TABLE OF CONTENTS

WEEKLY TRENDS & TAKEAWAYS. 3

Number of Cases. 3

Common Violations. 3

Week in Review.. 3

Observation. 3

CASE SUMMARIES. 4

1.       Case: Thomas G. Scheiman & Stephen M. Franko. 4

2.       Case: Robert Galloway. 6

3.       Case: Evan Von Scales. 7

4.       Case: Oakwood Capital Securities, Inc. 9

5.       Case: Barry L. Buchholz. 11

6.       Case: Luis S. Jean-Bart 12

7.       Case: Deutsche Bank Securities Inc. 14

8.       Case: James Daniel Lang. 16

9.       Case: Mark A. Carter. 18

10.    Case: Laidlaw & Company (UK) Ltd. 20

WEEKLY TRENDS & TAKEAWAYS

Number of Cases: TEN

Common Violations:

• Violations of FINRA Rule 2010 (high standards of commercial honor and just principles of trade)
• Regulation Best Interest (Reg BI) / Exchange Act Rule 15l-1(a)
• Unauthorized trading / discretionary authority violations (FINRA Rule 3260,2360)
• FINRA Rule 4511 (Recordkeeping / misreporting violation)
• Supervisory failures and deficient compliance

Week in Review:

Between November 17 and 21, 2025, FINRA took disciplinary actions against both individual registered representatives and firms for a range of violations, including unsuitable investment recommendations, undisclosed outside business activities, falsified expense reports, unauthorized trading, excessive options trading, supervisory failures, deficient disclosure in research reports, and failure to maintain net capital or proper handling of investor funds. Sanctions imposed included suspensions ranging from one to ten months, fines from $5,000 to $2.5 million, disgorgements, censure, partial restitution, and requirements for firms to implement or certify remedial supervisory measures. These cases highlight FINRA’s continued emphasis on ethical conduct, adherence to Regulation Best Interest, compliance with supervisory and reporting obligations, and maintaining robust firm-level oversight to protect investors and ensure market integrity.

Observation:

FINRA Rule 2010 remains the most frequently cited violation, reflecting FINRA’s emphasis on ethical conduct across a wide range of misconduct. Many cases also highlight failures in disclosure, supervision, or suitability obligations, showing that regulatory oversight targets both individual behaviour and firm-level compliance systems. Recurring compliance challenges for registered representatives include high-risk and unsuitable investment recommendations, unauthorized trading, and undisclosed outside activities. Large firms, such as Deutsche Bank and Laidlaw, are held accountable for systemic deficiencies, underscoring that lapses in oversight can impact thousands of transactions and a broad base of investors.

                                           CASE SUMMARIES

1.      Case: Thomas G. Scheiman & Stephen M. Franko

INTRODUCTION:

This summary reviews the disciplinary action against Thomas G. Scheiman and Stephen M. Franko, who recommended unsuitable GWG L Bonds to retail customers in violation of Reg BI and FINRA Rule 2010. The case highlights the obligation of registered representatives to make recommendations that are in the customer’s best interest, consistent with their financial profile, risk tolerance, and investment objectives.

• Date of Action: November 17, 2025
• Respondent: Thomas G. Scheiman, Stephen M. Franko
• Violations: 

A. Exchange Act Rule 15l-1(a) of Regulation BI:

This rule states brokers to act in the best interest of retail customers when making securities recommendations. The Care Obligation requires that recommendations be based on reasonable diligence and an evaluation of the customer’s investment profile, including factors such as age, risk tolerance, financial needs, liquidity needs, and investment experience.

Violation: In 2020, Scheiman recommended a $100,000 GWG L Bond to an 83-year-old customer, resulting in over 50% concentration of her liquid net worth in speculative bonds. Franko recommended GWG L Bonds to three retail customers whose investment profiles were inconsistent with the high risks, illiquidity, and speculative nature of the product. Both failed to meet Reg BI’s Care Obligation.

B. FINRA Rule 2010:

This rule states associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: By recommending high-risk, unsuitable securities to retail customers and failing to comply with Reg BI’s best-interest standards, both Scheiman and Franko violated the ethical obligations.

SUMMARY:

Scheiman and Franko recommended GWG L Bonds, speculative and high-risk corporate bonds, to retail customers despite the investments being unsuitable given the customer’s financial profiles and liquidity needs. These recommendations violated Reg BI’s Best Interest and Care Obligations and further constituted misconduct under FINRA Rule 2010. Their failures were particularly consequential given GWG’s ongoing financial losses and eventual default and bankruptcy.

SANCTIONS:

For Thomas G. Scheiman

• Two-month suspension.
• A fine of $5,000.
• $2,600 disgorgement + interest

For Thomas G. Scheiman

• Three-month suspension
• $5,000 fine
• Partial restitution $5,640 + interest

AWC Document:

2022074289901 Thomas G. Scheiman CRD 1508288_Stephen M. Franko CRD 2157707 AWC ks.pdf    

CONCLUSION:
This case reinforces FINRA’s mandate that registered representatives must evaluate the risk, liquidity, and suitability of investment products and ensure recommendations meet Reg BI’s best-interest standards. Recommending highly speculative securities without proper diligence or regard for a customer’s financial profile violates both regulatory obligations and fundamental ethical standards.

2.      Case: Robert Galloway

INTRODUCTION:

This summary reviews a FINRA disciplinary action against Robert Galloway, who falsified six expense reports to obtain reimbursements not permitted under firm rules. His conduct violated FINRA Rule 2010, which requires adherence to high standards of commercial honor.

• Date of Action: November 17, 2025
• Respondent: Robert Galloway
• Violations: 

A. FINRA Rule 2010:

This rule states associated persons to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.

Violation: Between January and April 2024, Galloway falsified six marketing reports for marketing expenses by claiming he had already incurred and inflated reimbursement amounts. He improperly received approximately $5,000 in reimbursements. This created false records and misled his firm.

SUMMARY:

Galloway submitted six falsified expense reports over a four-month period, seeking reimbursements for marketing expenses that were not yet incurred and overstating the amounts. This dishonest conduct violated FINRA Rule 2010 and resulted in Country Capital terminating his registration. FINRA determined that his actions demonstrated a failure to uphold required standards of commercial honor.

SANCTIONS:

Robert Galloway:

• Five-month suspension
• a $5,000 fine.

AWC Document:

2025-11-05_AWC_via_DocuSign_Robert_Galloway_2024083324501.pdf

CONCLUSION:
This action underscores FINRA’s expectation that registered representatives maintain integrity and accuracy in all business-related documentation. Falsifying expense reports constitutes unethical conduct and violates the principles of fairness and honesty that Rule 2010 is designed to protect.

3.      Case: Evan Von Scales

INTRODUCTION:

This summary reviews FINRA’s disciplinary action against Scales, who engaged in an undisclosed outside business activity (OBA) involving the promotion and sale of a foreign-exchange trading algorithm. By failing to provide required prior written notice to his member firm, Fidelity, Scales violated both FINRA Rule 3270 and FINRA Rule 2010.

• Date of Action: November 17, 2025
• Respondent: Evan Von Scales
• Violations: 

A. FINRA Rule 3270:

This rule states registered persons must obtain firm approval before engaging in outside compensated business.

Violation: From October to December 2023, Scales operated an LLC selling an automated trading algorithm. He advertised it on social media and sold the product to nine customers for $2,000 each. He earned $13,000 after refunds and fees. He did not notify or obtain approval from Fidelity and violated the Rule.

B. FINRA Rule 2010:

This rule states associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: Because a violation of Rule 3270 automatically constitutes a breach of ethical conduct, Scale’s undisclosed OBA violated Rule 2010.

SUMMARY:

Scales established and operated a foreign-exchange algorithm business without notifying or receiving approval from Fidelity, despite firm policies and FINRA rules requiring such disclosure. His failure to provide prior written notice, combined with earning compensation from the activity, violated FINRA Rules 3270 and 2010.

SANCTIONS:

• Three-month suspension
• a $5,000 fine.

AWC Document:

2024083203501 Evan Von Scales CRD 6957770 AWC ks.pdf

CONCLUSION:
Scales established and operated a foreign-exchange algorithm business without notifying or receiving approval from Fidelity, despite firm policies and FINRA rules requiring such disclosure. His failure to provide prior written notice, combined with earning compensation from the activity, violated FINRA Rules 3270 and 2010.

4.      Case: Oakwood Capital Securities, Inc.

INTRODUCTION:

This summary reviews FINRA’s disciplinary action against Oakwood Capital Securities, which, under prior management, failed to establish and maintain adequate supervisory systems and written supervisory procedures for monitoring deferred variable annuity exchange rates.

Date of Action: November 18, 2025

• Respondent: Oakwood Capital Securities, Inc.
• Violations: 

A. FINRA Rule 3110:

This rule states members must maintain systems to ensure compliance with securities laws and FINRA rules.

Violation:  Oakwood failed to establish and maintain a supervisory system, as well as written supervisory procedures, reasonably designed to supervise deferred variable annuity exchange activity. Although the firm’s procedures broadly stated that surveillance would occur, Oakwood had no actual processes or systems to track exchange rates, review trends, or identify representatives with potentially problematic activity. Its supervision consisted solely of manual transaction-by-transaction reviews, which were insufficient to detect patterns or repeated unsuitable recommendations.

B. FINRA Rule 2330:

This rule states firms must implement written supervisory procedures and surveillance to detect inappropriate annuity exchanges.

Violation:  Oakwood also failed to establish specific written supervisory procedures tailored to deferred variable annuities and by failing to implement the required surveillance mechanisms to identify inappropriate or excessive annuity exchanges. The firm did not monitor representative’s exchange activity at all, nor did it maintain any system for tracking exchange rates, which directly caused the firm to overlook a series of short-term and unsuitable variable annuity exchanges recommended by one of its representatives.

B. FINRA Rule 2010:

This rule states associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation:  Because Oakwood failed to comply with Rules 3110 and 2330(d), it also violated FINRA Rule 2010. Insufficient supervision of complex and high-risk products is considered conduct inconsistent with industry standards.

SUMMARY:

Under prior management, Oakwood Capital Securities failed for more than a year to maintain adequate supervisory systems and procedures for overseeing deferred variable annuity exchanges. The firm had no system for tracking exchange rates or patterns and conducted only basic transactional reviews. As a result, it failed to detect repeated, short-term, and unsuitable variable annuity exchanges recommended by a representative.

SANCTIONS:

• a censure and
• a $20,000 fine.

AWC Document:

2020065145802 Oakwood Capital Securities, Inc. fka Gardner Financial Services, Inc. CRD 21000 AWC ks.pdf

CONCLUSION:
This action underscores FINRA’s expectation that firms maintain effective supervisory systems especially when overseeing complex products such as variable annuities. A failure to monitor exchange activity exposes investors to unsuitable transactions and violates core supervisory and ethical obligations.

5.      Case: Barry L. Buchholz

INTRODUCTION:

This summary reviews the disciplinary action against Barry L. Buchholz for executing unauthorized trades in four customer accounts, violating FINRA Rule 2010. The case highlights the requirement for written or oral customer authorization before placing trades in non-discretionary accounts.

• Date of Action: November 18, 2025
• Respondent: Barry L. Buchholz.
• Violations: 

A. FINRA Rule 2010:

This rule states associated persons, in the conduct of their business, to “observe high standards of commercial honor and just and equitable principles of trade.

Violation: Between September and October 2023, Buchholz executed 10 unauthorized trades totalling $590,795 in the accounts of four beneficiaries of a deceased customer. He generated $16,245.63 in commissions. Two customers suffered losses from liquidating the unauthorized positions.

SUMMARY:

Buchholz executed a series of unauthorized trades in four customer accounts shortly after the accounts were funded from their father’s estate. By placing trades without any written or oral approval and later liquidating one customer’s holdings without consent, he violated FINRA Rule 2010. His actions generated significant commissions for himself and resulted in losses for certain customers, prompting formal complaints and regulatory action.

SANCTIONS:

• One-month suspension.
• $7,500 fine.
• $7,480 disgorgement + interest.

AWC Document:

2024081242701 Barry L. Buchholz CRD 1583582 AWC lp.pdf

CONCLUSION:
This case underscores FINRA’s strict prohibition against unauthorized trading in non-discretionary accounts. Registered representatives must obtain explicit customer authorization before executing any transactions. Failure to do so violates the ethical and professional standards embedded in FINRA Rule 2010 and exposes customers to unauthorized risk and financial harm.

6.      Case: Luis S. Jean-Bart

INTRODUCTION:

This summary reviews FINRA’s action against former registered representative Jean-Bart, who failed to timely respond to multiple FINRA Rule 8210 requests for information over a prolonged period, violating FINRA’s investigative requirements and conduct standards.

• Date of Action: November 19, 2025
• Respondent: Luis S. Jean-Bart
• Violations: 

A. FINRA Rule 8210:

This rule states associated persons to provide information, documents, and records necessary to an investigation, and prohibits failing to comply with such requests.

