Figuring out how to add up the FINRA fines and suspensions
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Richelle A. Elberg submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Richelle A. Elberg , Respondent (AWC 2012031144801, October 3, 2012).
Elberg was registered as a General Securities Representative from September 8, 2003 to February 20,2008 and then from November 21, 2009 to January 6,2012, with JSI Transaction Advisors, LLC. The AWC asserts that she had no prior FINRA disciplinary history.
From August 2010 to March 2011, Elberg received about $15,000 compensation for her preparation of research reports for a company that specializes in providing research reports on technology companies. The AWC alleged that such activity constituted outside business activity ("OBA"), and, further, that Elberg prepared the research reports without her having provided to her firm any written notice of the business activity, in violation of NASD Conduct Rule 3030 (for conduct before December 15, 2010) and FINRA Rules 3270 (for conduct after December 14, 2010) and Rule 2010.
FINRA Rule 3270. Outside Business Activities of Registered Persons
No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of NASD Rule 3040 shall be exempted from this requirement.
.01 Obligations of Member Receiving Notice. Upon receipt of a written notice under Rule 3270, a member shall consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person's responsibilities to the member and/or the member's customers or (2) be viewed by customers or the public as part of the member's business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Based on the member's review of such factors, the member must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including where circumstances warrant, prohibiting the activity. A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040. A member must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).
In accordance with the terms of the AWC, FINRA imposed upon Elberg a $5,000 fine and a 20-business-day suspension from association with any FINRA member in any capacity.
Elberg is not a particularly complicated FINRA case but it is a helpful one. Quite often individuals call regulatory lawyers such as me and launch into that most basic of evasions: Mr. Singer a friend of mine may have gotten paid to write some research reports and, you know, didn't quite understand that he had to disclose that activity to his firm, and, well, FINRA is now claiming that my friend was an Outside Business Activity and he's trying to figure out what he's looking at in terms of fines and suspension.
Yeah, sure - a friend of yours.
In any event, what Elberg shows all of Wall Street's "friends" is that a basic OBA violation is likely to run you at least $5,000 and a 20-business-day suspension. Unfortunately, most FINRA disciplinary cases aren't as clean-cut as this one and typically there are all sorts of tangential and cascading issues that result in more than one violation; however, like I said, Elberg didn't present itself as overly convoluted, so you have a usable baseline for comparison's sake when negotiating a settlement or deciding to have your day in court.
Could you look up a particular alleged violation and see what FINRA "Sanctions Guidelines" propose? Absolutely and that's a great place to start your inquiry. On the other hand, a word of caution about FINRA's Sanctions Guidelines - FINRA's Staff doesn't always seem to consult them. Fact is, too much of what goes on during the initial back-and-forth with most regulators is a game where the regulators fire an opening salvo of 4x fines and 4x suspension days when they are prepared to accept 1/2 X fines and 1/2 X suspension dates. Consequently, when the prospect of settlement is first raised with you, the Staff demand may well be for $20,000 in fines and 18 months of suspension for a given violation but the case eventually settles for, say, $5,000 in fines and a 10-day suspension - and a given regulator's guidelines might have suggested $5,000 and 15-day suspension. All of which explains why I prefer to place greater weight on the actual results from both recent settlements and fully adjudicated cases.
A word of warning to all you amateurs: Don't confuse sanctions achieved via settlement with sanctions imposed after a hearing. Similarly, make sure to factor in the costs of a lawyer and forum fees if you opt to have your day in court - a $10,000 fine and 10-day suspension via settlement may be far cheaper than a $5,000 fine a 5-day suspension after a hearing if your legal bill is $50,000. Also, do NOT confuse, on the one hand, arbitrations and civil court trials (between private parties) with, on the other hand, regulatory hearings (between a regulator and you).
Major financial organizations such as Bank of America, Wells Fargo, Citigroup, Morgan Stanley, UBS, and JP Morgan face considerable challenges trying to monitor various activities of their employees and such problems are often exponentially exacerbated when they involve emails, research reports, roles as trustees, etc. Few things on Wall Street are ever so hermetically sealed as to result in single, isolated violations. Which may well explain the reluctance of many financial institutions to permit many OBAs; and, accordingly, may also explain the focus of FINRA and other regulators on such violations of firms' in-house prohibitions.
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