Specifically, the FINRA Hearing Panel found that:
- respondents disseminated exaggerated, misleading, and unbalanced institutional sales materials and failed to retain copies of institutional sales materials;
- HedgeCap and Jahre permitted five associated persons (including one statutorily disqualified individual) to market hedge funds without being properly registered, and allowed another associated person to "park" her registration at the firm;
- respondents failed to adequately supervise certain activities at HedgeCap, failed to retain emails and instant messages, and made willfully misleading disclosures on three Uniform Applications for Securities Industry Registration or Transfer ("Forms U4″); and
- Jahre and HedgeCap responded falsely to numerous requests for information, testified falsely, and improperly permitted a hedge fund adviser to use soft dollars to pay rent to HedgeCap in violation of the hedge fund's offering memorandum.
Accordingly, the FINRA Hearing Panel expelled HedgeCap and barred Jahre in all capacities. Following an appeal by the respondents to FINRA's National Adjudicatory Counsel ("NAC"), on May 1, 2012, the NAC affirmed the Hearing Panel's findings and sanctions.
This "Street Sweeper" column examines only one aspect of the HedgeCap case: the issue of "parking." FINRA found that respondents violated NASD Rules 1031 and 2110 by permitting Jamie Lombardy ("Lombardy"), an individual registered with HedgeCap as a representative, to park her license at the firm.
NASD Membership and Registration Rule 1031: Registration Requirements
(a) All Representatives Must Be Registered
All persons engaged or to be engaged in the investment banking or securities business of a member who are to function as representatives shall be registered as such with NASD in the category of registration appropriate to the function to be performed as specified in Rule 1032. Before their registration can become effective, they shall pass a Qualification Examination for Representatives appropriate to the category of registration as specified by the Board of Governors. A member shall not maintain a representative registration with NASD for any person (1) who is no longer active in the member's investment banking or securities business, (2) who is no longer functioning as a representative, or (3) where the sole purpose is to avoid the examination requirement prescribed in paragraph (c). A member shall not make application for the registration of any person as representative where there is no intent to employ such person in the member's investment banking or securities business. A member may, however, maintain or make application for the registration as a representative of a person who performs legal, compliance, internal audit, back-office operations, or similar responsibilities for the member, or a person who performs administrative support functions for registered personnel, or a person engaged in the investment banking or securities business of a foreign securities affiliate or subsidiary of the member.
(b) Definition of Representative
Persons associated with a member, including assistant officers other than principals, who are engaged in the investment banking or securities business for the member including the functions of supervision, solicitation or conduct of business in securities or who are engaged in the training of persons associated with a member for any of these functions are designated as representatives.
(c) Requirement for Examination on Lapse of Registration
Any person whose registration has been revoked pursuant to Rule 8310 or whose most recent registration as a representative or principal has been terminated for a period of two (2) or more years immediately preceding the date of receipt by the Association of a new application shall be required to pass a Qualification Examination for Representatives appropriate to the category of registration as specified in Rule 1032.
FINRA found that in May 2004, Lombardy ended her association with another member firm - at that time, her registered representative license was set to expire in May 2006. Lombardy's husband was a partner with a compliance consulting firm that leased space from HedgeCap and provided legal and compliance advice to the firm. FINRA found that in April 2006, Jahre permitted Lombardy to register with HedgeCap as a favor to her husband. Apparently, the favor wasn't so altruistic as the regulator noted that HedgeCap apparently hoped that this arrangement might prompt the husband to reduce the cost to the firm for his services.
In concluding that Lombardy's registration with HedgeCap was not bona fide, FINRA noted that she did not have an office, desk, or email account at the firm, and did not perform any services for or receive any compensation from the firm. Further, the NAC found that Jahre never intended to employ Lombardy in the firm's investment banking or securities business. Although Jahre apparently asserted that "in the back of his mind" there was an expectation that Lombardy might provide services necessitating registration - FINRA simply did not find Jahre credible on that and other points.
Bill Singer's Comment
As I have long argued, I view FINRA's two-year expiration following the termination of a registration as counterproductive and an often significant factor in creating improper conflicts between registered persons and public customers. The unfortunate net effect of this misguided policy is to strengthen the bonds between a registered person and the employer by making the decision to resign (or the fact of being laid off) far more onerous because of the ticking time bomb. Moreover, the process by which waivers/extensions of the two-year deadline are granted often raises troubling questions.
This is not an isolated problem. This is not an issue that only pops up, occasionally, at some small firm. This is pandemic - at indie and regional firms, and at the big boys. Further, the ramifications of this foolish policy embeds itself in the very core of the industry's relationship with its customers and substantively impacts the ability of firms to pressure (subtley or otherwise) their salesforces to push house product or to look askance. What FINRA does not understand or refuse to acknowledge is that registered men and women should not hesitate to leave an employer simply because of the fear that they may not be able to re-register within two years. As recent history has demonstrated, Wall Street laid off tens of thousands of registered persons and not all of those folks were able to get rehired within two years. Go talk to some of the former folks from Lehman Brothers or Bear Stearns. Talk to former employees of Merrill Lynch, Smith Barney, Wachovia, Citigroup and JP Morgan.
As I noted in my August 7, 2009 Forbes column: "The Death Of The Salesman":
Reform the Registration System
As a lawyer, I sat for the bar in 1984 and have been admitted to the practice of law ever since. My license to practice law exists as long as I satisfy my continuing education requirements every two years (24 hours of courses) and have not engaged in any conduct that would disbar me. I don't lose my license if I quit law firm A and join law firm B, which is essentially what happens to most stockbrokers who find their registrations in limbo during periods of unemployment.
Stockbrokers are only deemed registered when they are employed by a member firm, and then have only 24 months to find subsequent employment or their registration expires. That system has given far too much leverage to the employer and has resulted in registered employees pushing unsuitable house product or the lesser-performing funds of a favored affiliate. The more onerous it is to leave a brokerage firm, the more pliable the stockbroker becomes to the demands of his or her employer-and those demands may well pressure the captive employee to do things that are wrong, if not illegal. Think of it this way: Imagine what would happen if you lost your driver's license every time you sold a car or returned a rental. As long as you pass the eye test for your renewal, your license is renewed-and I don't know of any driver's license with a mere two- year life. Am I comparing apples and oranges-yeah, you're right. But still, this issue is often at the root of much consumer fraud on Wall Street. It has to be changed.
Nonetheless, for better or worse, this is the rule in place. Given the ongoing softness of Wall Street and the continued announcements of layoffs, it is likely that there will remain a consistent level of pressure from registered persons facing the sunset of their licenses for industry colleagues to do a favor and "park" their registration in order to re-set the timer. Read this column well and note the consequences.