What Is FINRA’s Job?

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

A client of mine bought a BD, thereby requiring him to go through the CMA process. It was a very small firm, with fewer than ten registered reps. He was a newly minted 24, so he had other, more experienced principals on board to handle all supervisory responsibilities. His job, as outlined in the firm’s business plan that accompanied the CMA, was twofold: sales (i.e., to bring in banking deals) and to be the firm’s financier (i.e., the sole source of capital).

As is its right, MAP responded to the CMA by imposing Interim Restrictions, which, among other things, prevented my client – the guy who paid for the BD and who controlled the checkbook – from acting as a principal/supervisor, even though he was a 24. This confused him, and for obvious reasons. Remember, he was not planning on acting as a supervisor. Moreover, simply by virtue of the fact he controlled the firm’s money, it seemed difficult, if not impossible, for him to abide by that restriction.

So, he requested that MAP revise the Interim Restrictions, so he could at least make the decisions that impacted the firm’s – i.e., his – money. MAP agreed, and carved out an exemption to the no principal/no supervisory restriction by permitting him “to act in a limited capacity with respect to supporting the following financial functions of the Firm: invoice approval, payment of bills/corporate expenses, check writing, personal contributions of operating capital to the Firm, and oversight of corporate budgeting.” That certainly helped, but it was still difficult figure out what his role would be.

For instance: SEC case law states that the act of hiring someone may be viewed as an activity that only a principal can do. That suggests that if my client’s BD needed to hire someone, my client, because he was restricted from acting as a principal, could not be involved in the hiring process. But, because he was permitted to approve invoices, write checks, and had oversight of the firm’s budget, FINRA apparently imbued him with veto power, on the back end, of any decision the firm might make – including hiring decisions – that impacted the firm financially. Otherwise, others at the firm could theoretically do things – hire people and agree to pay them astronomical compensation, give themselves raises, throw a big party, buy a corporate jet, etc. – and my client would be left with no choice but to sign the check.

In light of that fuzzy situation – my client could not act as a principal by hiring people, but nevertheless could veto hiring decisions as a matter of firm finances – my client sought guidance from MAP. And here’s where it gets odd: MAP declined to provide any guidance. At the Enforcement hearing that ultimately ensued when FINRA filed a complaint against my client for allegedly breaching the terms of the Interim Restrictions, two MAP personnel testified. It was undisputed that my client reached out to MAP for help in crafting language that would accurately describe the role that MAP expected him to occupy, but would allow him still to control the firm’s financial situation.

Unfortunately, it was similarly undisputed that MAP didn’t provide the requested help. Under oath, MAP said, in essence, that’s not our job, and wished my client luck. MAP left my client to figure it out on his own. Granted, because my client had never been involved in a CMA before, had never owned a BD, he utilized the services of a compliance consultant to assist with the CMA. But, even the consultant had no ready answers to address the thorny questions raised by the odd place in which my client found himself.

As readers of this column are well aware, I used to work for NASD. Heck, I was a District Director. And, believe me or not, I instructed the examiners who worked for me that it was our job to help our member firms comply, whenever possible. And, frankly, it was routinely possible. The last thing we wanted was to encounter a problematic situation on an exam that could have easily been avoided if the BD had simply called and asked how to do something. Indeed, my Associate Director and I spent a lot of time encouraging the member firms in our District to call us with questions; but, that proved to be a difficult assignment, since historically members were extremely reluctant to display any sort of ignorance of any rule to their examiners, even by posing questions that ultimately would have provided better compliance. Regardless, it was important that we continued to try and get that message across, that we were, in fact, there to help our members.

Anyway, it is rather amazing to me what has become of FINRA. The notion that instead of answering a firm’s questions, today FINRA will, instead, ignore them, is staggering in its callousness, as well as its disregard for FINRA’s role as a membership organization. Then, compounding the problem, after not providing guidance, FINRA will happily file an Enforcement action when the firm does not manage to correctly divine FINRA’s expectations. I really don’t know how we got to this point, where dealing with FINRA has turned into such a game of “gotcha.”

My friend Brian Rubin just released his mid-year statistical review of FINRA’s Enforcement actions, and his data show a reduction in the number of cases brought so far this year, as well as the dollar amount of fines imposed. Does that suggest a correlation with Robert Cook’s listening tour? Has the pendulum finally started to swing back from the Enforcement oriented approach FINRA has maintained since it whiffed on the massive Bernie Madoff and Allen Stanford scams? Unfortunately, there is no way to know, at least not yet. Six months is too short of a timeframe to provide much meaningful perspective. Moreover, my personal experience suggests that there has been no perceptible change in attitude at the boots-on-the-ground level at FINRA, i.e., the examiners and regional counsel.

I remain hopeful, however, that sooner or later – and hopefully sooner, before small firms simply disappear completely – FINRA will again embrace the notion that it exists not just to file complaints, but, as well, to help its members avoid complaints in the first place.