In December FINRA’s new Rule 5123 went into effect.  The Rule requires members selling securities issued by non-members in a private placement to file the private placement memorandum, term sheet or other offering documents with FINRA within 15 days of the date of the first sale of securities, or indicate that there were no offering documents used. The Regulatory Notice, which includes the text of the rule is available here - Private Placements of Securities SEC Approves New FINRA Rule 5123 Regarding Private Placements of Securities.

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FINRA Notice of New Procedures for Late Disclosure Fees

FINRA has implemented new procedures regarding application of the late disclosure fee under Section 4(h) of Schedule A to the FINRA By-Laws to the reporting of judgment/lien events on Forms U4. Under the new procedures, FINRA is requesting that member firms provide the date the registered person learned of the judgment/lien on Form U4 when reporting such events and will assess the late disclosure fee based on that date.

The full FINRA Notice is available at its web site. If you have questions or issues with U-4 or U-5 disclosures, contact my firm at info@beamlaw.com to see if we can help you with those questions, or to remove questionable disclosures through an expungement procedure.

FINRA Small Firm Board Candidates Unload on the SRO

There are three candidates for one of the small firm seats on the FINRA Board of Directors, and they are taking aim at FINRA.

I have written about FINRA's unfair, or uneven, policies where small firms are treated more harshly than larger firms, and it is clearly a problem. Adding three small firm seats to the board did not help, but maybe this spotlight on FINRA will be a move in the right direction.

There is more at InvestmentNews.com...

FINRA Targeting Small Firms and Individual Brokers?

FINRA Respondent Wins Case, Now Running for FINRA Board

Three years ago, Kevin Carreno was about to become the top securities regulator in Florida, by way of an appointment by the Governor. However, as the appointment was being announced, FINRA decided to file an enforcement proceeding against Mr. Carreno, and the appointment slipped away.
Kevin believed that the enforcement case stemmed from an animus that developed between him and some Finra officials over his earlier, rigorous defense of a broker-dealer client, and fought the charges. In a rare decision, the FINRA hearing panel threw out all of FINRA Enforcement's claims - but that was too late for the Florida securities post.
Now Kevin is running for a seat on the FINRA Board of Governors. I have known Kevin for many years,he is not only an attorney but a well known and respected compliance professional. His background, experience and knowledge will make him an excellent addition to the FINRA Board. Having witnessed first hand the harm that an abusive regulator can cause to even the most respected securities professional, his election might bring some balance to an organization that is too often abusive towards member firms - in particular small firms.
Kevin is running for one of three small firm seats on the FINRA Board. The small-firm seat became available earlier this month when FINRA Board member Joel Blumenschein, president of Freedom Investors Corp., resigned after settling failure-to-supervise charges brought by Finra enforcers last September. Mr. Blumenschein's term was due to expire in August. We wrote about his settlement, the fact that he remainded on the Board despite being suspended, and his ultimate resignation.
Potential candidates for the vacant seat have to collect signatures from 3% of the 4,059 small firms registered with Finra in order to get on the ballot.
Read the InvestmentNews Article - If you can beat 'em, join 'em: Finra target now running for board - InvestmentNews
Related Articles

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FINRA Director Calls It Quits

I posted an article last week about this case - a FINRA Director entered into an AWC with FINRA over the operation of his brokerage firm, paid a fine and received a 90 day suspension. That in and of itself is not terribly notable - but he remained on FINRA's Board of Directors. THAT was notable. My article, FINRA Board Member Fined - Wrist Slap for a Prominent Member? analyzed the case, the fine and the penalty, and posed the question, What was FINRA thinking when they let him stay on the Board?

Well, he stepped down this week. At least he had more sense than his organization did. The Wall Street Article is here - Finra Director to Step Down- complete with a quote from me.

FINRA Fines Citi, Morgan, UBS and Wells $9.1 Million for ETFs

FINRA announced that it has fined Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for not having a reasonable basis for recommending the securities. The firms were fined more than $7.3 million and are required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers. Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products."

