FINRA loves to tout its supposed intent to bring meaningful cases, cases that matter to the investing public, rather than enforcing “foot faults,” as it has been accused of doing over the years. My own experience with FINRA suggests that while it talks a big game, in reality, we all still live in foot-fault city.
I stumbled across this decision recently, and it serves as a good example of two problems that FINRA has. First, FINRA is, at times, maybe most times, hardly the model of efficiency when it comes to promptly bringing cases against perceived bad guys. Second, it reflects how FINRA is still willing to spend its finite resources, in terms of time, manpower, and money, on an utterly fruitless pursuit, resources that anyone would agree – including the FINRA lawyers who brought the case and the Hearing Officer who had to consider the evidence – would have been better spent on something else.
The case started out normally, with FINRA filing an Enforcement action against the broker-dealer in 2017, alleging a number of nasty sounding historical sales practice violations. According to the decision, however, and for reasons that went unexplained, the complaint was filed five years after the exam of the matter was started, and fully four years after the matter was referred to Enforcement. From the defense perspective, that is a long time. A long time for documents to be preserved, for witnesses’ memories to remain intact. Remember: FINRA is not restricted by statutes of limitations (like the SEC, or like civil litigants), but it is still supposed to be procedurally fair to respondents, and one aspect of that fairness is not waiting too long to file a complaint.
Anyway, four of the firm’s registered representatives and two of its registered principals, including the firm’s president and its CCO, settled with FINRA. But not the firm, which answered the complaint and requested a hearing. After some delays – requested jointly by FINRA and the firm – that hearing got scheduled for December 2018. And here is where it got weird. In early October 2018, two months prior to the hearing, the firm filed Form BDW, to withdraw from FINRA membership. Consistent with that, later that month, the firm (through its president, since its attorney had been granted permission to withdraw) announced that the firm was not going to participate any further in the proceeding (for the simple reason that it was out of business). Days before the hearing was scheduled to start, the SEC terminated the firm’s registration. At the end of December 2018, FINRA also terminated the firm’s registration.
Despite all this, that is, despite the fact that FINRA had already gotten its settlements from the individuals who had been associated with the firm, and despite the fact that the firm’s registration had already been terminated, FINRA proceeded to issue a farcical “default” decision. Why farcical? Because it is based solely on the allegations in the complaint, as supported by an unopposed Declaration of a FINRA examiner effectively swearing that those allegations are well founded and supported by real evidence. Kind of difficult for FINRA to lose one of these.
In the Decision, even though it acknowledged that the firm was dead, FINRA proceeded nevertheless to impose significant monetary sanctions, including a $400,000 fine plus restitution to customer. These sanctions, of course, cannot be collected, inasmuch as a federal court determined years ago that FINRA has no legal ability to sue to collect its monetary sanctions. So, these numbers are meaningless, except, perhaps, to FINRA, since they help pad the total when FINRA tallies up at the end of the year just how many dollars in fines it imposed. Which, if that’s the motivation, is wrong. Indeed, you may recall not too long ago that FINRA was taken to task by the General Administration Office for including in its annual statistics fines imposed in cases in which the respondent was permanently barred (i.e., fines that had precisely zero chance of ever being paid), which the GAO felt was a bit misleading. (This resulted in a change of FINRA policy, and the elimination of the fine in bar cases.)
So, what do we have here? A case that took FINRA five years to file, resulting in a pointless default decision against a defunct firm that imposed meaningless monetary sanctions. All accomplished by spending money supplied by its member firms. Let me be clear about something: the fact that FINRA managed to tag the five individuals here is not a bad thing. If they violated the rules, they deserve the consequences. And if the violations were serious, as they appear to have been, those consequences are appropriately harsh. Those individuals who were not barred now have a disciplinary record that will follow them throughout their careers, which is how the system is designed. But, that is not true for the firm. It was already dead when FINRA shot it. What was the point?
The problems with this case boil down to two things. First, it is simply unfair for any respondent to be required to defend a case brought five years after the exam. FINRA needs to do something to accelerate the pace at which it conducts, and concludes, its exams, especially given the lack of any statutes of limitations. Second, FINRA should stop wasting its time – and members’ money – on activities that achieve nothing. Stated another way, FINRA should start to actually care about efficiency. Drop stupid cases early. Stop sending five people to OTRs. Indeed, better yet, eliminate some of the bureaucracy that chokes swift progress. I have said this before, but it bears repeating: when I joined NASD in 1993, there were fewer than ten corporate vice presidents; today, I believe the number has swelled to well over 100. Yet, somehow, NASD managed to regulate thousands more member firms than FINRA handles today. The bloat at FINRA’s middle-manager level – the people who have to sign off on exam dispositions, settlements, sanction recommendations, etc. – is daunting.