Violation: Jean-Bart failed to provide complete and timely responses to multiple FINRA Rule 8210 requests issued between October 19, 2023, and January 24, 2025. Despite extensions and repeated follow-up requests, he did not provide all required documents by the established deadlines. Some documents were not produced until more than 15 months after the initial due date. His prolonged lack of cooperation impeded FINRA’s investigation into alleged off-platform crypto-asset activity.

B. FINRA Rule 2010:

This rule requires associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: By failing to timely respond to FINRA Rule 8210 requests, Jean-Bart violated FINRA Rule 2010. An untimely or incomplete response to an 8210 request constitutes a breach of the standards of conduct required of registered persons.

SUMMARY:

Jean-Bart repeatedly failed to comply with FINRA’s Rule 8210 information requests over an extended period, delaying and hindering an active investigation. His failure to timely provide the required documents and information resulted in violations of both FINRA Rules.

SANCTIONS:

• Ten-month suspension.
• $5000 fine.

AWC Document:

2023080015803 Luis S. Jean-Bart CRD 5472965 AWC ks.pdf

CONCLUSION:
FINRA’s action highlights the critical importance of full and timely compliance with Rule 8210 requests. Failure to cooperate with regulatory investigations undermines FINRA’s ability to protect investors and enforce industry standards, and such conduct constitutes a serious violation of FINRA rules.

7.      Case: Deutsche Bank Securities Inc.

INTRODUCTION:

This summary reviews FINRA’s action against Deutsche Bank for longstanding failures to include required conflicts-of-interest disclosures in equity and debt research reports and for failing to maintain supervisory systems designed to ensure compliance with research disclosure rules. These failures occurred over an extended period and affected approximately 110,000 research reports.

Date of Action: November 19, 2025

• Respondent: Deutsche Bank Securities Inc.
• Violations: 

A. FINRA Rule 2241:

This rule governs equity research reports and requires member firms to ensure that such reports include complete and accurate conflicts-of-interest disclosures, such as whether the firm or its affiliates expect to receive investment banking compensation from the subject company, whether the subject company is or has been a client of the firm, and whether the research analyst or household members have a financial interest in the securities discussed..

Violation: Deutsche Bank violated FINRA Rule 2241 by publishing approximately 99,000 equity research reports that omitted required disclosures relating to expected investment banking compensation and thousands more that failed to disclose client relationships and analyst ownership interests. The missing disclosures resulted from flawed data feeds, incomplete client information, and inadequate monitoring of analyst trading. These failures spanned from January 2007 through May 2025 and reflect the firm’s inability to ensure that its equity research reports contained accurate, comprehensive, and compliant conflict-of-interest disclosures.

B. FINRA Rule 2242:

This rule governs debt research reports and requires firms to disclose expected investment banking compensation, client relationships, analyst financial interests, and other conflicts that may affect the objectivity of debt research.

Violation: Deutsche Bank violated FINRA Rule 2242 by publishing approximately 9,000 debt research reports containing incomplete or missing conflicts-of-interest disclosures, including failures to disclose expected investment banking compensation, client relationships, and analyst ownership. The firm also released 172 compendium debt research reports lacking the required hyperlink-accessible disclosures due to an incomplete online search tool. These violations, occurring from July 16, 2016, through May 2025, resulted from the firm’s long-standing failure to maintain adequate data systems and supervisory controls to ensure compliance with debt research disclosure requirements.

C. FINRA rule 3110:

This rule states member firms to establish, maintain, and enforce a supervisory system and written supervisory procedures designed to ensure compliance with applicable securities laws and FINRA rules.

Violation: From January 2007 to the present, Deutsche Bank failed to maintain a supervisory system reasonably designed to ensure that its research disclosures were accurate and complete. The firm did not verify the integrity of data feeds used for disclosure triggers and lacked adequate procedures to monitor and restrict research analyst trading in covered securities, including trades in third-party managed accounts. These deficiencies resulted in widespread disclosure omissions and violations of supervision rules.

D. FINRA Rule 2010:

This rule states member firms to observe high standards of commercial honor and just and equitable principles of trade.

Violation: Deutsche Bank’s systemic failures to comply with research disclosure obligations and supervisory requirements constitute violations of Rule 2010, as the firm failed to ensure transparency in areas critical to investor protection and market integrity.

SUMMARY:

For more than a decade, Deutsche Bank operated with defective data systems, inadequate oversight, and incomplete supervisory procedures, resulting in inaccurate or missing conflict-of-interest disclosures in approximately 110,000 research reports. These failures violated multiple research and supervision rules, undermining investor transparency and market integrity.

SANCTIONS:

• a censure.
• $2.5 million fine.
• An undertaking requiring senior management to certify, within 180 days, that Deutsche Bank has remediated the failures and implemented a supervisory system reasonably designed to comply with FINRA Rules.

AWC Document:

2022073416601 Deutsche Bank Securities Inc. CRD 2525 AWC ks.pdf

CONCLUSION:
This action underscores FINRA’s expectation that firms maintain rigorous systems ensuring complete and accurate research disclosures. Effective supervisory controls and transparent conflict-of-interest reporting are essential for investor protection and the integrity of the research process.

8.      Case: James Daniel Lang

INTRODUCTION:

This summary reviews FINRA’s action against Lang, who engaged in multiple outside business activities (OBAs) without providing the required prior written notice to his member firms. His failure to disclose compensated trustee and executor roles over several years resulted in violations of FINRA’s OBA and conduct rules.

• Date of Action: November 19, 2025
• Respondent: James Daniel Lang
• Violations: 

A. FINRA Rule 3270:

This rule prohibits registered persons from engaging in outside business activities or receiving compensation from any business outside their member firm unless they provide prior written notice to the firm.

Violation: Between October 2016 and December 2022, Lang failed to disclose multiple compensated fiduciary roles, including serving as trustee for two customer trusts and as executor of a customer’s estate. Despite being required to disclose all OBAs through LPL’s electronic system, Lang failed to report his trustee roles until after they were discovered during a branch audit, and even after being instructed to relinquish the positions, he continued acting as trustee. After joining IFG in October 2020, Lang again failed to disclose his ongoing trustee activity until December 2022. He also did not disclose his executor role to either firm. Lang repeatedly certified inaccurately on compliance questionnaires that he had no undisclosed outside activities and no fiduciary roles, rendering his conduct a clear violation of Rule 3270.

B. FINRA Rule 2010:

This rule states associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: By knowingly failing to disclose required OBAs, inaccurately completing compliance questionnaires, continuing fiduciary activities after direct firm instructions to cease, and withholding material information from both LPL and IFG, Lang violated FINRA Rule 2010, as nondisclosure of OBAs constitutes misconduct inconsistent with ethical industry standards.

SUMMARY:

Lang engaged for years in undisclosed outside business activities, including compensated trustee and executor roles for a long-time customer, despite firm requirements to report all external activities. His failure to disclose these roles and his inaccurate compliance certifications violated FINRA Rules 3270 and 2010.

SANCTIONS:

• Four-month suspension.
• $5000 fine.

AWC Document:

2020067065101 James Daniel Lang CRD 2959057 AWC lp.pdf

CONCLUSION:
This action reaffirms FINRA’s expectation that registered persons fully and accurately disclose all outside business activities. Failure to provide prior written notice undermines firm oversight, introduces undisclosed conflicts, and violates fundamental conduct standards.

9.      Case: Mark A. Carter

INTRODUCTION:

This summary reviews FINRA’s action against Carter, who engaged in excessive and unsuitable options trading, exercised discretion without authorization, and mismarked trades in two retail customer accounts while associated with Pruco Securities. His actions resulted in violations of Regulation Best Interest (Reg BI) and multiple FINRA rules.

• Date of Action: November 19, 2025
• Respondent: Mark A. Carter
• Violations: 

A. Exchange Act Rule 15l-1(a) of Regulation BI:

This rule states brokers to act in the best interest of retail customers when making recommendations, without placing their own interests ahead of the customer’s. It requires reasonable diligence to ensure the recommendation is suitable and not excessive in light of the customer’s investment profile.

Violation: From January to December 2023, Carter recommended more than 2,200 options trades to two retail customers whose profiles reflected long-term, capital-appreciation objectives making highly active and risky options strategies deeply unsuitable. His trading caused over $600,000 in losses, representing more than 99% of the customers’ account value, while generating commissions of $6,773 for himself. Annualized cost-to-equity ratios averaged 42%, demonstrating excessive trading far outside the customer’s best interest. Carter therefore wilfully violated Reg BI’s Best Interest Obligation and FINRA Rule.

B. FINRA Rule 3260:

This rule prohibits the exercise of discretionary trading authority in a customer’s account unless the customer provides prior written authorization and the member firm approves the discretionary arrangement in writing.

Violation: Carter exercised discretion in the customer’s accounts without obtaining any written authorization. Over the course of twelve months, he placed 2,314 options trades without speaking to the customers, violating the rule and exceeding both customer and firm authority.

C. FINRA Rule 2360:

This rule prohibits discretionary trading in options accounts unless it complies with Rule 3260 and specifically authorizes options trading.

Violation: Because Carter lacked written discretionary authority for options transactions, each discretionary trade he placed in the customers’ accounts constituted a separate violation of Rule 2360(b)(18)(A)(i). His extensive pattern of unauthorized discretionary options trades violated this rule repeatedly.

D. FINRA Rule 4511:

This Rule states members and associated persons to maintain accurate books and records, including properly marking whether trades are solicited or unsolicited.

Violation: Carter mismarked all 2,314 solicited options trades as unsolicited. These false markings caused the firm to maintain inaccurate books and records and concealed the magnitude of his excessive trading activity, constituting a direct violation of Rule 4511.

D. FINRA Rule 2010:

This Rule states associated persons to observe high standards of commercial honor and just and equitable principles of trade.

Violation: Because Carter engaged in unsuitable trading, exercised unauthorized discretion, and mismarked order tickets, he failed to meet the high standards of conduct required under Rule 2010. Each underlying violation independently supports a violation of this rule.

SUMMARY:

Carter’s trading activity was excessive, unsuitable, and unauthorized. He breached Regulation Best Interest, FINRA’s suitability rules, discretionary trading rules, and books-and-records requirements. His conduct resulted in severe customer harm and violated multiple FINRA rules.

SANCTIONS:

• Nine-month suspension.
• $20,000 fine.
• Disgorgement of $6,773 plus interest.

AWC Document:

2024081675801 Mark A. Carter CRD 6387371 AWC vr.pdf

CONCLUSION:
Carter’s misconduct demonstrates serious breaches of both suitability and supervisory standards. By recommending excessive and high-risk options trades that were not in the best interest of his retail customers, exercising discretion without proper authorization, and creating inaccurate trade records, Carter violated multiple FINRA rules and Regulation Best Interest. These actions caused significant financial harm to the customers and undermined the integrity of the brokerage process. FINRA’s sanctions including suspension, fines, and disgorgement underscore the critical importance of adhering to suitability obligations, obtaining proper authorizations, and maintaining accurate records to protect investors and uphold market integrity.

10.  Case: Laidlaw & Company (UK) Ltd.

INTRODUCTION:

This summary reviews FINRA’s actions against Laidlaw, which involved failures to maintain minimum net capital, deficient supervisory procedures, and improper handling of investor funds in a contingency offering. These deficiencies violated multiple SEC and FINRA rules, posing risks to investors and the integrity of the securities market.

• Date of Action: November 20, 2025
• Respondent: Laidlaw & Company (UK) Ltd.
• Violations: 

A. Exchange Act §§ 15(c)(3), Exchange Act Rule 15c3-1:

This rule states the minimum net capital standard that must be continuously met by all registered broker-dealers.

Violation: Between September 2022 and March 2023, Laidlaw operated while undercapitalized on at least 108 days, with deficiencies ranging from $53,000 to $1.26 million, sometimes exceeding $1 million. These deficiencies occurred because the firm failed to reconcile bank statements and general ledger entries consistently. By conducting business while undercapitalized, Laidlaw violated the minimum net capital requirements set forth in Exchange Act § 15(c)(3) and Rule 15c3-1.

B. Exchange Act § 17(a) and Exchange Act Rule 17a-11:

This rule states firms to notify FINRA and the SEC immediately if net capital falls below required minimums.

Violation: Laidlaw filed two inaccurate deficiency notices in December 2022 and January 2023, misreporting the start and end dates of net capital deficiencies. Additionally, an April 2023 notice overstated compliance. By failing to provide accurate and timely net capital deficiency notices, Laidlaw violated Exchange Act § 17(a) and Rule 17a-11.

C. FINRA Rule 4110:

This rule states a member firm to suspend all business operations during any period in which it is not in compliance with applicable net capital requirements.

Violation: Laidlaw continued to conduct securities business during the periods it was undercapitalized. By failing to suspend operations during these times.

