Securities Industry Commentator by Bill Singer Esq

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Report from FINRA Board of Governors Meeting -- December 2018 / Board Approves Rule Proposals, Reviews 2019 Budget and Appoints New Public Governor (FINRA Release)
http://www.finra.org/newsroom/2018/report-from-finra-board-of-governors-meeting-december-2018
In pertinent part, the FINRA Release announced that its Board had approved two rule proposals:

Proposal to Prohibit Compensated Non-Attorney Representatives (NARs) in Arbitration and Mediation - The Board approved filing with the SEC proposed amendments to the Codes of Arbitration and Mediation Procedure relating to prohibiting compensated non-attorney representatives from practicing in the FINRA arbitration and mediation forum.

Proposed Changes to the Codes of Arbitration Procedure Relating to Codification of Expungement Guidance - The Board approved proposed amendments to the Codes of Arbitration Procedure for Customer and Industry Disputes to codify the Notice to Arbitrators and Parties on Expanded Expungement Guidance and modify the fees for small claim expungement.

In the Matter of the FINRA Arbitration Between Sally Ann Reagan, Claimant, vs. Ganesh Ramachandran Iyer a/k/ "Gary Iyer" and Morgan Stanley, Respondents (FINRA Arbitration 17-01985, December 21, 2018).
http://www.finra.org/sites/default/files/aao_documents/17-01985.pdf
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2017, public customer Claimant Reagan asserted in part breach of fiduciary duty, negligence, fraud, and promissory estoppel. Claimant alleged that Respondent Iyer had engaged in aggressive, high-risk trading in her account, which included trading in emerging-market and aggressive exchange traded funds contrary to her investment objectives. Further, Claimant alleged that Iyer made unsuitable recommendations; failed to meet the requirements of Rule 1035 exchanges of annuities, resulting in tax consequences and surrender charges; and made misrepresentations concerning the management fees. Ultimately, Claimant sought $218,131.88 in compensatory damages, $436,262 in punitive damages, and interest, costs, and fees. Respondents Iyer and Morgan Stanley generally denied the allegations and asserted various affirmative defenses; and Iyer sought an expungement of the matter from his Central Registration Depository record ("CRD"). The FINRA Arbitration Panel found Respondent Iyer liable and ordered him to pay to Claimant Reagan $54,954.04 in compensatory damages plus 5% interest until paid in full.

In the Matter of the FINRA Arbitration Between Windsor Street Capital, LP, Claimant, vs. Mackey McFarlane Alligood and Scott David Werling, Respondents (FINRA Arbitration 18-00749, December 21, 2018).
http://www.finra.org/sites/default/files/aao_documents/18-00749.pdf
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in February 2018 and as amended, Claimant Windsor Street Capital asserted  fraud, breach of fiduciary duty and regulatory requirements, breach of contract, breach of FINRA Rule 2010 and failure to reasonably supervise. In addition to interest and a "disciplinary referral to FINRA to fully investigate Respondents' actions  . . ," Claimant sought a joint and several award:

to repay $500,000.00, including but not limited to the $200,000.00 fine incurred in connection with the SEC Order, together with the costs of the independent AML consultant, legal fees, and any other costs and expenses incurred in connection with the SEC Order and the preceding regulatory investigations; 

Respondents Alligood and Werling generally denied the allegations and asserted various affirmative defenses. The FINRA Arbitration Panel granted Claimant's Motion to Compel and for Sanctions, and barred Respondents from presenting any evidence in defense of the claim. The Panel denied all claims.

In the Matter of J.P. Morgan Securities LLC, Respondent (AWC 2014040051801, December 21, 2018). 
http://www.finra.org/sites/default/files/fda_documents/2014040051801%20J.P.
%20Morgan%20Securities%20LLC%20CRD%2079%20AWC%20va.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, J.P. Morgan Securities LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon J..P. Morgan Securities a Censure, a $175,000 fine for the Rule 605 and 2010 violations; a $100,000 fine for the Ruole 606 and 2010 violations; a $60,000 fine for the OATS violation; a $50,000 fine for the Rule 10b-10 and Rule 2010 violations; and a $175,000 fine for the supervisory violations. As set forth in the "Summary" portion of the AWC:

In connection with Review No. 20140400518, the Market Analysis Section (the "Market Analysis staff") of FINRA's Department of Market Regulation ("Market Regulation") conducted a review of the firm's compliance with Regulation NMS Rules 605 and 606 ("Rules 605 and 606") reporting requirements and the supervisory systems and procedures relating to those rules. Market Analysis staff conducted this review as a result of a FINRA Rule 4530 self-disclosure by the firm submitted to FINRA in January 2014. In its self-disclosure, the firm informed FINRA that it "ha[d] identified certain issues concerning the reports the Firm prepares pursuant to Rule 605 and Rule 606 of Regulation NMS . . ." The violations at issue here resulted from significant supervisory deficiencies that failed to detect misreported information arising from technology issues affecting both the systems of the firm and its third-party vendor. 