We have represented investors who lost significant sums of money in leveraged ETFs, which are securities which seek to deliver multiples of the performance of the index or benchmark they track. Inverse ETFs seek to deliver the opposite of the performance of the index or benchmark they track, profiting from short positions in derivatives in a falling market.

FINRA found that from January 2008 through June 2009, the firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers. The firms' registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile.

 More...

FINRA Board Member Fined - Wrist Slap For a Prominent Member?

An executive at a small brokerage firm is accused by FINRA of  of failing to supervise a broker who engaged in unsuitable penny stock trades, and after the affected client complained, the firm improperly agreed to guarantee the client against losses. As part of that guarantee, FINRA said Freedom Investors got the customer to agree not to file a complaint with FINRA.

Let's review - failure to supervise, unsuitable trades, unsuitable penny stock trades, guaranteeing a client against losses, obtaining agreement not to file a complaint with FINRA.

The fine? Let's be fair - the fine and penalty depends on the details. There are different degrees of failing to supervise, depending on who the supervisor is, the conduct, and who is being supervised. The details of the guarantee make a difference, and given FINRA's history of overstatement in its charges and press releases, it is possible that is a very mild, borderline "guarantee." Finally, we don't know what that agreement says about filing a "complaint with FINRA." If it is referring to a regulatory complaint, that is a problem. If they are referring to an arbitration complaint, it is not an issue at all. You can settle with a customer and have him agree, as part of the settlement that he is not going to sue you - that is the point of the settlement. But you cannot settle with a customer and get him to agree not to cooperate with FINRA in an investigation. That is a significant violation.

Referencing FINRA's own Sanction Guidelines, the starting point for FINRA's Enforcement Staff when they bring a case says: impeding FINRA investigation, a fine of $2,500 to $50,000, PLUS a suspension of one month to two years. Guaranteeing a customer against a loss, a fine of $2,500 to $25,000 plus a suspension of 30 days, or up to 2 years or a bar in egregious cases.

When I started looking into this my thought was that the penalties were too low. Using the guidelines, that may not be the case. Again, it depends on the details, but a $30,0000 fine and a 90 day suspension is within the guidelines. There are commentators who are arguing that the fine is a wrist-slap. Keep in mind that the supervisor did not do anything wrong to the customer, and the fact that he will be out of work for three months, with no compensation, plus a $30,000 fine, that sanction is not exactly mild.

Now add this to the mix - "His testimony, under oath, was at times both evasive and contradictory, thus highlighting the system's inadequacies." that is not good, and surely will increase the amount of the fine.

The real question is what would the fine and suspension have been if the broker was an executive at one of the thousands of small brokerage firms in this country. First, a 90 day suspension for an executive can be quite damaging to a small firm, as you lose a member of what is by definition a small management team for a quarter. But I have significant doubts that an executive of a small firm with that type of charge would have gotten a 30 day suspension - a year would have been more like it.

I don't know Mr. Blumenschein and as a defense attorney, I am happy for him that he was able to resolve the case with FINRA. But what is FINRA thinking? The man is on FINRA's Board of Directors! He gives "evasive and contradictory" answers during the investigation, he guarantees a customer against a loss, you suspend him for a month, and you let him stay on the Board, setting policy and making decisions that affect the whole industry?

Mr. Blumenschein may very well be a terrific Board Member, but what sort of message is FINRA sending by having him stay on the Board under these circumstances?

Finra suspends, fines its own board member

FINRA Fines Merrill Lynch $1 Million for Failure to Arbitrate Disputes With Employees

FINRA has fined Merrill Lynch, Pierce, Fenner & Smith $1 million for failing to arbitrate disputes with employees relating to retention bonuses. Registered representatives who participated in the bonus program had to sign a promissory note that prevented them from arbitrating disagreements relating to the note, forcing the registered representatives to resolve disputes in New York state courts.

