BD Law Blog - by Georgia Securities Lawyer Joel Beck

FINRA's National Adjudicatory Council Upholds $5 Million Fine against American Fund Distributors

In a Decision released today, FINRA's National Adjudicatory Council (essentially FINRA's appellate level hearing body) affirmed a Hearing Panel decision that found that American Fund Distributors violated FINRA's (then known as NASD) Anti-Reciprocal Rule.  The NAC found that AFD directed $98 million in brokerage commmissions to 46 broker-dealers that were the top sellers of its mutual funds.  The NAC affirmed the hearing panel fine of $5 Million.  The NAC Decision becomes FINRA's final action in the matter, and AFD may now appeal this decision to the SEC. 

FINRA Case Against H & R Block Dismissed by Hearing Panel

In a Decision issued by a FINRA hearing panel last Friday (April 25, 2008), a complaint against H & R Block Financial Advisors, Inc. by FINRA Enforcement was dismissed.  The Complaint related to sales of Enron bonds to customers for the one-month period preceeding Enron's bankruptcy filing in December 2001.  Enforcement alleged that H & R Block, through its representatives, gave false information to investors about the safety of the bonds and failed to disclose material negative information, including that rating agencies had downgraded the bonds.  The Complaint also alleged that the firm failed to establish and maintain an appropriate supervisory system to supervise the sales activities of its representatives. 

Enforcement filed the Complaint against the firm in November 2004.  The hearing was held in three cities over 24 days beginning May 2006 and ending in August 2007.  The panel found that Enforcement failed to prove any cause of action against H & R Block by a preponderance of the evidence, and therefore, dismissed the Complaint.

Continuing Education Requirements Takes Toll in Industry

Last month, FINRA announced that it fined and suspended 16 representatives of State Farm VP Management Corp. for misconduct in connection with the regulator's continuing education rule.  Part of the Rule requires the delivery of a "firm element" training, and FINRA explained that 9 representatives were supervisors at the firm, and they allowed or directed subordinates to complete the firm element program for them.  One other rep. was a supervisor who directed a subordinate to take the CE for other brokers, and the last six reps. were folks who took the CE training for their superiors.  The reps. were fined $5,000 to $10,000 dollars, and suspended 30 days to 6 months, with one rep. being barred as a principal.  According to the release, State Farm uncovered these irregularities and reported them to FINRA. 

Last week, according to an Investment News article, popular CEO of FSC Securities Corp. and Advantage Capital Corp. (both of Atlanta) Joby Gruber, resigned his position at both firms amid allegations that he allowed a subordinate to take continuing education training in his name.

New Hampshire Slams Ameriprise and Manager

The New Hampshire Bureau of Securities Regulation this month announced a settlement with Ameriprise pursuant to which the firm will pay the state about $3.8 Million in fines, costs of investigation and investor refunds.  The action relates the firm's alleged failure to report significant issues, including forgeries, to the Bureau, as required by a 2005 settlement agreement with the state.  In this 2008 action, the state found that Ameriprise failed to report its investigation of at least 96 instances of forgery by six of its agents in the Portsmouth, NH office.  Apparently, the forgeries were of customer signatures that agents affixed to documents to make it appear that the customers had received a financial plan, when the customer had not.  This apparently was done so that the brokers could meet sales goals. 

Also, the state took action against Larry Port, who was the group VP and responsible for supervision of the Portsmouth Office.  Under the terms of the settlement, Port is prohibited from engaging in the securities business - both sales and management - in New Hampshire for five years.  The Bureau noted that he had a "cavalier attitude about forgery."

This is a significant action taken by a state regulator.  If you remember from an earlier post here on BDLawBlog.com, the State of Georgia settled an action against Ameriprise last fall, finding that the firm failed to supervise reasonably two brokers and detect forgeries. 

FINRA Changes Categories for Rule 3070 Reporting to Capture Info. in Auction Rate Securities Complaints

In Regulatory Notice 08-17, FINRA announced a minor change to its Rule 3070 reporting requirements.  Part of Rule 3070 requires every firm to report quarterly statistical and summary information relating to customer complaints and grievance items that it receives.  Part of the statistical information reported deals with the type of security or product involved.  Now, apparently as a result of the recent auction failures in several auction-rate securities, FINRA seeks to identify complaints involving ARS.  The new categories for 3070 reporting includes designations to municipal debt ARS, corporate debt ARS, and closed-end funds ARS.  The new categories are to be used for the 2nd quarter 2008 filings and beyond. 

