in the firm’s equity capital markets group.  DiPaola was first interviewed by FINRA Staff in January of 2018.  The Staff obtained account statements for DiPaola’s E-trade accounts and his mother’s E-trade account.  FINRA also obtained over a million e-mails from Chardan.

00025601-300x166
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.

00025601-300x166
On May 6, 2022, FINRA released a “Discussion Paper – Expungement of Customer Dispute Information” (the “Discussion Paper”) to address what FINRA clearly sees as problems with the current system for expunging customer complains.  Let’s be clear from the outset, FINRA is openly hostile to the expungement of customer complaint information.  FINRA is particularly hostile to what they describe as “straight-in” expungement arbitrations where the financial advisor seeks expungement by naming their  firm as the respondent (typically after a customer arbitration has settled).

As many practitioners know, FINRA passed an amendment, effective September 14, 2020, establishing a minimum filing fee for expungement arbitrations.  The Discussion Paper touts the success of this amendment in reducing the number of straight-in expungement actions by 37% between 2019 and 2020.  Thus, FINRA makes it clear that its goal is reduction of expungement claims rather than making sure the claims have merit.

The tone of the Discussion Paper starts off somewhat defensive as FINRA makes sure to let the public know how few expungements are actually awarded every year.  Between January 2016 and December 2021, approximately 8 percent of financial advisors registered with FINRA had a customer dispute disclosure on their record and only 1 in 10 had customer dispute information expunged during that time period.  If expungement of customer dispute information is so rare, it is hard to understand why FINRA has as they put it, “engaged in longstanding efforts with NASAA and state securities regulators to explore a redesign of the current expungement process.”  I recently blogged about the Alabama Securities Commission’s (“ASC”) intervention into an expungement award confirmation proceeding and the ASC’s very dim view of the “straight-in” expungement process.  In light of the intervention and then the subsequent release of this Discussion Paper, it seems likely that more state regulators than just Alabama are unhappy with the current expungement system.

Contact Information