FINRA Rules on Communications

FINRA is forever tweaking the definitions used for the communications put out by a member firm. A few years ago, I had to put serious effort into explaining how sales literature differed from advertising, and all the special rules on public appearances and independently prepared reprints. Going forward, FINRA only wants to work with three specific categories of communications: correspondence, retail communications, and institutional communications. Of these, only retail communications are subject to prior principal approval and filing copies with FINRA. Correspondence and institutional communications have to be monitored, and principals need to make sure that these communications are not misleading. They just are not subject to the heightened supervision of communications going out to > 25 retail investors. It is a little strange to see FINRA rely so heavily on this arbitrary number 25, but they do. The exact same thing--a seminar handout, for example--is correspondence if delivered to 25 or fewer retail investors but becomes a retail communication if delivered to more than 25. What we used to call advertising and sales literature is now either correspondence or retail communications depending on how large the audience is. FINRA also no longer cares whether the communication goes to an existing customer or a prospect--again, the number 25 is suddenly the determining factor. Pass Your Series 7 Exam

Every little thing

I've passed my Series 65 exam within the past two years, so if I wanted to I could register as an investment adviser. I have no criminal or disciplinary activity in my past, so I would definitely be granted a license by the State of Illinois Securities Department to start telling people what to do with their money or managing their brokerage accounts in exchange for a percentage of assets. But, unfortunately, my record-keeping skills are atrocious. I'm always getting notices from the IL Dept. of Revenue about late filings, penalties, and interest. I'll print my monthly account statement for the Roth IRA but inexplicably forget to print statements for the SIMPLE IRA. So, I stink at keeping records, and record keeping is a big deal for both advisers and broker-dealers. On Friday mornings, I usually go to the FINRA website and see what kind of rule violations are going on in the industry. For the firms, it's usually a lack of good record-keeping that gets them in trouble. They fail to report trades to TRACE (corporate bonds), or they submit reports that are inaccurate. Every little thing has to be perfect, as AXA Advisors discovered recently, according to this disciplinary action summary I'm reading right now. Apparently, on a few trades in municipal securities, the firm reported to the RTRS system that they had acted in a "principal" capacity, when, in reality, they had acted in an "agency" capacity. This, of course, also caused the firm to deliver customer trade confirmations that were inaccurate. Penalty? $20,000 fine.
Geeze. If you read the summary, you'll notice that AXA didn't bother to argue--they used AWC (acceptance, waiver, and consent) to settle the matter. On the other hand, I saw that in another case, the respondents appealed the NAC decision to the SEC, and are now appealing the SEC decision to the federal appellate courts.
However, we can only have so much fun with one blog post, and it's time for me to head to the office pretty soon, anyway.

Broker Check

Up to now there has been a big difference in the way that state securities regulators and FINRA publish violations of agents, principals, and broker-dealers. While the state securities regulators tend to keep the notices of revocation up indefinitely, FINRA (formerly NASD) has allowed the violations to disappear after two years. That way if an agent were barred by NASD (now FINRA) for cutting bad checks and misappropriating client funds, the public would only know about it for 2 years after he got himself kicked out of the business. The state securities Administrator would usually issue an order of revocation, and that would stay up on the website indefinitely. Apparently, FINRA doesn't think that's good enough, and they're probably right in thinking that more investors will go to the "broker check" site at http://www.finra.org/ than their state regulators' site, especially with all the FINRA TV and radio commercials out there encouraging them to do exactly that.
In any case, starting in a few days, any agents or principals who get in trouble with FINRA will have the violation sitting in broker check indefinitely. That way, if they try to switch to, say, the insurance business, customers will be able to look them up at broker check and see that maybe they aren't the sort of people investors should trust with a $1.5 million annuity purchase.
Go ahead and check out the actual press release at the link below. And, more important, stay out of trouble once you get your securities license.

