I Want HIS Lawyer!

From Ulmer’s Broker-Dealer Law Corner Blog
By Alan M. Wolper

A little over a year ago, the SEC announced a stunning settlement with Merrill Lynch regarding its violation of SEC Rule 15c3-3, commonly known as the “Customer Protection Rule.” This is an important rule whose name gives away its purpose:  it is designed to ensure that if a broker-dealer ever fails, customer assets can be quickly returned to the customers and not swallowed up by the BD or its creditors.  In violating the rule, the SEC concluded that Merrill “plac[ed] billions of dollars of . . . customers’ money at risk.”  Why was the settlement stunning?  First, and most notably, because it cost Merrill $415 million, the biggest penalty the SEC had ever exacted for such a rule violation.  Second, because unlike most settlements, in which the respondent neither admits nor denies the findings, Merrill admitted the facts, and that the violation was “willful.”

Right before the long Labor Day weekend, the SEC announced the bookend to that matter, a settlement with William Tirrell, Merrill’s former FINOP and Head of the Regulatory Reporting Department, i.e., the man who ran the department that was responsible for Merrill’s compliance with Rule 15c3-3.  Given the magnitude of Merrill’s violation, the important nature of the violation from a customer perspective, Merrill’s admission of guilt, and the finding that the violation was willful, one would expect that Mr. Tirrell would get seriously whacked by the SEC, right?  Nope.  To the contrary, amazingly enough.  Unlike Merrill, Mr. Tirrell was found not to have acted willfully; rather, the SEC found that he “negligently caused” Merrill’s $415 million 15c3-3 violations.

Moreover, and even more astounding, Mr. Tirrell’s settlement has him paying nothing. Not a cent.  Moreover, he was not barred.  Nor was he suspended, not for a single day.  Indeed, the only sanction imposed on Mr. Tirrell was an order that he “cease and desist from committing or causing violations of and any future violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-3 thereunder.”

So, let’s get this straight: Merrill acted willfully in committing these rule violations, but Mr. Tirrell only acted negligently in causing these violations?  Merrill pays $415 million, but Mr. Tirrell pays nothing?  Even after the following findings against Mr. Tirrell?

  • Mr. Tirrell and his subordinates calculated Merrill’s customer reserve requirement each week;
  • Mr. Tirrell caused Merrill to reduce the amount of money it should have reserved for the protection of its customers by billions of dollars through the use of certain trades that “improperly used . . . customer assets to finance [Merrill’s] own activities”; and
  • Mr. Tirrell failed to respond to questions from FINRA for information about those trades, which “prevented regulators from receiving information that could have prompted them to prohibit ML from moving forward.”

Commentators, myself among them, have been complaining forever that there is a clear disparity between the treatment that management of small firms receives at the hands of regulators versus the treatment that big firm management receives. The regulators routinely deny this, of course, but, a situation like Mr. Tirrell’s amply demonstrates that this denial is bogus.  While this is nothing but rank speculation, I find it difficult to believe that a FINOP at a small firm would have managed to walk away from a series of rule violations like this with a finding that his or her conduct was merely “negligent,” without paying a penny in civil penalties, and without being barred or suspended.

Perhaps there is something more to this story than meets the eye, something that explains the ridiculous difference between what Merrill had to pay and what the man who was responsible for Merrill’s rule violations had to pay.  But, perhaps not.  Perhaps this is simply another, but shining, example of the point I made in May last year, when MetLife paid a measly $25 million to settle an annuity switching case with no individual being named as a respondent and no finding of willfulness:  when it comes to dealing with regulators and settlements, money talks.