D. FINRA Rules 3110:

This rule states member firms to establish, maintain, and enforce supervisory systems and written supervisory procedures (WSPs) reasonably designed to ensure compliance with applicable laws and rules.

Violation: Between September 2022 and June 2023, Laidlaw failed to maintain WSPs for general ledger maintenance, reconciliation, intercompany transactions, and net capital calculations. Staffing shortages exacerbated these deficiencies, and no remedial steps were taken until July 2023.

E. Exchange Act § 15(c)(2) and Rule 15c2-4(b)

This rule sates that in contingency offerings, broker-dealers either deposit investor funds into a separate account or transmit funds to an independent escrow agent when the broker is affiliated with the issuer.

Violation: Between November 2020 and January 2021, Laidlaw participated in a contingency offering for an affiliated issuer but failed to establish an independent escrow account, instructing investors to send funds directly to the issuer.

SUMMARY:

Laidlaw’s failures to maintain net capital, submit accurate deficiency notices, establish supervisory systems, and properly handle investor funds in a contingency offering violated multiple SEC and FINRA rules. These lapses created regulatory and investor risks and demonstrate significant supervisory and compliance deficiencies.

SANCTIONS:

• a censure
• $200,000 fine.

AWC Document:

2023077061201 Laidlaw & Company (UK) Ltd. CRD 119037 AWC ks.pdf

CONCLUSION:
Laidlaw’s conduct demonstrates significant failures in financial and supervisory controls. By operating while undercapitalized, submitting inaccurate net capital deficiency notices, failing to suspend business during periods of deficiency, neglecting to maintain adequate supervisory procedures, and mishandling investor funds in a contingency offering, the firm violated multiple SEC and FINRA rules. These violations exposed investors and the marketplace to risk and reflect a breakdown in both compliance and operational oversight. FINRA’s sanctions, including censure and a $200,000 fine, underscore the importance of maintaining adequate capital, accurate reporting, robust supervisory systems, and proper handling of investor funds to protect investors and uphold market integrity.

I. Investment Advisers

A. Adherence to Fiduciary Standards of Conduct

• The Division will review advisers’ adherence to both the duty of care and duty of loyalty obligations (as defined under the Investment Advisers Act of 1940 and related rules). SEC+1
• Key focus areas:
  • The influence of advisers’ financial conflicts of interest on providing impartial advice. SEC
  • Whether advisers appropriately consider the relevant factors when recommending or providing advice, including: cost, investment product or strategy objectives and characteristics (e.g., liquidity, lock-up periods, volatility), the likely performance in varying market/economic conditions, time horizon, cost of exit. SEC
  • Whether advisers seek best execution (for client trades) with the goal of maximizing value for clients under the circumstances of the transaction. SEC
• Investment products/strategies flagged for special attention:
  • Alternative investments (e.g., private credit, private funds with long lock-ups). SEC+1
  • Complex investments (e.g., ETFs wrapping less liquid underlying strategies, option-based ETFs, leveraged/inverse ETFs). SEC+1
  • Products that carry higher investing costs (e.g., high commissions or higher investment expenses compared to similar products). SEC+1
• Advisers to specific investor groups or with particular business models:
  • Advisers recommending to older investors / those saving for retirement (and likely to have longer horizons, possibly less liquidity). psca.org+1
  • Advisers to newly launched private funds; advisers that have not previously advised private funds (looking at valuation, liquidity, fees, side letters, differential treatment of investors). SEC+1
  • Advisers that are dually registered as broker-dealers, or where an adviser uses third-parties to access client accounts (creating potential conflicts). SEC
  • Advisers that have recently merged or been acquired, where operational/compliance risks may increase. SEC

B. Effectiveness of Advisers’ Compliance Programs

• The SEC will review advisers’ compliance programs (policies, procedures) across core areas: marketing, valuation, trading, portfolio management, disclosures/filings, custody. SEC
• The inquiry will include whether the compliance policies/procedures are implemented and enforced, not just on paper. SEC
• Conflicts of interest: whether the disclosures address fee-related conflicts, particularly in connection with adviser compensation structures, account/product structuring. SEC
• Examinations may focus on advisers whose business models/operations are changing (e.g., offering new asset types, using new technology) to see whether the compliance programs remain appropriate. SEC

C. Never-Examined Advisers and Recently Registered Advisers

• The Division continues to prioritise examinations of advisers that have never been examined and those that are recently registered. SEC+1
• The rationale: to encourage the establishment and maintenance of robust compliance programs early in their lifecycle. SEC

II. Investment Companies (Mutual Funds, ETFs, etc)

• The SEC continues to prioritise examination of registered investment companies (“RICs”) because of their importance to retail investors and retirement-savings vehicles. SEC+1
• Typical examination scope: compliance programs, disclosures and filings (e.g., summary prospectus), governance practices. SEC
• Specific operational/strategic areas of focus:
  • Funds that participate in mergers or similar transactions — operational and compliance challenges associated with those. SEC
  • Funds employing ** less liquid or illiquid investments**, or complex strategies (for example closed-end funds, funds using leverage) — valuation, liquidity and conflict-of-interest issues. SEC+1
  • Funds with novel strategies or investments, including those with leverage vulnerabilities. SEC
• As with advisers, priority also given to funds that have never been examined or are newly registered. SEC

III. Broker-Dealers

A. Financial Responsibility and Customer Protection

• The SEC will examine broker-dealers for compliance with rules such as net capital, customer protection, liquidity and resiliency (especially with third-party vendors, cash-sweep programs, prime brokerage). SEC+1
• Focus on operational/compliance risks: e.g., vendor-risk management, counterparty risk, liquidity risk. SEC+1

B. Trading-Related Practices and Services

• Reviews will cover extended hours trading, municipal securities (including variable rate demand obligations/rate-reset VRDOs) and other fixed income trading practices. SEC
• Order routing and execution practices: best execution, pricing of illiquid instruments, alternative trading systems. SEC
• For example, whether broker-dealers appropriately rely on the bona fide market-making exception under Regulation SHO. SEC

C. Retail Sales Practices, Including Compliance with Regulation Best Interest (Reg BI)

• Broker-dealers will be examined for whether recommendations are in clients’ best interests (not placing broker’s interests ahead of the client’s) and whether disclosures (e.g., Form CRS) are appropriate. Stinson+1
• Particular focus: recommendations to older investors, those saving for retirement or college; product menus; limited product offerings; suitability in context of client’s background and investment objectives. psca.org+1

IV. Self-Regulatory Organisations (SROs) / Market Infrastructure

• The SEC will examine entities like national securities exchanges, clearing agencies, and entities subject to the Regulation Systems Compliance & Integrity (SCI) regime for compliance with rules, vendor/operational risk, incident-response, etc. SEC
• For designated systemically important clearing agencies: risk management, liquidity/default management, vendor/operations. SEC

V. Other Market Participants

• Municipal advisors: The Division will review whether they meet fiduciary duties to municipal entity clients (e.g., advice on pricing/methods of sale of municipal securities) and comply with core standards of conduct (e.g., Municipal Securities Rulemaking Board Rule G-42). SEC
• Transfer agents: Focus on processing of items/transfers, safeguarding funds/securities, record-keeping/retention, and compliance with amended Regulation S-P for covered institutions (incident response program, vendor oversight). SEC
• Funding portals: For entities operating as funding portals (under the Jumpstart Our Business Startups Act a/k/a “JOBS Act”), Examination will review arrangements with third-parties for investor funds, policy/procedure design, and once the compliance date hits, adequacy of incident-response, vendor oversight under Reg S-P. SEC
• Security-based swap dealers (SBSDs) and SBSEFs: The Division will focus on SBSDs for compliance with reporting obligations (e.g., under Regulation SBSR), margin/capital/segregation; SBSEFs will be examined for rules and internal procedures for trade monitoring, trade processing, participation oversight. SEC

VI. Risk Areas Impacting Various Market Participants (Cross-Cutting Risks)

A. Information Security & Operational Resiliency

• Cybersecurity remains a major priority: registrants’ ability to prevent interruptions, protect investor information and assets, governance practices, data loss prevention, access controls, incident-response (including ransomware). SEC+1
• Compliance with Regulations S-ID (identity theft) and S-P (safeguards rule, disposal rule, incident-response obligations) for covered institutions: ensuring policies/procedures for vendor oversight, incident response. SEC

B. Emerging Financial Technology

• Focus on registrants’ use of automated investment tools, AI, trading algorithms/platforms, and alternative data sources. SEC+1
• Key themes:
  • Whether representations about a firm’s AI capability are accurate.
  • Whether the records and disclosure are consistent with how the tools are used.
  • Whether the automated advice/recommendations align with investors’ profiles, strategies and regulatory obligations (especially for retail and older investors). AInvest+1

C. Regulation Systems Compliance & Integrity (SCI)

• For entities subject to the SCI regime: examinations will review incident-response programs, vendor risk, oversight of indirect systems, and whether confidence in market infrastructure (e.g., exchanges, clearing) is maintained. SEC

D. Anti-Money Laundering (AML)

• The Division will review whether broker-dealers and certain registered investment companies have AML programs appropriately tailored to their business, including: independent testing of the program; customer identification programs (including beneficial owner identification of legal-entity customers); suspicious-activity reporting; and sanctions compliance. SEC

VII. Compliance with New Rules and Regulatory Developments

• The 2026 priorities emphasise compliance with newer regulatory requirements, for example the 2024 amendments to Regulation S-P (privacy of consumer financial information and safeguarding customer information) which apply to investment advisers, investment companies, broker-dealers, transfer agents, funding portals. SEC
• Firms should monitor how changing market operations, product innovation, business model shifts, and technology use align with evolving expectations of the SEC’s examiner program (which uses risk-based strategies) rather than checking “off the list”. SEC

Key Implications for Firms

• Firms should review and update their conflict-of-interest frameworks, disclosures, compliance programs (especially for newer or alternative business lines).
• Firms offering products to older investors or retirement‐savers should pay particular attention to whether product recommendations align with investor objectives, risk tolerance, and cost/exit liquidity.
• Firms using alternative or illiquid strategies, private credit, ETFs with complex strategies, should examine their valuation, liquidity, fee, and disclosure practices in light of heightened scrutiny.
• Firms using AI/automation/trading algorithms must ensure their representations are accurate, oversight is in place, controls exist, and disclosures align.
• Firms acting as or relying on third-party vendors (custody, access, data, platforms) should ensure their vendor-risk management, incident response, cyber-security, identity-theft programs are robust and documented.
• Firms that are newly registered or have never been examined should treat this as an opportunity to build strong compliance programs rather than hope to avoid review.
• Firms should note that crypto/digital-asset specific language is less prominent in this year’s priorities (though not eliminated as an area of exam focus).* cryptoslate.com+1

* While the document does not highlight crypto as its own category, that does not mean crypto-related activity is exempt from review; rather, it’s subsumed under broader risk categories.

      I.            Background

First Trust has operated as a wholesale distributor of securities issued mainly by affiliated investment companies since 1991. It employs approximately 700 registered representatives across four branch offices nationwide.

   II.            The Violations: What Went Wrong?

A.    Unauthorized and Excessive Gifts

First Trust wholesalers routinely provided lavish perks that far exceeded FINRA’s annual $100 per person non-cash gift limit. These included:

• Multiple instances of courtside basketball tickets valued at around $3,200 per pair, given without an accompanying First Trust employee.
• Tickets to a Broadway musical costing more than $1,800, again without firm accompaniment.
• Bottles of alcohol priced at $400 or higher, given repeatedly to client representatives.
• Luxury suite tickets for NBA and NHL playoff and professional football games worth tens of thousands of dollars.

Additionally, one representative received over $31,000 in tickets and entertainment within 18 months, such as NBA All-Star game luxury suite access. Another was given more than $50,000 in gifts and entertainment over a four-year period, including meals, concerts, and golf outings, with seventeen events exceeding $21,000 in one year.

Furthermore, six wholesalers explicitly linked gifts to sales targets, such as promising hockey game tickets contingent on a broker selling $1 million in Unit Investment Trusts (UITs) or offering to pay for future events if sales goal of $1 million to $10 million were achieved.

These actions violate FINRA Rules 2341(l)(5) and 2010, which prohibit excessive gifts and sales-based inducements.

B.     Falsification of Expense Reports and Records

More than 40 expense reports were falsified involving more than $650,000. Violations included:

• Listing deceased or inactive individuals as attendees.
• Omitting actual attendees from reports to lower apparent costs.
• Coordinating false reports through private texts, evading firm surveillance.

Supervisors occasionally advised wholesalers on how to disguise true expenses, violating FINRA Rules 4511 and 2010, Section 17(a) of the Securities Exchange Act of 1934, and Exchange Act Rule 17a-3.

C.    Failure to Accurately Report to Client Firms

First Trust submitted at least 25 quarterly reports to client firms, understating or omitting non-cash perks benefits over $500,000, including a failure to report luxury suite tickets costing $20,000 for football games in late 2019. Despite improvements after October 2021, some omissions continued, violating FINRA Rule 2010.