When it comes to Proper WSPs, sometimes its not the implementation. (Or what we can learn from the new movie Leatherheads)

Earlier this week the wife and I went to the movie theater and saw the new movie Leatherheads.  It was a good movie, and we both enjoyed it.  The movie follows a professional football team in 1925 when professional football hardly had a following like it does today.  In one scene, Dodge, the team leader, directs a new player to play offensive line and to  "hit anyone" that comes near the quarterback.  This new player was a very big, strapping fellow (apparently without lineman experience) and he took the direction given him quite literally.  After the snap as opposing players approached him and the quarterback, he slugged them in the face, knocking them out.  He also took out the referee who approached him to let him know such conduct was not allowed under the rules of the game.

In an earlier post, I referenced FINRA's recent letter to firms announcing their 2008 examination priorities.   As we come to expect, supervision is on the list.  FINRA examiners will again be looking at firms to ensure that they have WSPs that are appropriately tailored  to the size of the firm, the nature of its business, and its personnel.  They will also review to ensure that the WSPs are implemented by those charged with supervisory responsibilities.  And, as we can see from each month's disciplinary actions posted online, the regulators have no shortage of firms that they can charge with failing to supervise or failing to establish, maintain and enforce an adequate supervisory system.

So what does Leatherheads have to do with supervision.  Well, what struck me (pun intended) is that sometimes it is not about the implementation.  Preparation is equally important.  In the scene described above, the new recruit did exactly what he was told.  People came near, and he hit them.  He stopped them from getting to the quarterback.  Problem was, he wasn't fully prepared for the position, its duties and responsibilities, and he certainly didn't understand the rules that he had to work within.  In my  experience I've observed that some firms approach their supervisory system in this way as well - no preparation.  For example, consider a firm purchasing an off-the-shelf procedures manual that they don't bother tailoring to the unique characteristics of the firm.   Or consider delegating supervisory responsibilities to folks with no training on what needs to be done, and why its important.  To have a rules compliant supervisory system, remember to look at both the appropriateness of the supervisory procedures and controls, and with the manner in which they are implemented. 

Recent Enforcement Cases - When A Loss is A Win (Maybe).

FINRA recently updated its Office of Hearing Officers disciplinary decisions page, placing recent decisions online.  These decisions were issued in January and February of this year.  Two cases in particular caught my eye, and reinforce the perspective of many that sometimes it pays to fight Enforcement when it comes to sanctions. 

The two cases involved Marc Winters (Case E102004083704) and Lisa Ann Tomiko Nouchi (Case E102004083705), both former representatives of UBS FInancial Services, Inc. (The Decisions can be found online here).  Both were alleged to have improperly obtained CDSC waivers for clients by falsely representing that the clients were disabled, when they were not.   These actions, FINRA alleged, violated NASD Rules 2110 and 3110 in that the conduct was unethical and involved false books and records. According to the Decisions, the misconduct occurred in 2003.  Winters was alleged to have obtained $14,882.46 in waivers for 14 customers in 42 mutual fund redemptions; Nouchi allegedly obtained $4,986.72 in waivers for 15 customers in 21 redemptions.  It appears from the Decisions that neither respondent contested the facts, but were obviously arguing for more reasonable sanctions for their actions.

According to the Decisions, FINRA Enforcement requested the panel impose a two-year suspension for each of the respondents, along with a fine of $30,000 for Winters and a fine of $10,000 for Nouchi.  After hearing the evidence, including the testimony of each of the respondents, the Hearing Panel opted for significantly different sanctions.  The Panel suspended Winters for 30 business days and fined him $30,000, plus costs for the hearing.  The Panel suspended Nouchi for 90 days and fined her $10,000, plus costs for the hearing.  What we don't know in these two instances is what settlement terms Enforcement offered prior to going to hearing. 

According to the FINRA website, these cases are now going to be heard by the National Adjudicatory Council, because they were either appealed or called for review.  It is possible that either Enforcement or the respondents appealed the case, or that, even with no appeal by a party, the NAC called the case for review.  If the NAC called it, its likely because it wants to consider the appropriateness of the sanctions.  At the NAC level, after the briefings and arguments, the NAC may affirm, reverse, or modify the findings, and the sanctions.  We'll have to wait a considerable time to see the ultimate FINRA outcome in these cases.