Street Legal: The Woodshed
Why is it always the little guy who gets sent to the regulator's woodshed?
The website for FINRA member firm Fortune Financial Services (FFS) describes the firm as an independent broker/dealer headquartered in a historic building in downtown New Brighton, Pennsylvania. FFS handles mutual funds, variable and fixed annuities and life insurance products, and mortgages, catering to the independent and/or part-time financial planner and mortgage specialist. “We believe in the part-time producer and have found this works very well for those individuals and their clients who have a natural market outside the securities industry (i.e. CPAs, P&C agents, etc),” the website says.
FINRA seems to have had quite a different view of how well FFS's business models worked. Among other things, FINRA found that acting through Registered Principal Brian Lee Daniels, FFS failed to maintain and preserve all of its business-related electronic communications (and lacked adequate policies and procedures relating to such record retention); improperly increased the number of registered representatives in its offices despite failure to obtain FINRA's approval; and conducted business at unregistered branch offices.
Sent to the Woodshed
Without admitting or denying the allegations, respondents FFS and Daniels consented to the entry of findings and sanctions pursuant to FINRA's Acceptance, Waiver and Consent (AWC) settlement process. Daniels was fined $25,000 and suspended nine months in Principal capacities only.
FFS was censured and fined $125,000 — but it's what comes next that's truly noteworthy. In addition, FFS was prohibited for 90 days, commencing five business days after issuance of the AWC, from registering any associated persons, except for individuals who perform only compliance and/or supervisory duties.
And don't think for a minute that once the 90 days expires, poof, things automatically go back to normal. No, the termination of the registration prohibition is contingent upon FFS certifying to FINRA in writing that
- it complied with the prohibition (within 10 business days after the ban); and
- systems and procedures are in place that are reasonably designed to achieve compliance with laws, rules and regulations concerning the preservation of electronic mail communications (within 90 days of the issuance of the AWC).
FINRA sent FFS to the woodshed: You got 90 days to get your act together before you even think about hiring more retail folks. There have to be consequences, says the self regulator. This time it's a six-figure fine and a veritable shut-down of retail hiring for three months. Next time? Well, there better not be a next time!
In October 2009, FINRA issued the so-called Madoff Report, which was highly critical of its own examination, investigative, and prosecutorial failures. (See my blog, BrokeandBroker.com, for a more extensive discussion of the report) There was a lot of hand wringing in that report. A lot of promises and apologies. Of course, this is the same FINRA that is now lobbying to expand its empire into the investment advisory and financial planning sectors.
Is Saying “Sorry” Enough?
Why does there always seem to be a regulatory woodshed for FINRA's member firms and registered reps but no place for the regulator to take a time-out when it misbehaves? Was FINRA fined for its lapses as documented in the press and its own Madoff Report? Not that I have read. Were any senior level FINRA regulators suspended or fired? Again, not that I have read. Oddly, FINRA imposes a hiring ban upon the likes of FFS, yet sees no inconsistency with simply sloughing off its own shortcomings and seeking even more responsibilities among investment advisors and financial planners (with the concomitant increase in revenues).
Similarly, need I run through the litany of now discredited and tarnished major FINRA firms? Given the devastation that the big boys brought to our economy and the ever unfolding tales of regulatory misconduct, should we have expected, by now, that FINRA would have shackled those behemoths with the same devastating hiring bans and creative sanctions that seem so easily crafted for the indie/regional community?
Yeah, I know, it's never the same when you compare the financial supermarkets to the mom-and-pops. It's different. You have to understand that the larger firms only engage in unintentional lapses. It's the little guys who always engage in intentional fraud. You wouldn't really expect FINRA to shut down a household name, would you — not even for, say, 90 or so days? Perish the thought.
Bill Singer is the publisher of RRBDLAW.com and BrokeAndBroker.com