After merging with Bank of America in January 2009, Merrill Lynch implemented a bonus program to retain certain high-producing registered representatives and purposely structured it to circumvent the requirement to institute arbitration proceedings with employees when it sought to collect unpaid amounts from any of the registered representatives who later left the firm. FINRA rules require that disputes between firms and associated persons be arbitrated if they arise out of the business activities of the firm or associated person.

In January 2009, Merrill Lynch paid $2.8 billion in retention bonuses structured as loans to over 5,000 registered representatives. Merrill Lynch structured the program to make it appear that the funds for the program came from MLIFI, a non-registered affiliate, rather than from the firm itself, allowing it to pursue recovery of amounts due in the name of MLIFI in expedited hearings in New York state courts to circumvent Merrill Lynch's requirement to arbitrate disputes with its associated persons. Later that year, after a number of registered representatives left the firm without repaying the amounts due under the loan, Merrill Lynch filed over 90 actions in New York state court to collect amounts due under the promissory notes, thus violating a FINRA rule that requires firms to arbitrate disputes with employees.

FINRA Fines Merrill Lynch $1 Million for Failure to Arbitrate Disputes With Employees

FINRA Fines Citigroup Global Markets $725,000 for Failure to Disclose Conflicts of Interest in Research Reports

FINRA has fined Citigroup Global Markets, Inc. $725,000 for failing to disclose certain conflicts of interest in its research reports (published from January 2007 through March 2010) and research analysts' public appearances. Due to technical deficiencies, the database Citigroup used to identify and create disclosures was inaccurate or incomplete. In concluding this settlement, the firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

FINRA Fines Citigroup Global Markets $725,000 for Failure to Disclose Conflicts of Interest in Research Reports

FINRA Fines Credit Suisse Securities $1.75 Million for Regulation SHO Violations and Supervisory Failures

FINRA has fined Credit Suisse Securities (USA) LLC $1.75 million for violating Regulation SHO and failing to properly supervise short sales of securities and marking of sale orders. As a result of these violations, Credit Suisse entered millions of short sale orders without reasonable grounds to believe that the securities could be borrowed and delivered and mismarked thousands of sales orders. Reg SHO requires a broker or dealer to have reasonable grounds to believe that the security could be borrowed and available for delivery before accepting or effecting a short sale order. Requiring firms to obtain and document this "locate" information before the short sale is entered reduces the number of potential failures to deliver in equity securities. In addition, Reg SHO requires a broker or dealer to mark sales of equity securities as long or short.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "Credit Suisse's Reg SHO supervisory and compliance monitoring system was seriously flawed. Millions of short sale orders were being entered in its systems without locates for over four years because the firm did not have adequate Reg SHO technology and procedures in place."

FINRA Fines Credit Suisse Securities $1.75 Million for Regulation SHO Violations and Supervisory Failures

FINRA and Ontario Securities Commission Sign Regulatory Cooperation Arrangement

FINRA and the Ontario Securities Commission (OSC) today announced they have entered into a Memorandum of Understanding (MOU). The MOU will facilitate the exchange of information with respect to regulated entities that operate across the U.S.-Canadian border. It was signed in Toronto on Nov. 10, 2011, and establishes a strong framework to improve the ability of the OSC and FINRA to oversee securities firms and markets. The arrangement will aid the exchange of information on firms and individuals under common supervision, support collaboration on investigations and enforcement matters, and provide a more complete view of market activity.

Mr. Wetston, Chair of the OSC, said, "Cross-jurisdictional regulatory coordination is essential for protecting investors in today's global marketplace. This framework acknowledges the interconnectedness of our markets and represents our commitment to working collaboratively with our international regulatory partners to address threats to investors and markets."