D.    Lack of Adequate Supervision Supervisory Failures

Despite having written policies, First Trust failed to supervise the provision and reporting of non-cash compensation properly. The supervisory system relied on wholesalers’ unverified self-reporting and permitted modifying approved reports without internal checks. Notably, the firm failed to supervise Firm-paid tickets prior to October 2021, significantly compounding compliance failures.

These supervisory failures violated FINRA Rules 3110(a), 3110(b), and 2010.

III.            Remedial Actions Taken by First Trust

To address these issues, First Trust implemented several corrective measures, including:

• Establishing a dedicated compliance audit function reporting directly to executive management focused on non-cash compensation and sales practices.
• Enhancing tracking systems for event ticket distributions.
• Disciplining employees through suspensions without pay, fines, and increased supervision.

IV.            Sanctions and Undertakings

First Trust agreed to:

• A censure.
• A $10 million fine.
• An undertaking mandating the firm’s senior management, identified as a registered principal, to certify annually for three years that it complies with FINRA Rules 2010, 2341, 3110, and 4511 as well as Exchange Act 17(a) and Exchange Act Rule 17a-3.

The firm voluntarily waived any right to claim an inability to pay, now or at any time after the execution of this AWC, the monetary sanction imposed in this matter.

   V.            Why This Matters?

This case underscores the importance of ethical practices and cautious supervision in brokerage operations. It reflects FINRA’s dedication to protecting investors by holding firms accountable for improper gift and entertainment practices that may skew financial advice.

For firms operating in the securities industry, First Trust’s penalty is a stark reminder to maintain transparent records, enforce reasonable gift limits, and foster a culture of compliance to ensure trusted client relationships and market integrity. The statements in this blog post are allegations as set forth in the AWC.

Herskovits PLLC represents broker-dealer and registered persons in defense of FINRA investigations and disciplinary actions.  Feel free to contact us for a consultation at (12) 897-5410.

Summary: FINRA Disciplinary Action – Kenneth John Malm

On May 20, 2025, FINRA released an AWC for Matter No. 2023078405601.

Background:

• Kenneth John Malm was registered as a General Securities Representative and Investment Banking Representative with Osaic Wealth, Inc. (formerly Securities America, Inc.).
• In August 2024, Malm was permitted to resign during an internal review after being named as a beneficiary of a client’s estate.
• Malm allegedly accepted and received a bequest of over $1 million from a deceased client (not an immediate family member) without notifying or obtaining approval from his firm.

Alleged Violations:

• FINRA Rule 3241:  Provides that “[a] registered person shall decline being named a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate upon learning of such status” unless: (a) the customer is an immediate family member; or (b) the representative provides written notice to firm, and the firm (after performing a reasonable assessment of the request) approves the request.
• FINRA Rule 2010: Requires high standards of commercial honor and just and equitable principles of trade.

Sanctions:

• Suspension: 7 months from associating with any FINRA member in any capacity.
• Fine: $10,000, payable upon reassociation with a member firm or before seeking relief from any statutory disqualification.

Additional Notes:

• The matter originated from a tip to the FINRA Securities Helpline for Seniors.
• Malm waived his rights to a hearing, appeal, and other procedural protections by accepting the settlement.
• This action will become part of Malm’s permanent disciplinary record and will be publicly disclosed.

Conclusion:
Malm’s case highlights FINRA’s strict stance on conflicts of interest and the importance of disclosure and firm approval when it comes to bequests from clients. Malm’s alleged failure to follow these rules led to a significant suspension and fine, serving as a warning to other brokers in similar situations.

Herskovits PLLC has a nationwide practice representing individuals and entities faced with FINRA investigations or disciplinary actions.  Feel free to contact us at (212) 897-5410.

The 2024 FINRA Annual Regulatory Oversight Report provides a detailed overview of FINRA’s regulatory activities, priorities, and key initiatives for the year. The report covers areas such as market regulation, member supervision, enforcement actions, and rulemaking efforts. It also highlights trends in the financial industry, emerging risks, and FINRA’s response strategies. The document emphasizes the importance of protecting investors, ensuring market integrity, and maintaining fair and efficient markets.

Financial Crimes

The financial crime section of the report details FINRA’s focus on combating activities such as money laundering, fraud, and market manipulation. Key initiatives include the use of advanced surveillance technologies and data analytics to detect suspicious activities. FINRA also emphasizes the importance of firms adhering to Anti-Money Laundering (AML) regulations, including thorough customer due diligence and suspicious activity reporting. The report highlights several enforcement actions taken against firms and individuals involved in financial crimes, showcasing FINRA’s commitment to maintaining market integrity and protecting investors.

Crypto Assets Developments

FINRA addresses the growing involvement of member firms in crypto-related activities and the associated risks. The report emphasizes the need for firms to have robust compliance frameworks to manage the unique risks of crypto assets, including fraud and market manipulation. FINRA is focused on ensuring that firms adhere to existing regulations while also adapting to the evolving landscape of digital assets. This includes enhanced due diligence, investor protection measures, and the proper disclosure of risks associated with crypto products.

Firm Operations

This section highlights the importance of strong operational risk management practices, especially in the context of technological advancements and increased cyber threats. FINRA underscores the need for firms to maintain comprehensive business continuity plans, implement effective cybersecurity measures, and ensure the proper management of third-party vendors. The report also discusses the importance of ongoing training and awareness programs for staff to mitigate operational risks, particularly in a remote or hybrid work environment.

Communications and Sales

FINRA focuses on the regulation of communications between firms and their customers, particularly in the context of digital platforms and social media. The report stresses the importance of transparency and accuracy in marketing materials and customer communications. Firms are encouraged to establish strong supervisory systems to oversee sales practices, ensuring that they are fair and not misleading. The section also touches on the use of new communication technologies and the need for firms to adapt their compliance programs accordingly.

Market Integrity

The report outlines FINRA’s efforts to uphold market integrity through vigilant surveillance, examinations, and enforcement actions. Key areas of focus include detecting and preventing market manipulation, insider trading, and other illicit activities. FINRA employs advanced analytics and technology to monitor trading activity and identify suspicious behavior. The organization also works closely with other regulators to ensure coordinated responses to potential threats to market integrity.

Financial Management

FINRA emphasizes the importance of sound financial management practices within member firms, particularly in areas such as capital adequacy, liquidity management, and financial risk management. The report discusses the need for firms to comply with financial responsibility rules and to maintain sufficient capital reserves to withstand economic stress. Additionally, FINRA highlights the importance of regular financial reporting and audits to ensure transparency and accountability.

For more in-depth information, you can review the full report here.

On October 16, 2023, the Securities and Exchange Commission’s Division of Examinations released its 2024 examination priorities to inform investors and registrants of the key risks, examination topics, and priorities that the Division plans to focus on in the upcoming year. This year’s examinations will prioritize areas that pose emerging risks to investors or the markets in addition to core and perennial risk areas.

“The Division of Examinations plays a critical role in protecting investors and facilitating capital formation,” said SEC Chair Gary Gensler. “In examining for compliance with our time-tested rules, the Division helps registrants understand the rules as well as ensures that markets work for investors and issuers alike. The Division’s efforts, as laid out in the 2024 priorities, enhance trust in our ever-evolving markets.”

“Continuing to make our examination priorities public increases transparency into the examination program and encourages firms to focus their compliance and surveillance efforts on areas of potentially heightened risk to retail investors,” said Division of Examinations’ Director Richard R. Best. “We hope that aligning the publication of our examination priorities with the beginning of the SEC’s fiscal year will provide earlier insight to registrants, investors, and the marketplace of adjustments in our areas of focus year to year.”

The Division conducts examinations and inspections of SEC-registered investment advisers, investment companies, broker-dealers, transfer agents, municipal advisors, securities-based swap dealers, clearing agencies, and other self-regulatory organizations. The Division prioritizes examinations of certain practices, products, and services that it believes present potentially heightened risks to investors or the integrity of the U.S. capital markets. It uses a risk-based approach to fulfill its mission to improve compliance, prevent fraud, monitor risk, and inform policy.

The published priorities are not exhaustive of the focus areas of the Division in its examinations, risk alerts, and outreach. The scope of any examination includes analysis of an entity’s history, operations, services, products offered, and other risk factors.

As it relates to broker-dealers, the Division of Examinations will focus on:

• Regulation Best Interest, with an emphasis on (1) recommendations with regard to products, investment strategies, and account types; (2) disclosures made to investors regarding conflicts of interest; (3) conflict mitigation practices; (4) processes for reviewing reasonably available alternatives; and (5) factors considered in light of the investor’s investment profile, including investment goals and account characteristics. Examinations will focus on products s that are: (1) complex, such as derivatives and leveraged ETFs; (2) high cost, such as variable annuities; (3) illiquid, such as nontraded REITs and private placements; (4) proprietary; and (5) microcap securities. Examinations may also focus on recommendations to certain types of investors, such as older investors and those saving for retirement or college.
• Form CRS, including how broker-dealers describe (1) the relationships and services that it offers to retail customers; (2) its fees and costs; and (3) its conflicts of interest, and whether the broker-dealer discloses any disciplinary history.
• Financial Responsibility Rules, including the Net Capital Rule and the Customer Protection Rule.
• Trading Practices, with an emphasis on : (1) Regulation SHO, including the rules regarding aggregation units and locate requirements; (2) Regulation ATS, and whether the operations of alternative trading systems are consistent with the disclosures provided in Forms ATS and ATS-N; and (3) Exchange Act Rule 15c2-11.

The collaborative effort to formulate the annual examination priorities starts with feedback from examination staff who are uniquely positioned to identify the practices, products, services, and other factors that may pose risk to investors or the financial markets. The Division also gathers input and advice from the Chair and other Commissioners, staff from other SEC divisions and offices, other federal financial regulators, investors, and industry groups.

Herskovits PLLC represents broker-dealers, investment advisors, and registered individuals in SEC and FINRA examinations. Feel free to contact us for a consultation (212) 897-5410.

FINRA recently published an AWC entered into with Richard L. Langer, a registered representative with Planner Securities LLC. FINRA accused Langer of violating FINRA Rules 2210 and 2220. FINRA Rule 2210 governs communications by registered representatives with the public and FINRA Rule 2220 sets forth requirements with respect to options-related communications.

The review of Langer’s communications originated with a cycle examination conducted by FINRA Member Supervision. According to FINRA, between January 2016 and November 2019, Langer maintained a public Facebook page for an investment club he operated. Langer authored 20 posts on the Facebook page regarding the performance, investment returns, industry standing, and purported successes of the investment club and a separate hedge fund at which Langer traded.

For example, on January 9, 2018, Langer posted:

Good Day to all! Hope everyone had a wonderful Holiday season and wishing everyone a healthy and happy 2018! We did it yet again! #2 top performing options hedge fund for November 2017, 1.93% return. With a year to date return on invest of 29.12% We still remain the Top performing options Hedge fund in 2017!! i can tell you that December record breaking return (to be released in 2 weeks) put us over 34% return for 2017 making [Hedge Fund A] the #1 options strategy hedge fund on the street for 2017,, That’s back to back years we took # 1 best performing options strategy hedge fund on the Planet !! interested in putting your money to work for you? Ask us.

FINRA Rule 2210(d)(l)(A) provides that:

[a]II member communications must be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service. No member may omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading.

FINRA found Langer’s Facebook posts violative of Rule 2210 because they provided only positive news about the hedge fund and the investment club and did not disclose any risks associated with these investments. As such, the posts did not, “provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service.”

Langer also published 11 Facebook posts regarding options. FINRA Rule 2220(d)(l)(A) provides that options communications regarding standardized options “must be limited to general descriptions of the options being discussed,” and “must not contain … past or projected performance figures, including annualized rates of return, or names of specific securities.” (emphasis added). Langer’s posts went beyond general descriptions and included performance of certain transactions. Langer also failed to state that options are not suitable for all investors as required by Rule 2220(d)(2)(A).

There are also two requirements to the rule that Langer failed to meet. First, retail options communications, “issued by a member concerning options shall be approved in advance by a Registered Options Principal designated by the member’s written supervisory procedures.” Second, retail options communications shall be submitted to the Advertising Regulation Department of FINRA … at least ten calendar days prior to use.” See FINRA Rule 2210(a)(5); FINRA Rule 2220(a)(l)(C).

“Retail” communications are those made to more than 25 retail investors with a 30-day period. Langer’s posts, which were made on a public Facebook page that had approximately 130 followers, are retail communications but Langer neither got approval from a Registered Options Principal before publishing nor were the communications submitted to the Advertising Regulation Department of FINRA.

For these violations, Langer agreed to a 10 business-day suspension and a $5,000 fine. Langer’s sanctions are at the very low end of the FINRA Sanctions Guidelines and arguably lenient given the number of posts, the three-year period of violative activity and the potential investor harm that could have arisen from this sort of marketing. Notably, the AWC is silent as to whether investors bought or sold securities based on the Facebook posts or whether they were subsequently harmed.

