Money Talks, And FINRA Is Listening

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

Last year I wrote about FINRA’s effort to encourage firms to self-report their problems, pausing to wonder at the suggestion attributed to Jessica Hopper, a Senior Vice President with Enforcement, that cooperating with FINRA by self-reporting “not only fulfills a firm’s regulatory responsibilities, but it can also mean the difference between a slap on the wrist and a steep fine, should the infraction elevate to an enforcement case.” Well, last week, LPL Financial got tagged for $2.75 million in an AWC that, remarkably enough, recites that FINRA “recognized LPL’s extraordinary cooperation.” I would hardly characterize this a slap on the wrist. One can only imagine the size of the fine had LPL not been so extraordinarily cooperative.

But that’s not the point of this piece. Rather, it is that this case serves to highlight, once again, the disparate treatment that FINRA doles out to big, rich firms vs. small firms. The former just write fat checks and get casually on with life, while small firms can struggle to survive a single regulatory incident. I mean, just look at LPL’s BrokerCheck report. It reflects 123 final “Regulatory Events” (admittedly, not all of which are FINRA related). The descriptions encompass an astounding 255 pages. The fines that LPL has agreed to pay are almost too high to compute, unless you have the time to slog your way through the entire tome that is LPL’s report. In addition to the most recent AWC, we can see, among other relatively recent disclosures, 12 payments of $499,000 each to a variety of states for selling unregistered securities and related supervisory failures. The fines imposed on LPL in just the first 25 reported Regulatory Events (i.e., the first 52 pages) total almost $14 million, and that doesn’t include a $10 million fine the firm paid to FINRA in 2015.

Simply put, what this shows is that money talks in the world of securities regulation. If you happen to be a firm that can afford to pay enormous fines, not only will you not get kicked out of the industry for being a recidivist, you will actually be commended for your “extraordinary cooperation.” What makes this even more amazing is that the particular rule violations that are the subject of last week’s AWC were repeat occurrences of prior misconduct. The Overview section of the AWC recites that LPL got in trouble because its AML supervisory system was flawed, and because it failed to make amendments (as well as timely amendments) to Forms U-4 and U-5. That $10 million AWC from 2015 I mentioned? Well, guess what? It concerned the very same issues, i.e., an AML system that failed to generate alerts of certain misconduct, and a failure to file amendments to Forms U-4 and U-5. Sound familiar? Imagine how a small firm would get treated if it committed the same rule violations exam after exam.

For what it’s worth, I had initially intended to focus on the substantive lessons to be gleaned from the AWC, including (1) the increasing mandate to file a SAR (since there appears to be nothing to gain from not doing so and plenty to lose), and (2) the need to construe broadly and liberally the definition of “customer complaint” for the purposes of determining whether disclosure is required. For those reasons, the AWC still makes good reading. But, admittedly, I got distracted by the detailed recitation at the end of the AWC of LPL’s efforts to cooperate with FINRA and the impact those efforts undoubtedly had on the fine, still a whopping $2.75 million but who knows how much less than it would otherwise have been.

I don’t mean to come down too hard on LPL; it can’t help it if it has the money to continue to pay these fines, or the fact that the regulators are content to keep cashing those checks and congratulating themselves for another successful exam. LPL didn’t create this system, it just lives in it, as do lots of other big firms. But, it doesn’t make it fair. That was true two years ago when I posted this blog about MetLife and it’s true now. And if FINRA ever tries to tell you that it treats all its member firms the same, regardless of their size or, more importantly, their financial wherewithal, I would beg to differ. You don’t have to take my word for it, either. LPL’s BrokerCheck report will tell you everything you need to know.