http://www.finra.org/Newsroom/NewsReleases/2009/P120385

Disciplinary Actions

It's Friday morning and, as usual, I'm at the FINRA website looking at recent disciplinary actions. For the month of October there are about 40 pages' worth of infractions, ranging from recordkeeping mishaps to outright bad behavior. I'll place the link below, or you can just go to http://www.finra.org/, then "industry professionals," and then look under "enforcement" for "disciplinary actions." This month you'll find several small fines resulting from sloppy reporting of trades. You'll notice that the same firm often has two or three violations in the same month. And you'll see that Regulation SHO, in which short sales have to be executed very carefully and properly, is a hot topic for the regulators. Reg SHO is all about making sure that when shares are sold short, there actually are shares available. Otherwise, the laws of supply and demand are being manipulated, and market manipulation is the number-one thing that the SEC and FINRA try to prevent. Before executing the short sale, the broker-dealer has to locate the securities and reasonably believe they can be delivered. Of course, the procedures involved to "locate" the securities are new, and it's tough to get the supervisory system in place. Luckily, FINRA is there to help motivate the firms to improve their systems by handing out fines and naming names .
I'll let you take it from here:
http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinaryactions/p120231.pdf

FINRA Regulations

It's Friday morning and, as usual, I'm reading up on recent regulatory actions at the http://www.finra.org/ website. Reading the August recap, I see a pattern of firms being fined for failing to give customers a fair and reasonable price on transactions. But I also notice that often firms get fined by FINRA just for sloppiness. For example, NSM Securities in Palm Beach, Florida was just fined $50,000 for "failure to preserve all of its business-related electronic communications, including communications exchanged with its clearing firm for over a year." Institutional Capital Management of Houston, Texas was fined $10,000 for conducting business when their balance sheet (net capital) was insufficient. Prebon Financial Products, Inc. of Jersey City, New Jersey was fined $10,000 because it "failed to accurately report the execution time for corporate bond transactions to the Trade Reporting and Compliance Engine (TRACE); failed to accurately report the execution time for OTC equity transactions; and failed to accurately report the execution time or price for transactions in NASDAQ National Market securities. The findings also stated that the firm failed to include all of the terms and conditions of orders, the correct execution time on order tickets for equity securities transactions, and order tickets did not indicate whether transactions were long or short. The findings also stated that the firm prepared order tickets for transactions in TRACE-eligible securities that did not include the receipt time."
I am so glad I never did anything crazy like try and open my own broker-dealer. OMG, it would be a never-ending stream of fines and sanctions due to my decided lack of record-keeping skills. In any case, sanctions and fines often have little to do with malice or greed--it's just really hard to stay on top of all the details that need to be attended to in this industry.

MSRB Rules

It's Friday morning and, as usual, I am visiting the FINRA website to see which firms are being hassled currently for rule violations. I always enjoy seeing some of your testable points in action, and this morning I see that a firm is being fined for failing to deliver official statements with new issues of municipal securities. As always, this is not a dig on the particular firm--there are so many ways to violate MSRB and FINRA rules that it would only surprise me if a well known firm did not find itself in hot water every couple of months.

You can read the news release at:
http://www.finra.org/Newsroom/NewsReleases/2009/P118457

Fair and reasonable commissions

Many people become frustrated with the Series 7 when it seems that all the information they're being forced to learn has "nothing to do with the real world."

Actually, it does.

For example, say you're struggling to memorize the "factors used to determine fairness" for commissions and markups. You may think you're learning a useless set of bullet points, but just the other day a large broker-dealer was fined $300,000 for charging unreasonable commissions, and one of the registered reps was barred by FINRA (which is bad).
Here is a snippet from the FINRA press release:

As a consequence of the firm's inadequate supervision, during the period from April 2002 to January 2006, representative Hernandez charged approximately 27 customers commissions that were substantially in excess of the firm's calculated rate for appropriate charges. He overcharged one customer approximately $1.2 million. In February 2006, the firm terminated Hernandez's employment. In March 2008, in a separate action by FINRA, Hernandez consented, without admitting or denying the charges, to findings against him and he was barred. Two other registered representatives in different branch offices also overcharged commissions on a repeated basis, but on a smaller scale.

Oh well. Don't think I'm picking on a particular firm. If you study the disciplinary actions by FINRA, you'll soon see that virtually all firms get fined and sanctioned for something or other. I'm just recommending that when it comes to rules and regulations, you can dig in a little deeper and see how the "test world stuff" relates to the so-called "real world."

The link to the full press release is:

http://www.finra.org/Newsroom/NewsReleases/2008/P117393