April 3, 2013
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, Ralph William Hicks Jr., submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Ralph William Hicks Jr., Respondent (AWC 2010023789701, March 28,2013).
Since his first registration in 1986, Hicks had been associated with three member firms prior to registering with First Heartland Capital, Inc. from February 7, 2005, through October 31, 2006, and, then again, from September 2, 2008, and November 1, 2011. The AWC asserts that Hicks had no prior disciplinary history.
While registered with First Heartland during approximately 2009 through 2011, the AWC alleges that Hicks disseminated to some 200 to 1,000 members of the public:
- advertising and sales literature to the public in YouTube videos;
- invitations to seminars and workshops; and
- letters concerning, among other things, bonus incentives.
The materials cited above generally related to equity index annuities ("EIAs") seminars. The AWC alleges that some of the advertising and sales literature used by Hicks presented oversimplified claims which omitted material information, or failed to provide a sound basis for evaluating the facts. Similarly, the communications purportedly contained exaggerated, unwarranted or misleading statements or claims. In addition, Hicks allegedly failed to secure the prior approval by a First Heartland registered principal before distributing the above referenced materials.
The Devil In The Details
Among the more pointed assertions in the AWC were that Hicks had presented EIAs favorably in comparison to other annuity types, but he failed to adequately describe the risks and limitations of EIAs - among the alleged deficiencies were the failure to satisfactorily address:
- lack of EIA liquidity due to surrender penalties;
- guarantees associated with EIAs are subject to the ability of the issuer to pay the claims;
- limits posed by participation rates and interest rate caps; and
- the merits of other annuity types versus EIAs.
In addition to some of the more traditional lapses involving sales lit and advertising noted above, the AWC alleges that Hicks posted videos containing customer testimonials on YouTube without making required disclosures. Finally, Hicks allegedly failed to file advertising and sales literature which discussed registered investment companieswithin 10 business days of first use or publication.
The AWC asserted that the conduct cited above constituted violations by Hicks of NASD Conduct Rules 2210(b)(1)(A); 2210(d)(1)(A); 2210(d)(1)(B); 2210(d)(2)(A); 2210(d)(2)(c); and 2210(c)(2)(A) and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Hicks a $10,000 fine and a twenty- business-day suspension from associating with a FINRA member in any capacity.
Bill Singer's Comment
Thar Be Monsters
Interesting case on a number of levels - but I found the citation to YouTube to be particularly intriguing as it shows the extent to which the marketing of financial products has now fully embraced the digital age, replete with online content, social media, and whatever else is on the way down the road. In fact it was only on April 2, 2013, that the SEC published an announcement titled: "SEC Says Social Media OK for Company Announcements if Investors Are Alerted," in which we are advised, in part:
The Securities and Exchange Commission today issued a report that makes clear that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information.
The SEC's report of investigation confirms that Regulation FD applies to social media and other emerging means of communication used by public companies the same way it applies to company websites. The SEC issued guidance in 2008 clarifying that websites can serve as an effective means for disseminating information to investors if they've been made aware that's where to look for it. Today's report clarifies that company communications made through social media channels could constitute selective disclosures and, therefore, require careful Regulation FD analysis . . .
Without question, as I have reported in "Street Sweeper" in recent years, EIAs are a regulatory priority and have presented horrific examples of investor abuse. To that extent, FINRA is truly acting responsibly in policing this product and its marketing. Without question, the AWC has set forth alleged violations that need to be addressed by the industry to ensure that investors are making informed purchases.
However, before you are too quick to chastize Hicks' use of YouTube or his other alleged transgressions, consider that Wall Street's rules and regulations pertaining to advertising and marketing are far from user friendly; and, to be blunt, are an often indecipherable mess presenting a dangerous maze rather than well-marked highway. Further, the landscape for posting on Facebook, Linked-In, Twitter, or the rest is just as uncharted. In reality, whole sections of online regulatory activity may just as well be captioned with the warning "Thar Be Monsters," given the lack of intelligible guidance.
The Pilgrimage To FINRA At Delphi
As a former registered person myself, I've never quite understood the logic of a regulatory scheme designed for non-lawyer stockbrokers, when that very scheme frequently requires industry participants to consult with lawyers as to what a given provision means or whether a proposed activity was okay. To that extent, FINRA's rules often require a pilgrimage to Delphi, a sacrifice to the regulatory gods, and the reading of omens from some seer. Of course, as any fan of Ancient Greek literature knows, on top of everything else, the wisdom of the oracles was quite often incomprehensible - much like what far too many Wall Street regulatory lawyers offer their clients. I mean, c'mon now, be honest, how many times has a stockbroker in Hicks' position submitted proposed materials to his firm's compliance or legal department, only to get back a comment along the lines of
Well, you know, it seems okay to me, but FINRA could have a problem with it, but, gee, I don't actually see anything wrong, but it does make me somewhat uncomfortable, and, hey, if you want to run with it, okay, but, I would suggest that you ask FINRA first, but, hmmm, the last time we called them on something like this they seemed annoyed and said that they don't give legal advice, but, maybe you could try again anonymously; however, if there's a problem, don't come back to me and complain that I didn't warn you.
Reading the Entrails
Some of you may suggest that I am overstating the complexity of the problem. For those of you who doubt my characterization of the mysteries and equivocations inherent in modern-day securities industry regulation, please consult the current, full FINRA Rule 2210 that I appended below. Supposing that you wanted to post a snippet of a seminar on YouTube, replete with a comment from an attendee? Read through the rule below and see if you are comfortable with the answer to your question. Might I suggest that you pick out a particularly white dove - maybe two - before approaching your nearest oracle?