The firm's Rule 4530 self-disclosure identified issues that affected the firm's Regulation NMS reporting during April 2010 through November 2014 (the "Regulation NMS review period"). Following the firm's discovery of the issues disclosed in its self-report, the firm broadened its review and established a working group to evaluate and identify other issues affecting Rule 605 and Rule 606 reporting. The working group was comprised of personnel from technology, business unit representatives and other stakeholders, legal, and compliance. Further, the firm retained outside counsel to support the effort. 

As a result of the efforts undertaken by the firm's working group, the firm ultimately identified a total of ten technology-driven issues that affected the firm's Regulation NMS reporting, two of which also impacted OATS reporting pursuant to FINRA Rule 7450. Further, the firm's supervisory system, including its written supervisory procedures, were not reasonably designed to achieve compliance with laws and regulations applicable to Rule 605, Rule 606, and Rule 7450. 

In connection with Review No. 20150442276, the Trading and Financial Compliance Examinations ("TFCE") staff (the "TFCE staff') of Market Regulation conducted a 2015 TFCE Cycle Examination of certain trading activity of the firm, primarily for the trade date of August 17-18, 2015 (the "TFCE review period"). The examination found that, from February 2015 through June 2016, as a result of a vendor's system configuration, Mid-Price Peg, Immediate or Cancel orders were misclassified in the firm's Rule 605 reports. Further, during the TFCE review period, the firm failed to submit information to OATS and failed to provide, or provided inaccurate or incomplete, confirmations to customers. Finally, as described below, the firm's supervisory system, including its written supervisory procedures, were not reasonably designed to achieve compliance with laws and regulations applicable to Rule 605, SEC Rule 10b-10, and Rule 7450. 

Thus, the firm violated Rules 605 and 606 of Regulation NMS, FINRA Rule 7450, SEC Rule 10b-10, NASD Rule 3010 (for the period prior to December 1, 2014), FINRA Rule 3110 (for the period after November 30, 2014), and Rule 2010.

Bill Singer's Comment: Assuming that the government shut-down ends within 2019, it will be interesting to see if the federal regulator will adopt FINRA's emphasis on "self reporting" when it comes to NMS issues. In a bevy of Electronic Blue Sheet settlements published just before the staff furloughs took effect, the SEC made a point of noting that trade reporting issues had been detected by firms that took remedial and proactive measures.  In anticipation of SEC proceedings, the following three Respondents each submitted an Offer of Settlement that the SEC accepted. In the Matter of:

MUFG Securities Americas Inc. https://www.sec.gov/litigation/admin/2018/34-84758.pdf

Citadel Securities LLC https://www.sec.gov/litigation/admin/2018/34-84759.pdf

Natixis Securities Americas LLC https://www.sec.gov/litigation/admin/2018/34-84760.pdf

(Orders Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and Cease-and-Desist Order; '34 Act Rel. Nos. 84758, 84759, and 84760; Admin. Proc. File No. 3-18914).

http://www.rrbdlaw.com/4332/securities-industry-commentator-by-bill-singer-esq/

Industry compliance professionals know, however, that many member firms do not have the staffing to timely detect many NMS issues and even when detected, there is often a cultural bias against self reporting. It will be interesting to see if in 2019, both FINRA and the SEC begin to exact higher fines and other sanctions when confronted by firms who are not self reporting NMS violations, and, in fact, are covering up such shortcomings in a manner that amounts to obstruction.

Specifically, Nannini solicited two firm customers to invest in a biotech manufacturing company (the "Company") and facilitated their investments by providing them with information about the Company, arranging for one of the customers to visit the Company's plant, helping the customers transfer their funds, and providing the customers with updates after their initial investments. In total, the customers invested $290,000 in the Company. Nannini routed one of the customers' funds from the customer's Firm account through an IRA account outside of the Firm before investing the funds in the Company, which made it more difficult for the Firm to identify that the customer was investing in the Company. 

The Company filed for bankruptcy prior to making any payments to either customer. As a result, one of the customers lost all of the money she invested in the Company. She later obtained 572,500 after filing an arbitration claim arising from her investments, which she settled with CIO, Nannini and two other parties. The other customer, BK, recovered only $788 of the $70,000 he invested, as part of the Company's bankruptcy proceeding. 

Nannini also purchased 1,500 shares of Company stock for S1,500 without providing written notice to CIO of his personal investment in the Company. 

During the Relevant Period, Nannini submitted two compliance questionnaires to CIG in which he stated inaccurately that he bad not engaged in any private securities transactions. 

By virtue of the foregoing, Nannini violated NASD Rule 3040 and FINRA Rule 2010. 

• Securities Industry Commentator
• Bill Singer