Herskovits PLLC has a nationwide practice defending against FINRA investigations and representing individuals in FINRA arbitration. Feel free to contact us at (212 897-5410.

FINRA recently released Regulatory Notice 22-23 providing guidance on what firms should consider when constructing succession plans for Financial Advisors (“FAs”) who will no longer service their customers do to expected or unexpected life events.

The Need for a Plan

The Notice begins by listing the various cost/benefits of having or not having a succession plan, which would seem obvious to all. It takes no great imagination to see the benefits of a sound succession plan in the event of an FA’s sudden death or the consequent difficulties of not having such a plan. The Notice, however, provides some interesting real-life anecdotes that FINRA Staff have witnessed of the years regarding succession failures and successes.

The Notice also addresses the much trickier issue of an FA’s possible diminished capacity. FINRA noted that some firms have implemented comprehensive policies regarding possible diminished capacity among employees. These include:

• training on signs of cognitive decline,
• having a formalized escalation process to raise concerns,
• establishing a diminished capacity committee to evaluate and decide next steps,
• developing a committee to evaluate representatives’ limitations, engage their physicians, protect their privacy and implement working arrangements that comply with relevant employment laws and accommodated their disabilities; and
• engaging with representatives and, depending on the circumstances, supporting the representatives with implementing a new working arrangement, developing a succession plan, providing assistance with performance issues or recommending termination.

Types of Plans

FINRA notes that there is no set way to craft a succession plan and that the complexity and details of any plan may vary greatly based on the firm but, in general, plans can broadly be divided into two categories: (1) internal programs, or (2) an external sale or other transaction.

Internal programs can come in many forms. One answer to the succession problem is for firms to encourage teams of FA’s to work together. Many large firms are actively encouraging FA’s to join teams and actively discouraging solo FA’s. The team can come in different forms. For example, it could consist of two or more FA’s of similar seniority who put a plan in place to purchase the others book of business should the need or desire arise. The team could also involve the hiring of younger FA’s with the goal of developing them to someday take over the more senior FAs book.

An FA, not with a team, might designate in advance an FA as his successor or the firm may make such designation, in each case informing customers of the new arrangement. Many, if not all, of these transition plans incorporate agreements to pay retiring representatives commissions once they leave.

External plans generally consist of a sale of the book of business to another firm or an FA at another firm or a merger of two firms. In the case of an external succession plan, the retiring FA often agrees to continue to work for a certain amount of time to help transition the clients to the new FA.

Relevant FINRA Rules

FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information) requires firms to adopt Business Continuity Plans (“BCPs”) designed to ensure that firms continue to meet customers’ needs in the event of an emergency or significant business disruption. Depending on the size of the firms and role of an individual FA, a succession plan may need to be part of the BCP.

A member firm’s succession plan may involve the Membership Application Program rules, FINRA Rules 1011 – 1019, that could include filing a Continuing Membership Application (CMA), or engaging in the materiality consultation process (MatCon). A change in ownership could trigger an obligation for member firms to file a CMA under FINRA Rule 1017 (Application for Approval of Change in Ownership, Control, or Business Operations). Rule 1017(a) specifies the changes in firms’ ownership, control or business operations that require a CMA, such as a merger with another member firm; an acquisition or transfer of 25 percent or more of the member firm’s assets; or a material change in business operations as defined in FINRA Rule 1011(m). In general, the Notice encourages firms to work closely with their Risk Monitoring Analysts at FINRA and share relevant succession planning for control person.

The Notice also highlights the concern of a succession being necessitated by the lengthy suspension or bar of an FA. In these situations, FINRA sees a heighted risk that the disciplined FA may sell his book of business to another FA who will improperly act as a proxy while sharing commission with the former FA. FINRA suggests that firm’s monitor for, “an unusually high degree of engagement between the representative and former representative or an unusually low degree of engagement between the new representative and that representative’s customers . . . .” FINRA also suggests that firm’s conduct customer “check-in calls” to determine of the terminated FA is improperly engaging with former customers.

Firms will also have to consider the payment of commissions to an unregistered person if that is part of the succession plan. FINRA Rule 2040 governs the payment of transaction-based compensation by member firms to unregistered persons. Subject to conditions, under Rule 2040(b), member firms can pay continuing commissions to their “retiring registered representatives,” after they cease to be associated with the firms, derived from accounts held for continuing customers of the retiring registered representative regardless of whether customer funds or securities are added to the accounts during the period of retirement.

Rule 2040(b) incorporates guidance from prior SEC no-action letters on the payment of commissions to retired registered representatives (referred to herein as SEC Staff Retired Representatives Guidance). Accordingly, firms and representatives who are drafting, reviewing or executing agreements for continuing commission payments to retired representatives should consider the requirements of Rule 2040 and the prior SEC Staff Retired Representatives Guidance. See SEC No-Action Letter to the Securities Industry and Financial Markets Association and SEC No-Action Letter to Amy Lee, Chief Compliance Officer, Co-CEO, Packerland Brokerage Services Questions for Consideration

The Notice concludes with a lengthy set of “Questions for Consideration” with regard to succession planning. For example, FINRA urges firms to consider such things as:

• Does the firm have a plan that addresses both retirement as well as unplanned life events?
• Does the plan account for both external and internal transitions?
• Are there different procedures for key personnel?
• Does the firm’s plan address risks of diminished capacity?
• Are written succession agreements required? Can they be customized?
• Does the plan address FAs’ disciplinary histories and other regulatory risks?
• Does the plan address continuing commissions in a way that complies with FINRA Rule 2040?
• Does the plan protect nonpublic customer information?
• Does the plan address the required customer communications necessary upon transition?

These are only a small sample of the questions that FINRA poses and suggests that firms consider when constructing a succession plan. What the Notice makes abundantly clear is that, given that over 16% of all FAs are over the age of 60, the issue of succession is only going to grow in the coming years and firms would be wise to be prepared for the many pitfalls involved.

Herskovits PLLC represents financial advisors in litigation, arbitration and regulatory matters. Feel free to contact us at (212) 897-5410

It has been reported that Morgan Stanley conducted a “nationwide probe” of abuses associated with its Former Advisor Program, a sun-setting plan that allows retired FAs to receive a split of fees and commissions paid by former clients. Further to this reporting, we conducted a survey of FINRA AWCs issued in the last 12 months in which FINRA claims an FA falsely used his individual rep code on customer trades in circumvention of the appropriate joint rep code, which would have yielded lesser compensation to the FA. The results of this survey were interesting. First, in virtually all cases, the FA worked for Morgan Stanley. That is interesting. It seems doubtful that people predisposed to rig the comp system work only for Morgan Stanley. Second, substantial disparities exist with regard to the sanction imposed by FINRA. Although the conduct is similar in all cases, FINRA’s sanction has ranged from a wrist-slap (10-business day suspension) to potentially career-ending (six-month suspension).

The table below illustrates the point (with hyperlinks to the AWCs):

This trend is troubling. According to a study by J.D. Power, the average age of a financial advisor is 57 years old and approximately one-fifth are 65 or older. It was estimated by Cerulli Associates that 37% of financial advisors (collectively controlling 40% of total industry assets) will retire within the next 10 years.

All of the major broker-dealers offer sunset plans for retiring FAs. Merrill Lynch offers the “Client Transition Program.” UBS offers the “Aspiring Legacy Financial Advisor Core Program.” Morgan Stanley offers the “Former Advisor Program.” Wells Fargo offers the “Summit Program.” Given the age of the workforce, and the proliferation of sunset plans, I’m wondering this: who is protecting the retiring or retired FA? Is FINRA proactively protecting against abuses by the inheriting FA or are they simply waiting for Form U5s to drop? Have firms other than Morgan Stanley audited their sunset plans to ensure that production credits are properly allocated to the retired FA?

The cynic in me believes nothing is being done to protect the interests of participants in the various sunset plans.

Herskovits PLLC represents financial advisors nationwide. Feel free to call us at (212) 897-5410 to discuss your case.

FINRA’s Office of Hearing Officers recently rendered a decision on an issue of first impression in Dep’t of Enforcement v. NYPPEX, LLC, et al., (Disc. Proc. No. 2019064813801). Enforcement charged FINRA member firm, NYPPEX, LLC, its former CEO, Laurence Allen, and its CCO, Michael Schunk, with numerous violations of FINRA rules. The charges stemmed from Respondents’ conduct in the wake of a temporary restraining order issued by a New York state court against Allen. Among other things, the order, obtained at the behest of the Office of the Attorney General for the State of New York (“NYAG”), enjoined Allen from engaging in securities fraud and violating New York’s securities laws. Enforcement took the position that the TRO rendered Allen statutorily disqualified from continued association with a FINRA member firm. Allen could have remained associated with the Firm if it applied for, and received, FINRA’s permission pursuant to FINRA Rule 9520. Allen’s supervisor, Schunk, however, purportedly let Allen continue as an associated person at NYPPEX for over a year without seeking a waiver from FINRA.

FINRA’s disciplinary proceeding was triggered by the ex parte TRO. After a two-year investigation, in December 2018, the NYAG commenced an action under Article 23-A of New York’s General Business Law, known as the Martin Act, against Allen and certain others. The NYAG applied on an ex parte basis for preliminary injunctive relief against Allen, NYPPEX Holdings, and others under Section 354 of New York’s General Business Law. The NYAG stated that a preliminary injunction was warranted because of the allegations of fraud and fraudulent practices by Allen and his refusal to produce documents or appear for testimony. In December 2018, the Supreme Court of the State of New York granted the NYAG the relief it sought and issued the TRO without hearing from Allen or NYPPEX. Allan was served with the Order in January 2019 and Schunk learned about it that month as well.

On December 4, 2019, the NYAG filed a complaint in the New York Supreme Court against NYPPEX, Allen and others (Index No. 452378/2019). In February 2020, the New York Supreme Court concluded a five-day hearing and issued a preliminary injunction prohibiting Allen and NYPPEX from, among other things, violating the Martin Act and from “facilitating, allowing or participating in the purchase, sale or transfer of any limited partnership interest in [the fund].” At this point in time, NYPPEX filed an MC-400 Application seeking permission for NYPPEX to remain associated with a disqualified person, Allen. FINRA Enforcement, however, argued that Allen became statutorily disqualified when the TRO was issued in 2018, more than a year before NYPPEX filed the MC-400 Application.

A person is deemed disqualified from continued association with a FINRA member firm if, among other things, such person “is enjoined from any action, conduct, or practice” specified in Section 15(b)(4)(C) of the Exchange Act. That section, in turn, includes a situation in which a person “is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from . . . engaging in or continuing any conduct or practice in connection with any such activity, or in connection with the purchase or sale of any security.”

Once a member becomes aware that one of its associated persons is subject to a disqualification, the member is obligated to report the event to FINRA. The firm must amend the individual’s Form U4 within 10 days of learning of a statutory disqualifying event. The member firm then must either file a Form U5 terminating the individual’s association or file an MC-400 Application seeking to sponsor the association of the disqualified person. If the member firm neither terminates the individual nor submits an MC-400 Application, the member is ineligible to continue in FINRA membership.

In the case of NYPPEX and Allen, the respondents argued that the TRO did not cause Allen to be statutorily disqualified and they claimed that they relied on both in house and outside counsel in coming to that conclusion. Among other things, Respondents argued that the TRO did not subject Allen to statutory disqualification because it was issued ex parte and Allen had no “notice and opportunity to be heard.” The OHO noted that “[w]hether an ex parte temporary restraining order triggers a statutory disqualification appears to be an issue of first impression.” The OHO, however, had little difficulty in finding that the TRO was indeed an injunction that triggered statutory disqualification. The decision notes that nothing in the language of the Exchange Act requires notice and opportunity to be heard before an event is disqualifying. The OHO concluded, “[i]n sum, there is no basis to conclude that Congress meant to exclude an ex parte temporary restraining order from the operative provision.”

Finally, the OHO also rejected any advice-of-counsel defense because, “[r]eliance on advice of counsel is not relevant to liability if scienter is not an element of the violation.” The decision noted, however, that even when reliance on advice of counsel is not relevant to liability it may be considered as a possible mitigation of sanctions. In the present case, however, there seems to be little mitigation of the sanctions imposed. NYPPEX was expelled from FINRA membership, Allen was barred from the securities industry, and Schunk was fined $120,000, barred from acting in any principal or supervisory capacity and suspended from the industry three and a half years.

Similar to Enforcement, the NYAG likewise prevailed at trial. The New York Supreme Court found Allen and NYPPEX liable for assorted false and misleading statements and ordered disgorgement of nearly $7 million.

Herskovits PLLC has a nationwide practice defending investigations and litigation brought by FINRA and other regulators. Feel free to call us for a consultation at (212) 897-5410.