FINRA and Ontario Securities Commission Sign Regulatory Cooperation Arrangement

Small Broker-Dealers Closing At Fast Pace

Over 500 broker-dealers are expected to close in the coming year. That is not a good sign for the industry or for our collective financial health. If investors are limited to dealing with the banks for their investment and financial lives we will see more travesties like Lehman Principal Protection Notes, auction rate securities, CDOs and other "products" that allow the firms to take a position that is opposite what they are telling clients to do.

A large part of the problem, if not the entire problem, is over zealous regulation. While FINRA talks a good game, that message has not filtered down to the field, and there is far too much of a "gotcha" mentality. Its the regulations and overzealous enforcement that is going to put the firms out of business. I just wrote about this problem - FINRA Targeting Small Firms and Brokers?

FINRA needs to wake up. Smaller firms provide the advice, attention and real-deal financial counseling that individual clients need. Sure, there are some great financial advisers at the wire-houses - I represent tons of wire house reps all of whom care deeply for their clients - but the firms themselves are just poorly run machines with no regard for anything other than making a buck. Driving the small firms and brokers out of business with expensive and unnecessary compliance programs, coupled with outrageous fines and penalties for bookkeeping errors is harming our economy, not helping it.

Broker-dealer shrinkage: Closures rapidly outpacing new entrants

FINRA Targeting Small Firms and Individual Brokers?

John Crudele at the NY Post recently penned a column Small Firms Claim FINRA Targets Them that is generating quite a reaction. We represent a large number of small firms, ranging from firms with 5 registered representatives to approximately 300 registered representatives, and our clients are the ones who originally alerted us to the article. There is a fair amount of truth to the article - FINRA is much more aggressive with small firms than it is with big firms.

Anyone who follows FINRA enforcement proceedings has a hint of the disparity, when we see wirehouses like Merrill Lynch and Bank of America receive the equivalent of wrist-slap fines for their violations. What the general public does not know is that for the same violation at any of the other 4,000 firms in the country the fine would be multiples, on a percentage basis, against the small firm, and the charges would include charges against individuals at the firm, not just the firm. When was the last time you saw FINRA name Ken Lewis or John Thain in an enforcement proceeding? Don't bother looking, it has never happened, but take a look at how often they name the president or senior executive of a BD with hundreds of brokers as a respondent.

The simple fact is that FINRA is out to show how tough it is which causes numerous problems. FINRA examiners simply love to spend months at a firm during a routine audit - yes, I said months. Imagine trying to run your business while you have to dedicate a conference room to two examiners, provide them with a staff member to fetch documents and make copies for them, and make yourself available on a moments notice to answer questions. Now imagine that going on for 4 or 5 or 8 months, every day.

This of course is in addition to the hours spent complying with the morass of rules and regulations that often do not apply to your particular business model, knowing all the while that one missed form, one account not verified, or one other slip up could cost you a fine starting at $2,500.00. It is not a pleasant existence.
And FINRA knows that the small broker-dealers, and individual brokers, cannot afford the fight - so FINRA brings the fight, but brings it against the small broker-dealers and individual brokers, betting on the fact that the firm cannot afford to fight and will therefore settle the charges, regardless of how questionable the charges. It happens every day.

But now smaller firms and individuals are starting to fight back and are devoting the resources to defend themselves against the FINRA onslaught. And we are starting to see a turn in the statistics.
The heavy-handed issue remains, and Mr. Crudele has now posted a followup, - Tales from Wall St. about heavy-handed Finra detailing the reaction he has received to the original article and promising more articles on FINRA's apparent desire to destroy the small broker-dealer industry.