On September 19, 2022, the SEC’s Division of Examination issued a Risk Alert concerning the new investment adviser marketing rule, Advisors Act Rule 206(4)-1 (“the Marketing Rule”). In connection with the Marketing Rule, the Commission also amended the Books and Records Rule, Advisors Act Rule 204-2 and the Form ADV. The Marketing Rule became effective on May 4, 2021 but firms were given an 18-month transition period. Thus, firms must be compliant with the Marketing Rule by November 4, 2022.

According to the Staff’s announcement, examinations will focus on four areas: a) Policies and Procedures, b) the Substantiation Requirement, c) Performance Advertising Requirements, and d) Books and Records

With regard to policies and procedures, the Commission’s noted that the Marketing Rule Adopting Release, stated that firms must adopt procedures that, “include objective and testable means” of preventing violations of the Marketing Rule. Examples of such means are:

• internal pre-review and approval of advertisements,
• reviewing a sample of advertisements based on risk, or
• pre-approving templates.

As discussed in more detail below, many of the Marketing Rule restrictions are inherently subjective thus, it remains to be seen how supervisory reviews or even pre-approved templates can ever be “objective and testable.”

The next area of examination, the Substantiation Requirement is a perfect example of the subjective nature of many parts of the Marketing Rule. The Marketing Rule prohibits advertisements that “[i]nclude a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission.” (emphasis added). The Staff advises firms to make contemporaneous records with each advertisement demonstrating the basis for their belief that a fact was accurate. They also advise firms to draft policies and procedures to address how the requirement is met. Ultimately, however, a violation of the Substantiation Requirement hinges upon the subjective element of “reasonable” belief.

Many Performance Advertising Requirements present similar subjective judgements while some are objectively straightforward. For instance, firms may not present gross performance in an advertisement unless they also present net performance. Similarly, firms may not advertise performance results unless they specify the time-period. Let us examine, however, three prohibitions listed by the Staff that are not so black and white.

• to the extent an advertisement includes the performance of portfolios other than the
  portfolio being advertised, performance results from fewer than all portfolios with
  substantially similar investment policies, objectives, and strategies as the portfolio being
  offered in the advertisement.

This prohibition requires a firm to make a very subjective determination as to which portfolios have “substantially similar investment policies, objectives, and strategies” to the portfolio being advertised. It is not hard to imagine that a firm and the SEC Staff may disagree on what makes a portfolio “substantially similar.”

Firms are prohibited from including hypothetical performance in an advertisement:

• unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience.

This prohibition contains the seemingly impossible subjective test of determining if the hypothetical performance would be “relevant to the likely financial situation and investment objectives of the intended audience.” The use of the word “likely” here is tantamount to making a good guess.

As a final example, firms cannot include predecessor performance in an advertisement:

• unless the personnel primarily responsible for achieving the prior performance manage accounts at the advertising adviser and the accounts that were managed by those personnel at the predecessor adviser are sufficiently similar to the accounts that they manage at the advertising adviser.

First, in this prohibition there is the subjective question of which personnel were “primarily responsible” for the prior performance. This is a question that no examiner could ever objectively answer. Second, the prohibition requires a determination that the predecessor accounts were “substantially similar” to the accounts being advertised. Again, an entirely subjective question.

Finally, the SEC’s announcement states that exams will focus on firm’s books and records. The SEC amended Advisors Act Rule 204-2 in connection with the new Marketing Rule. Firms are required to maintain certain advertising related records, “such as records of all advertisements they disseminate, including certain internal working papers, performance related information, and documentation for oral advertisements, testimonials, and endorsements.”

Despite the Staff’s instructions that firm’s policies and procedures must have “objective and testable means” of preventing Marketing Rule violations, the fact remains that compliance with new Marketing Rule requires a slew of subjective judgements. The words “reasonable”, “reasonably” and “likely” appear 13 times in the Marketing Rule. The word “material,” the definition of which also contains the word “reasonably,” appears no less than 12 times in the Marketing Rule. Unfortunately, as with so many other rules, “reasonable” is likely to be in the eye of the examiner.

Herskovits PLLC has a nationwide practice defending RIAs with inquiries from the SEC or state securities regulators. Feel free to call us for a consultation. (212) 897-5410.

On September 6, 2022, the SEC issued an order instituting administrative and cease-and-desist proceedings against Perceptive Advisors LLC (“Perceptive”) a New York based investment adviser. In anticipation of the institution of the proceedings, Perceptive and the SEC entered into a Settlement.

Perceptive provides investment advisory advice to pooled investment vehicles and according to its March 31, 2022 Form ADV it had approximately $10.36 billion in assets under management. One of Perceptive’s investment vehicles is the Perceptive Life Sciences Master Fund, Ltd. (the “PSLM Fund”).

The gravamen of the SEC’s order revolves around Perceptive’s activities concerning special purpose acquisitive companies (“SPACs”). A SPAC is generally a publicly-traded, shell company which raises money, through an IPO, for the purpose of acquiring other, privately held companies. SPAC’s have “sponsors” that launch the IPO and generally manage the business of the SPAC, including the process of acquiring target companies. The sponsor is typically compensated on a percentage (often 20% to 25%) of the SPAC’s initial public offering proceeds (in the form of discounted shares and, at times, warrants). This compensation is sometimes referred to as the sponsor’s “promote” or “founder shares,” and it is received upon completion of a SPAC’s acquisition of a target company.

In 2018, Perceptive formed a SPAC and the sponsor was 100% owned by THE PSLM Fund. Subsequently, Perceptive formed three additional SPACs; however, unlike the first SPAC, five of Perceptive’s “supervised persons” took an ownership interest in the sponsors (20% for two of the funds and 30% for the last).

The order goes on to explain how this ownership interest by Perceptive personnel creates conflicts of interest for Perceptive. For example, because the five individuals only earn their compensation as sponsor owners’ when a SPAC makes an acquisition they had an incentive to engage in business combination even though transaction was not necessarily in the best interest of their advisory clients.

The order also noted that Perceptive’s conflict could, and apparently did, cause Perceptive to cause the PSLM Fund to make an investment that would assist the SPAC in completing their acquisitions. The order notes the PSLM Fund purchased stock of two of the SPACs on the open market just prior to closing business combinations.

According to the Commission, Perceptive failed to disclose this conflict to the board of directors of the PSLM Fund. In addition, Perceptive made material misstatements and omissions concerning the SPAC to investors in the PSLM Fund by failing to disclose that Perceptive personnel owned an interest in the sponsor. In a July 28, 2020 email communication, Perceptive stated that the PLSM Fund does not participate in the SPAC outside of the sponsor shares when in fact, at that point in time, the PSLM Fund had already engaged in two PIPE transactions to support acquisitions by the SPACs.

Among other things, the Commission found that Perceptive, “willfully violated Section 206(2) of the Advisers Act, which makes it unlawful for any investment adviser, directly or indirectly, to ‘engage in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client.’” The SEC also found the Perceptive violated Advisors Act Section 206(4) which makes it unlawful for any adviser to a pooled investment vehicle to, “make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading . . . .” The Commission noted that only a finding of negligence is required to show a violation of Section 206(2) and Section 206(4) of the Advisors Act.

For the conduct described above, Perceptive agree to pay a civil, monetary penalty of $1.5 million along with the usual order to cease-and-desist from committing or causing future violations of the same Advisers Act and Exchange Act Rules.

Herskovits PLLC has a nationwide practice defending companies and individuals subjected to SEC investigations. Feel free to contact us at (212) 897-5410.

On August 23, 2022, FINRA published an AWC reflecting a settlement with ViewTrade Securities, Inc. The AWC alleges that ViewTrade failed to establish and implement written AML policies and procedures that could reasonably detect and cause the reporting of suspicious transactions in violation of FINRA Rule 3310. FINRA Rule 3310 requires that each member firm develop and implement a written AML program reasonably designed to achieve and monitor the member’s compliance with the requirements of the Bank Secrecy Act (31 U.S.C. 5311, et seq.) (BSA). Rule 3310(a) further requires firms to, “[e]stablish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under [the BSA] . . . . ” The regulations implementing the BSA, in turn, require every broker-dealer to file a Suspicious Activity Report (“SAR”) with the Financial Crimes Enforcement Network any time they detect, “any suspicious transactions relevant to a possible violation of law or regulation.”

FINRA’s past guidance on this issue (NTM 02-21 and Regulatory Notice 19-18) advised firms to look for red flags and provided several examples:

• Customers’ mailing address is associated with multiple other accounts or business that do not appear related,
• Customers that buy and sell securities for no discernable purpose,
• Inflows or outflows of funds that are well beyond the known means of the customer, or
• Unexplained or extensive wire activity.

FINRA described a litany of failures on the part of ViewTrade to monitor for suspicious activity. While ViewTrade produced a daily transaction report to be review by a designated principal, the firm’s WSPs failed to reflect how that principal was supposed to use that report. Apparently, ViewTrade’s WSPs contained no parameters on detecting suspicious activity, no guidance on who would review the report or the frequency of the review. ViewTrade’s procedures also failed to address how personnel should document their reviews of the report and when and how to escalate potential issues. ViewTrade failed to review instances where its surveillance reports flagged potential spoofing, layering and wash trades.

FINRA also criticized ViewTrade’s surveillance reports for not being reasonably designed to detect suspicious activity. The example provided in the AWC stated that ViewTrade’s volume report was designed to detect when a customer’s trading activity surpassed a certain percentage of average daily volume, yet was unreasonably limited to low-priced securities. Remarkably, when reviewing reports for suspicious trading activity, the reviewers apparently had no automated system to determine if a particular customer’s account had previously come up on a given exception report.

According to the AWC, the failures of ViewTrade’s AML policies and procedures resulted in multiple failures to detect and investigate suspicious activity. For example, ViewTrade did not detect or investigate when purportedly unrelated foreign-based customers opened accounts on the same day with identical or near-identical mailing addresses. Similarly, ViewTrade did not detect or investigate several instances of purportedly unrelated foreign-based customers opening accounts and then using identical email addresses to submit indications of interest in an upcoming IPO. In three separate IPOs in which ViewTrade acted as underwriter, ViewTrade failed to detect multiple foreign-based customers who, on an unsolicited basis, provided identical indications of interest in the IPOs at or near the same time. After the IPOs, ViewTrade’s customers engaged in suspicious trading activity that FINRA described as, “indicative of bid support and attempts at manipulating market prices.”

ViewTrade also allegedly failed to detect inflows and outflows of assets that were not in line with the customer’s stated net worth and income. In one example, a customer listed their net worth between $50,000 and $100,000 and then proceeded to purchase over a $1,000,000 in securities in a single year, included the large amount of the IPOs discussed above.

Separately, the AWC also alleged that ViewTrade violated various rules regarding procedures required for managing the risk surrounding market access. From July 2017 through at least February 2020, ViewTrade provided its customers access to trading on multiple exchanges through use of ViewTrade’s market participant identifier. ViewTrade established credit controls for its customers, but it did not monitor on an ongoing basis whether its customer credit controls remained appropriate, and it did not have any written supervisory procedures in place requiring that it do so.

For this laundry list of rule violations, FINRA imposed a fine of $250,000 and ViewTrade is required to work with a third-party consultant (approved by FINRA) to set its house in order. In determining sanctions, the AWC does note that ViewTrade “took proactive steps and invested substantial resourced to remediate its AML program.” ViewTrade must see a $250,000 fine as a great result, particularly in light of some of the much heavier fines that other firms have paid for AML issues, such as the $15 million fine that Interactive Brokers paid in 2020.

Herskovits PLLC has a nationwide practice defending against FINRA investigations and disciplinary proceedings. Feel free to contact us at (212) 897-5410.

FINRA recently released Regulatory Notice 22-18, reminding firms about their obligation to supervise registered representatives to prevent falsification of digital signatures. FINRA’s guidance comes on the heels of multiple investigations concerning instances when registered representatives forged or falsified client signatures on account transfer documentation or on disclosure forms, “acknowledging a products alignment with the customer’s investment objective and risk tolerance . . . .”

FINRA’s notice explains the varied methods used to forge or falsify electronic signatures and how firms can thwart such forgeries or detect them after the fact. Generally, electronic signatures have an audit trail with identifying information such as the recipient’s IP address and e-mail address. Financial advisors have been admonished for sending documents to their personal e-mail addresses or to an assistant to sign the documents themselves. Firms also found instances where documents were sent to an IP address that was the same as the registered representative or that was inconsistent with the customer address on file. Sometimes representatives sent e-mails to the e-mail address associated with an outside business activity. FINRA’s guidance recommends that firms review correspondence to look for these red flags.

FINRA reports that, in some cases, administrative staff raised issues to management about pressure by representatives to manipulate the digital signature process. FINRA encourages training for such staff to encourage them to resists such pressure.