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FINRA Fines Credit Suisse $4.5M; Merrill Lynch $3M - Financial Planning

The Financial Industry Regulatory Authority has hit Credit Suisse Securities LLC with a $4.5 million fine and Merrill Lynch with a $3 million fine for not properly representing data and supervising the residential subprime mortgage securitizations they sold.
The fines, which were announced by independent regulator FINRA on Thursday, were for improper handling that took place at the firms in 2006 and 2007. Each firm’s violation prevented certain investors from adequately understanding the nuances of residential subprime mortgage securities (RMBS), according to FINRA’s investigation.
RMBS are subject to certain disclosure rules when they are sold. Firms are required to provide investors with past delinquency rates for similar financial products. They are also required to tell investors how they calculated those delinquency rates.
Both Credit Suisse and Merrill Lynch failed to adequately follow those rules, according to FINRA.

Judge Dismisses Suit Against FINRA for Misleading Members

I am still waiting for a copy of the decision, but according to InvestmentNews.com, Judge Rakoff of the SDNY has dismissed the suit brought by two member firms against FINRA for misleading its members in connection with the merger with NYSE Enforcement.

According to the article, Judge Rakoff held "SROs and their officers are absolutely immune from private damages suits challenging official conduct performed within the scope of their regulatory functions."

There are two obvious problems with this decision. First, FINRA consistently argues, when it suits its purpose, that it is not a government entity, and therefore the proscriptions on its conduct that would apply to a government entity do not apply to it's conduct. Second, the conduct had issue has little if anything to do with the regulatory function of FINRA, it was an organizational matter, and the material put forth to the members in order to vote on a proposal, was allegedly false.

I am certainly not an expert on governmental immunity, but it seems to me that the immunity issue arises, if at all, in connection with the regulatory function. For example, a broker cannot sue FINRA for misconduct in the course of an investigation. If FINRA is a government entity or actor, that is fine. Of course, if it is a government entity or actor, individuals appearing before it have a Fifth Amendment right, which we all know FINRA members do not have, because FINRA is not a government entity or actor. Alice, meet the looking glass.

But now we have a membership organization that has immunity for claims of lying to its membership in connection with a merger with another membership organization?

Something is wrong here. Something is very wrong.

More>>>

Finra Cracks Down On Arbitrator Credentials

According to Financial Advisor Magazine, FINRA is plugging a loophole that has allowed many of its 6,200 arbitrators to serve on its panels without first checking their credentials. According to the article, FINRA began background verification of arbitrators in October 2003. However, the bona fides of those who had joined its ranks before then were not checked—until now. More>>>

Brokers Being Trashed Again By FINRA

We all know that FINRA, along with the SEC, has been taking a beating over the past year for its failures to uncover significant frauds that have costs investors millions of dollars. There is no need to re-hash all of that, but now FINRA is attempting to do something to fix its image.

And that something is to expand BrokerCheck. Not increased survelliance of brokerage firms, not better education of examiners, not more training for the examination teams - they are going to expand the disclosures on BrokerCheck to further defame and discredit individual brokers.

There has been a discussion over recent months to keep brokers information on BrokerCheck for more than two years after a broker leaves the industry. There are a number of good arguments on both sides of that debate, but FINRA is going ahead with a proposal to keep those records online for an undisclosed period of time after the broker is no longer under its jurisdiction.

At the same time FINRA also announced that it wants to expand the civil and criminal complaint histories of its BrokerCheck service, which would give the general public more information on brokers. Sure, more information is always good, right?

Wrong. FINRA is proposing to include information that is not reportable on Form U-4 and is going to do so on the Internet. Certain reporting items, such as customer complaint letters that are filed, but never pursued, are not reportable on Form U-4 after two years have passed. The rationale for non-disclosure is clear and simple - a customer filed a complaint, he never filed an arbitration or a lawsuit, and the firm and broker never paid him any money. There is no reason to continue to report that complaint, since there is no finding of wrongful conduct, and an implication that the complaint was not a meaningful complaint, since the customer never pursued it.

Having taken that position for decades, and while continuing to maintain that position, FINRA is now proposing to disclose these non-meaningful, unsworn and unproved complaints on BrokerCheck! A customer sends a complaint letter, accusing his broker of all sorts of wrongful conduct, never pursues the complaint, never files an arbitration, and FINRA wants to make that complaint public. Sure, that will ehance the public's respect for FINRA, at the expense of the tens of thousands of brokers who have such an item in their history.