FINRA noted that some firms use an authentication process that asks the customers to answer certain questions to authenticate their signatures. The problem, however, is that representatives have been able to circumvent this process because they have enough information about the customer to answer the questions themselves. FINRA warns firms from relying solely on such authentication processes for supervision.

Of course, FINRA’s position and guidance make sense when a registered representative is trying to deceive their customer. FINRA, however, states that, “[f]orgery occurs when one person signs or affixes, or causes to be signed or affixed, another person’s name or initials on a document without the other person’s prior permission.” FINRA goes on to state that forgery is a violation of FINRA Rule 2010. FINRA’s definition of forgery does always line up with state law. For example, in New York and New Jersey, the crime of forgery requires an intent to defraud. The Model Penal Code adopted by many states also requires an intent to defraud or injure to establish forgery. So if a representative electronically signs a customer’s document solely for the customer’s convenience they have not committed forgery. For example, imagine that a customer mails a check to fund their account but forgets to endorse it. The registered representative decides to sign the customer’s name and deposit the check to avoid any delay in getting the money into the account. The registered representative is not guilty of forgery but we know that FINRA still deems this a violation of FINRA Rule 2010.

FINRA also states that it is only forgery when done “without the other person’s permission.” Is FINRA saying that a registered representative can sign a document on behalf of a customer, electronically or otherwise, if they have the customer’s permission? That seems doubtful. As a practical matter, every firm likely has a policy against letting registered representatives sign documents even with a client permission so it is not a wise thing to do. A violation of a firm policy, however, is not necessarily a violation of FINRA Rule 2010. “A FINRA Rule 2010 violation requires either bad faith or a breach of ethical norms in the industry. In the context of Rule 2010 violation, the SEC has defined bad faith as a dishonest belief or purpose, and unethical conduct as conduct inconsistent with the moral norms or standards of professional conduct.”[1] It would seem that when it comes to forgery and Rule 2010, FINRA should start differentiating between bad faith behavior designed to harm or deceive a customer and behavior that is solely to avoid inconveniencing a customer.

Herskovits PLLC has a nationwide practice defending against FINRA investigations and disciplinary proceedings. Feel free to contact us at (212) 897-5410.

[1] Dep’t of Market Reg. v. Paul C. Dotson, 2015 FINRA Discip. LEXIS 47, at *83 (OHO Aug. 7, 2015) citing Blair Alexander West, Exchange Act Release No. 74030, 2015 SEC LEXIS 102, at *20 (Jan. 9, 2015) and Edward S. Brokaw, Exchange Act Release No. 70883, 2013 SEC LEXIS 3583, at *33 (Nov. 15, 2013).

What is a securities dealer? The answer is more complicated than people might think. On August 2, 2022, the SEC announced that it had reached a settlement with a Long Island firm, Crown Bridge Partners, LLC (“Crown Bridge”) and the two brothers who owned the firm Soheil and Sepas Ahdoot, for failing to register as a dealer. As part of the settlement, the Defendants agree to pay disgorgement and prejudgment interest of $8,390,601.27 and a civil penalty of $810,307, and to a five-year penny stock bar.

According to the SEC’s complaint, Crown Bridge purchased approximately 250 convertible notes from approximately 150 penny stock issuers. In all, during the Relevant Period, Crown Bridge sold into the public markets approximately 35 billion shares of unrestricted, post-conversion shares of penny stock issuers, for millions of dollars in profits. Soheil and Sepas initially found companies interested in issuing convertible notes by reviewing OTCMarkets.com, a website that includes a news feed of SEC filings and press releases from penny stock issuers. They used the website to identify issuers that appeared to need or had expressed a need for financing. They then cold called the issuers directly. Over time, as Crown Bridge grew its business and became known in the industry, issuers, brokers, and finders reached out directly to Soheil and Sepas to seek funding.

Absent their apparent failure to register Crown Bridge as a Dealer under Exchange Act Section 15(a) [15 U.S.C.§ 78o(a)], Soheil and Sepas executed what appears to have been a very shrewd and successful business plan. Crown Bridge purchased convertible notes directly from penny stock issuers. They negotiated the terms of the notes that led to millions of dollars in profits when the notes were converted into shares of stock. The notes typically contained terms that were highly favorable to Crown Bridge and reduced Crown Bridge’s exposure to market risk such as a conversion discount ranging from 25% to 50% to the prevailing “market price,” a term the notes typically defined as the lowest trading price, or lowest closing bid price, of the issuer’s common stock during the 10 to 25 days on or before the date of the conversion notice. Also critical was Crown Bridge’s right to convert the notes in increments, enabling Crown Bridge to convert what it could sell immediately, while shielding the remaining balance from exposure to market price movements.

Crown Bridge typically held the notes for six months, or until such time as it could claim the SEC Rule 144 exemption from registration [17 C.F.R. § 230.144]. SEC Rule 144 allows non-affiliates who acquire restricted stock directly from the issuer in a private transaction to resell it free of restriction into the market after observing a holding period, among other requirements.

The SEC’s complaint very specifically points out that Crown Bridge converted the notes with an eye toward distributing the underlying shares into the public markets for a profit based on the spread between the market price and the discounted acquisition price, as opposed to holding the shares for appreciation. The SEC noted that, “[t]his limited exposure to market risk is a common attribute of a securities dealer. It derived those profits principally from the discounted acquisition price, not from appreciation in the market price of the issuer’s common stock.” The SEC also stated that, “[t]his limited exposure to market risk is a common attribute of a securities dealer.”

Section 3(a)(5) of the Act generally defines a “dealer” as, “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise . . . .” The SEC’s website states, that “[t]raders are excluded from the definition of a dealer” because while they may buy and sell securities for their own account, the do so “not as part of a regular business.” So what does it mean to be “in the business” of buying and selling securities versus being a common investor? What if a substantial part of someone’s income comes from day trading? Does it matter, as noted above, that the profits derived by Crown Bridge were not from appreciation in the price of the stock? What if Crown Bridge held the securities for longer and were exposed to more market risk but still made a profit from the discounted acquisition price?

The SEC’s “Guide to Broker-Dealer Registration” provides the following guidance regarding whether someone is a dealer:

• a person who holds himself out as being willing to buy and sell a particular security on a continuous basis;
• a person who runs a matched book of repurchase agreements; or
• a person who issues or originates securities that he also buys and sells.

Here are some of the questions you should ask to determine whether you are acting as a dealer:

• Do you advertise or otherwise let others know that you are in the business of buying and selling securities?
• Do you do business with the public (either retail or institutional)?
• Do you make a market in, or quote prices for both purchases and sales of, one or more securities?
• Do you participate in a “selling group” or otherwise underwrite securities?
• Do you provide services to investors, such as handling money and securities, extending credit, or giving investment advice?
• Do you write derivatives contracts that are securities?

It seems that the brothers Ahdoot could credibly answer “no” to all of these questions and also state that the first three bullet points do not describe their business model. Yet, the SEC deemed them to be dealers rather than traders based almost solely on the fact that they had limited exposure market fluctuations.

The SEC seems to understand that there is some ambiguity in the current statutory definition of dealer. In March 2022, the SEC has proposed a new rule that further defines the phrase “as part of a regular business” as used in the definition. The new rule is primarily aimed at market participants who are not registered dealers and yet “engage in a routine pattern of buying and selling securities for their own account that has the effect of providing liquidity.” With the sale of 35 billion shares in the market over four years, it certainly seems that Crown Bridge squarely falls under the definition of a dealer if regularity of trading and having the effect of providing market liquidity are the key factors.

Herskovits PLLC has a nationwide practice defending against SEC investigations and litigation. Feel free to call us for a consultation. (212) 897-5410.

On July 15, 2022, FINRA filed Regulatory Notice 22-15 and announced the amendment of its Code of Arbitration for Industry Disputes to conform to the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, Pub. L. No. 117-90, 136 Stat. 26 (2022). The amendments permit person with claims of sexual assault or sexual harassment to pursue those claims in court irrespective of any agreements otherwise mandating arbitration.

Background

FINRA members historically forced employees to arbitrate claims of sexual harassment or assault by use of agreements containing pre-dispute arbitration clauses. The pre-dispute arbitration clauses were typically contained within a Form U4, employment agreements or provisions within an employee manual that the employee was bound by.

Use of pre-dispute arbitration clauses for claims of sexual harassment or sexual assault was upended by the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021. FINRA has now changed its rules to comport with the Act.

Amendments to FINRA’s Rules FINRA Rule 2263 Rule 2263 (titled: Arbitration Disclosure to Associated Persons Signing or Acknowledging Form U4) now includes a new Section 4 stating:

“A party alleging a sexual assault claim or sexual harassment claim that has agreed to arbitrate before the dispute arose may elect post dispute not to arbitrate such a claim under the Code. Such a claim may be arbitrated if the parties have agreed to arbitrate it after the dispute arose.”

FINRA Rule 13100 Rule 13100 contains definitions applicable to the Code of Arbitration Procedure for Industry Disputes. FINRA has added a definition for “sexual assault claim,” meaning:

“a claim involving a nonconsensual sexual act or sexual contact, as such terms are defined in section 2246 of title 18 of the United States Code or similar applicable Tribal or State law, including when the victim lacks capacity to consent.”

FINRA also added a definition for “sexual harassment claim,” meaning:

“a claim relating to conduct that is alleged to constitute sexual harassment under applicable Federal, Tribal, or State law.”

FINRA Rule 13201 Rule 13201, as amended, applies to arbitration of statutory discrimination claims and codifies a prohibition against the use of pre-dispute arbitration agreements for claims under a whistleblower statute, or claims sexual harassment or sexual assault. Rule 13021 now includes a new Section (c) stating:

“A party alleging a sexual assault claim or sexual harassment claim that has agreed to arbitrate before the dispute arose may elect post dispute not to arbitrate such a claim under the Code. Such a claim may be arbitrated if the parties have agreed to arbitrate it after the dispute arose. If the parties arbitrate such a claim, the claim will be administered under Rule 13802.”

FINRA Rule 13803 Rule 13803 is triggered when a claimant files certain claims (such as a sexual harassment claim) in court and other claims (such as a compensation claim, for example) in arbitration. In an instance like this, a member is now permitted to file a motion forcing the employee to consolidate all outstanding claim in the court proceeding.

Herskovits PLLC has a nationwide practice representing individuals in the securities industry with claims of sexual assault or sexual harassment. Feel free to call us for a consultation at (212) 897-5410.

Practitioners are familiar with the fact that a failure to respond to a FINRA Rule 8210 request almost automatically results in an industry bar. Except when it doesn’t. The Office of Hearing Officers (the “OHO”) recently published a decision in which it discussed what the Hearing Officer referred to as a “partial but incomplete response” to FINRA’s requests for testimony.

In March, the OHO rendered a decision against Jason DiPaola who was accused by FINRA Enforcement of taking discretion in his mother’s E-trade account without written instructions and without disclosing the account to his employer Chardan Capital Markets, LLC (“Chardan”) in violation of NASD Rule 3050. Dep’t of Enforcement v. DiPaola, Discip. Proc. No. 2018057274302 (OHO Mar. 25, 2022). The OHO, however, claimed that the “most serious allegation” was DiPaola’s failure to appear and provide on-the-record (“OTR”) testimony.

DiPaola was not a trader at Chardan and had no retail customers. DiPaola worked in the firm’s equity capital markets group. DiPaola was first interviewed by FINRA Staff in January of 2018. The Staff obtained account statements for DiPaola’s E-trade accounts and his mother’s E-trade account. FINRA also obtained over a million e-mails from Chardan.

The Staff asked for a second OTR which took place in April 2019. During the second OTR, DiPaola’s counsel, who also represented Chardan, asked that the OTR be suspended because he discovered that he had a conflict upon hearing DiPaola’s testimony. A third OTR took place over two days on July 17, 2019 and July 18, 2019.

On March 11, 2021, a year and eight months since DiPaola’s two-day, 2019 OTR, the Staff asked for yet another OTR on March 26, 2021. DiPaola’s counsel informed the Staff that he was not available on March 26^th. On March 26, 2021 the Staff sent DiPaola’s counsel a Wells Notice and another Rule 8210 request for an OTR on April 5^th. Dipaola’s attorney responded in an e-mail, “[a]re you serious? You served a Wells Notice, you cannot take another OTR after serving a Wells Notice. Does your supervisor know what you are doing?” The FINRA Supervisor declined to withdraw the request and DiPaola failed to appear on April 5^th. Enforcement sent another 8210 requesting an OTR on April 15, 2021 which DiPaola also failed to attend.

DiPaola argued that FINRA lacked the authority to demand his testimony because FINRA’s investigation had concluded with the issuance of the Wells Notice. In making this argument, DiPaola relied on FINRA Regulatory Notice 09-17 (“RN 09-17”). RN 09-17 discusses the Wells process. Part of the process is that, after receiving a Wells Notice, the potential respondent is then given the opportunity to make a Wells Submission explaining why formal charges are unwarranted. RN 09-17 states that the Staff will review the Wells Submission “and may ask for additional information or obtain additional evidence in the matter.” DiPaola’’s attorney’s argued that no further investigation could take place until DiPaola had made a Wells Submission. The Hearing Officer disagreed.

Here is where the matter gets interesting. Enforcement sought to bar DiPaola from the industry for failing to attend the OTR. As many lawyers know, this is the standard sanction that FINRA seeks for failing to respond to an 8210 request and it is routinely granted by the OHO. For an individual who provides a partial but incomplete response to Rule 8210 requests, the Sanction Guidelines state that “a bar is standard unless (i) the person can demonstrate that the information provided substantially complied with all aspects of the request,” or (ii) mitigating factors are present. The OHO stated that it was also required to assess (i) the importance of the information sought from FINRA’s perspective, (ii) the number of requests made and, (iii) whether the respondent provided valid reasons for not responding.

Despite finding that DiPaola had no valid reason for not responding and that the information sought was important, the Hearing Panel declined to impose a bar and only imposed a 30 day suspension. The most significant factor seem to have been the issuance of the Wells Notice. The Hearing Panel determined that the act of issuing the Wells Notice meant that Enforcement had reached a preliminary determination to recommend formal discipline. The Hearing Panel decided, therefore, that DiPaola’s prior testimony and information responses before April 2021 were “significantly, if not substantially compliant with Enforcement’s Rule 8210 requests.” Notably the OHO imposed no suspension related to the other causes of action and drastically reduced Enforcement’s request of a bar with regard to the Rule 8210 violation. The OHO also reduced Enforcement’s requested fines of $32,500 to a mere $5,000.

Interestingly, it was probably the threat of a bar that caused DiPaola to take this matter to an administrative hearing in the first place. Unfortunately for DiPaola, Enforcement’s overreach likely cost him a great deal in legal fees and anxiety. Despite this win, he probably wishes he had gone to that OTR in the first place.

Herskovits PLLC has a nationwide practice defending FINRA investigations and disciplinary proceedings. Feel free to call us for a consultation at (212) 897-5410.

On July 7, 2022, FINRA’s Office of Hearing Officers issued its decision in Dep’t of Enforcement v. Burford, Discip. Proc. No. 2019064656601 (OHO July 7, 2022). Here, the Hearing Panel found that Burford caused no customer harm. There was no evidence that Burford gained monetarily from his actions. Burford was “polite, respectful, and cooperative” throughout the investigation and disciplinarily proceeding. Nonetheless, the Hearing Panel refused to deem these factors “mitigating” and whacked Burford with a 6-month suspension – double the suspension sought by Enforcement – and $10,000 fine. At its core, this is a case of registered representative alleged to have improperly taken instructions from a deceased customer’s widow. This case highlights the perils of efforts by a financial adviser to assist an individual when those efforts skirt the policies of a broker-dealer.

Background Facts

Burford was registered with Hilltop Securities Independent Network, Inc. In November 2019, Hilltop discharged Burford and filed a Form U5 alleging a “failure to follow firm policy regarding the death of a client.”

FINRA alleged that Burford failed to notify Hilltop that one of his customer’s (a first cousin of Burford’s wife) passed away in October 2016. The customer had a trading authorization agreement on file permitting Burford to accept trading instructions from the customer’s wife. After the customer’s death, Burford executed 9 trades at the instruction of the decedent’s widow and facilitated 8 ACH disbursements to the widow. The post-death trading activity and money movements came to light when the decedent’s daughter (the adult child from a prior marriage) challenged the customer’s will and petitioned the probate court to restrain the widow from any further disposition of the decedent’s property. Apparently, the widow did not file the will for probate until February 2019, more than 2 years after her husband’s passing. Under Texas law, the right to inherit under a will is not effective until the will is admitted to probate.

FINRA’s Enforcement Department filed a one-count Complaint in September 2021 alleging that Burford violated FINRA Rule 2010 (requiring registered representatives “to observe high standards of commercial honor and just and equitable principles of trade”) by engaging in unauthorized trading and withdrawals. Specifically, FINRA alleged that the trading authorization terminated upon the customer’s death and, in any event, the trading authorization never permitted money movements. According to FINRA, until the probate court admitted the will for probate and issued letters testamentary, no one had authority to direct transactions in the decedent’s brokerage account.

Burford defended the Complaint by alleging that (a) the widow was the named executor and primary beneficiary of the customer’s will; (b) the widow directed and authorized the transactions and money movements; and (c) the activity in question served the widow’s best interests.

The Hearing Panel’s Findings

The Hearing Panel found numerous “aggravating factors:”

• Burford effected the transactions over a lengthy period of time (3 years).
• The value of the transactions was “high” (more than $200,000).
• Burford “concealed” his actions from Hilltop by failing to timely submit the certificate of death and failing to inform Hilltop of the transactions effected after the customer’s death.

Importantly, the Hearing Panel rejected the “no harm, no foul” defense by finding that the harm was the “potential legal risk” to himself and Hilltop caused by the activity in question. Even though a “misguided attempt” to act in a customer’s best interest may be mitigating (Dep’t of Enforcement v. Noard, No. 2012034936101, 2017 FINRA Discip. LEXIS 15, at *29-30 (NAC May 12, 2017) (A respondent’s misguided attempt to act in a customer’s best interest may be mitigating)), the Hearing Panel found that the widow was not Burford’s customer and refused to treat any of Burford’s actions as mitigating. See Dep’t of Enforcement v. Correro, No. E102004083702, 2008 FINRA Discip. LEXIS 29, at *16 (NAC Aug. 12, 2008) (finding that a goal to benefit a customer is not a defense to a violation of NASD Rule 2110, the predecessor to FINRA Rule 2010); Dep’t of Enforcement v. Sears, No. C07050042, 2009 FINRA Discip. LEXIS 4, at *3-6, 11 (NAC July 23, 2009) (Rule 2010 violation found for unauthorized trading even though there was no evidence that respondent “acted in bad faith …. gained any commissions on the [ ] unauthorized trades, or was otherwise motivated by selfish interests.”).

This case serves as a stark reminder that efforts to appease a customer (or, here, a non-customer) may nonetheless be viewed by FINRA as a serious rule violation.

Herskovits PLLC has a nationwide practice representing individuals and broker-dealers in FINRA investigations and disciplinary proceedings. Feel free to call us for a consultation. (212) 897-5410.

In April 2018, the SEC proposed a new regulation that would govern the standard of conduct that applies when broker-dealers make recommendations to retail customers. Specifically, the proposal sought to established an express best interest obligation that would require all broker-dealers and associated persons to act in the best interests of their retail customers at the time a recommendation is made without placing the financial or other interests of the broker-dealer or associated person ahead of the interests of the retail customer.

At the time, the Commission received over 6,000 comments on the proposed rule. Ultimately, in July 2019, the SEC adopted Rule 15l-1(a) of the Securities Exchange Act of 1934 (“Reg BI”). On June 15, 2022, the SEC filed the first complaint for a violation of Reg BI since it was enacted. The SEC filed a complaint against Western International Securities, Inc. (“Western”) and five of its registered representatives for violating Reg BI in connection with the sale of high risk, illiquid and unrated debt securities known as L Bonds issued by GWG Holdings, Inc. (“GWG”).

Compliance with Reg BI consists of four components: the Disclosure Obligation, the Care Obligation, Conflict of Interest Obligation, and the Compliance Obligation. Registered representatives must comply with the Disclosure Obligation and the Care Obligation, which include:

1. The Disclosure Obligation requires a written disclosure to the customer at the time a recommendation is made of all the material facts relating to the investment including, among other things, all costs and fees that may apply to the customer’s account.
2. The Care Obligation requires that the firm’s registered representatives exercise reasonable diligence, care, and skill to understand the product being recommended including risks, reward and costs.
3. The Conflict of Interest Obligation requires a firm to identify and disclose all conflicts of interest that may exist in connection with a particular investment recommendation.
4. The Compliance Obligation is the most straightforward of the four obligations as it simply requires a firm to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest

Between July 2020 and April 2021, Western’s registered representatives sold approximately $13.3 million L Bonds to their retail customers. The Commission’s complaint faults Western for not establishing any criteria or thresholds for a customers’ financial resources before investing in L Bonds. The Commission also noted that Western’s Chief Compliance Officer reviewed a due diligence report on the L Bonds but did not distribute the report to Western’s registered representatives. The most significant issue it seems from reading the SEC’s complaint is that the registered representatives did not understand the product. In particular, Western’s registered representatives actually took a training course on the L Bonds but were not aware of a significant change to GWG’s business model that made the 2020 issuance of L Bonds very different in terms of their risk profile from the L Bonds issued in previous tranches.

The SEC concluded that L Bonds might be appropriate for “certain customers willing to accept a substantial degree of risk” but the registered representatives recommended L Bonds to customers who did not fit that profile. This “mismatch” meant that the registered representatives did not “demonstrate reasonable diligence, care or skill in determining that the L Bonds were in their customer’s best interests.”

The SEC also found Western’s policies and procedures were insufficient with regard to Reg BI. Interestingly, Western’s procedures were “substantially copied” from a Small Entity Compliance Guide that was published by the SEC. As such, the SEC found the policy too generic and not tailored to Western’s business. The policy also lacked an enforcement mechanism. The SEC’s prayer for relief included a request for an injunction, disgorgement of commissions earned and a civil penalty in an unspecified amount.

Perhaps most significantly, despite the financial industries’ understandable interest in Reg BI, it is hard to discern a significant difference between the obligations of Reg BI and the existing suitability obligations that have existed for years under FINRA Rule 2111. The SEC recitation of alleged wrongdoing by Western and its employees could just have easily amounted to a finding that they sold L Bonds that were not suitable for their clients in violation of FINRA Rule 2111. Based upon the SEC first invocation of Reg BI, It is not clear what Reg BI adds to the existing regulatory enforcement scheme.

Herskovits PLLC has a nationwide practice defending against investigations and actions filed by the SEC. Feel free to call us for a consultation at (212) 897-5410.

“Defendant understands and agrees to comply with the [SEC]’s policy ‘not to permit a defendant . . . to consent to a judgment or order that imposes a sanction while denying the allegation in the complaint . . . .’ 17 C.F.R. § 202.5. In compliance with this policy, Defendant agrees not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis. If Defendant breaches this agreement, the [SEC] may petition the Court to vacate the Final Judgment and restore this action to its active docket. Nothing in this paragraph affects Defendant’s: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation in which the [SEC] is not a party.”

Language to this effect is in every consent agreement with the SEC. The CFTC and FINRA also place substantively identical injunctions regarding what defendants can say about their cases once they settle.

Now, almost 20 years later, Mr. Romeril is tired of staying silent and is seeking to have his case heard by the Supreme Court. Romeril’s primary argument is that the judgment which incorporated his consent agreement with the SEC should be voided because it constitutes a prior restraint that infringes his First Amendment rights and that it violated his right to due process.

So far, Romeril has lost at the district court level and lost his appeal to the Second Circuit and is now seeking a writ of certiorari to take this case to the Supreme Court. While Romeril’s case is interesting in its own right, it is also interesting to note the various individuals and institutions that have filed amicus briefs in support of his arguments. The list includes Mark Cuban and Elon Musk who have famously and publicly clashed with the SEC in recent years. Cuban and Musk make the interesting argument that the SEC’s gag orders run contrary to the agency’s mission of market transparency. The amicus brief highlights the SEC’s supposed hypocrisy in insisting on the silencing of settling defendants while at the same time demanding full transparency for settlements between private parties. Their amicus brief notes that,

“[t]he SEC regularly brings enforcement actions against individual and companies based, at least in part, on their failure to provide the investing public sufficient information about their settlements or litigation.”

Musk, in particular, has had a very public bout with the SEC over his First Amendment rights. Musk settled a 2018 case with the SEC in which he was accused of making false and misleading statements about Tesla through his twitter account. Part of the settlement required Musk to have his tweets vetted by a securities lawyer before posting them. Musk has since unsuccessfully sought to overturn his 2018 settlement and has accused the SEC of trying to “muzzle and harass” him.

The Supreme Court has discretion as to when it will grant certiorari and for writs filed by attorneys the success rate of having a case heard is only 6% (the rate is much lower if ­you include pro se applicants). There is some statistical evidence however, that amicus briefs filed at the certiorari stage considerably increase the odds of certiorari being granted.

Presumably, if Mr. Romeril wins the CFTC and FINRA will have to take similar gag orders out of their settlement agreements. In 2015, a study showed that the average cost for a company to respond to an SEC formal investigation was north of $4 million[2] and that is before any litigation has commenced! Surely many innocent companies and executives have decided to settle with the SEC rather than endure the frustration and expense of an SEC investigation and litigation. Maybe someday those same people and companies can settle with the SEC and still publicly proclaim their innocence.

Herskovits PLLC maintains a nationwide practice defending SEC investigations and litigation. Call us for a consultation at (212) 897-5410.