FINRA also takes the position that an arbitration claim that is settled for less than $15,000 is not reportable, for similar reasons. Suddenly, while maintaining that these decisions are not meaningful or significant, they are proposing to put them on BrokerCheck as well.

The disclosures that brokers must make are intrusive, and unnecessary to the regulatory purposes. The argument has always been that the information about arrests that are dismissed, complaints that are never proven, are all part of the mix of information that is necessary to properly regulate the industry. Fair enough, and since the information was not going to be publicly disclosed, there was not too much of a debate about the disclosures.

Now FINRA is changing course, and going to make that information public, as if that information would have stopped the 50 billion dollar fraud that FINRA's examiners missed year after year.

Why is it that FINRA attempts to address its own regulatory failings by trashing brokers. Why not clamp down on misconduct at the firm themselves?

Could it be that brokers are easy targets, with no trade organization, and have no meaningful voice in the process that affects them so profoundly?

 More>>>

Bad Advice -Ignore FINRA Social Media Guidance

Securities regulation is a big deal for those in the industry. The mix of rules, regulations and regulators is a dangerous web of potential violations, fines and suspensions. But those who are in the industry know that the regulators are serious, that they are looking for violations, and will bring actions for those violations.

Maybe it is a sign of the Madoff times, but I can't help but shutter when I read comments from supposedly educated and experienced people who comment on rules and regulations. We all know that FINRA has released its social media guidelines. And we know that like most topics, there can be more than one opinion on the impact of new pronouncements.

Some think that the guidelines are too vague, and therefore meaningless. The vagueness that they are referring to is a desire to meet two goals - first to insure that new rules and regulations address a wide range of situations, and second, to allow firms to create their own supervisory system to meet the challenges of their particular mix of issues. For the inexperienced, bright line tests are better because they are easier. The experienced prefer principle-based regulation - tell me what you want to accomplish, and I will figure out the best way for me and my firm to get there.

But that claim of vagueness has led to another unfortunate, and potentially dangerous conclusion. From a legal blog today, talking about FINRA's social media guidelines:

Investing blogs seem to be eyeing the rules with a wary eye, but the consensus seems to be something a long the lines of "it's impossible for them to enforce this, and they're probably not going to be too aggressive anyway."

I hope that any financial professional who is guided by that statement has my business card on his desk. He is going to need it shortly.

FINRA is taking this seriously, and is already requesting documents regarding the use of Facebook, LinkedIn and Twitter. It is not impossible for them to monitor the use of social media, they will do so, and will seek sanctions for misuse.

FINRA Fines Firm $300,000 For Failing to Verify Account Identity

For those readers who think that the requirement to verify the identity of account holders is not a big deal, think again. FINRA has fined Pinnacle Capital Markets $300,000 for failing to do exactly that.

The FINRA press release does not have any comments from the firm, but I suspect that because the accounts were sub-accounts, the firm may have believed that verification was not necessary. I am guessing of course, but the point is $300,000 is a pretty hefty fine for not obtaining proper account documentation. More>>>

FINRA Releases Social Media Guidance For Brokers

FINRA released its Regulatory Notice on Communications with the Pubic Through Social Networking Web Sites today, a full month ahead of schedule. The notice will undoubtedly become the standard by which firms, and FINRA, will gauge compliance in the use of sites such as LinkedIn, Facebook and Twitter. While some firms may still prohibit the use of these sites, others may take some level of comfort in the release, and permit limited use of these sites by registered persons. It is Regulatory Notice 10-06.

I am a panelist on a webinar tomorrow, Advisers and LinkedIn: What you can, cannot and should be doing - and will be discussing the implications of the Notice. The webinar is free, and registration information is available at
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20100110/STATIC/100119998