A FINRA member firm settles allegations of a host of violations, among which are entering into a new line of business without the regulator's prior approval, deficient disclosures in research reports, a host of website shortcomings, and the ever popular Written Supervisory Procedures miscues. Some may see this case as nit picking; others will find it a helpful lesson as to what needs to be handled with care.
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, Olympia Asset Management. LTD., submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Olympia Asset Management. LTD., Respondent (AWC 2010020992501, July 25, 2013).
Olympia Asset Management, LTD., ("OAM") with three branches and 24 registered representatives, is in the business of trading equity securities and has been a FINRA-regulated firm since September 8, 2003.
From January 2010 through September 2010, OAM employed three research analysts and issued at least 22 equity research reports; however, the firm did not file for or obtain prior approval for its entrance into these business lines of activity, in purported violation of NASD Rule 1017. The AWC further alleges that seven OAM equity research reports published during the relevant period failed to:
provide required disclosures in violation of NASD Rule 2711(h); and
prominently disclose the OAM's name, in violation of NASD Rule 2210(d)(2)(C).
SIDE BAR: My law firm clients often ask me what exactly constitutes a "material change" of their FINRA Membership Agreement so as to warrant notifying the self-regulatory organization and seeking its approval. Frankly, the answer to that is fairly simple -- you merely need to read NASD Rule 1011: Definitionswhere you will find this:
(k) "material change in business operations"
The term "material change in business operations" includes, but is not limited to:
(1) removing or modifying a membership agreement restriction;
(2) market making, underwriting, or acting as a dealer for the first time; and
(3) adding business activities that require a higher minimum net capital under SEC Rule 15c3-1
From June 2009 through September 2010 (the "relevant time"), the AWC alleges that in addition to improperly implying that regulators had endorsed the services provided by OAM's clearing firm, OAM's website failed to:
accurately refer to Olympia Capital Markets Group (an operating unit of the Firm) as a non-broker dealer;
make clear which services were offered by FINRA member firm OAM;
hyperlink to the Securities Insurance Protection Corporation (SIPC) in violation of NASD Rule 2210; and
failed to hyperlink to FINRA, in violation of IM-2210-4.
SIDE BAR: Just what we need, another bit of regulatory esoterica. The cited IM-2210-4 has been superseded by FINRA Rule 2210: Communications With The Public, which states in pertinent part:
(e) Limitations on Use of FINRA's Name and Any Other Corporate Name Owned by FINRA
Members may indicate FINRA membership in conformity with Article XV, Section 2 of the FINRA By-Laws in one or more of the following ways:
(1) in any communication that complies with the applicable standards of this Rule and neither states nor implies that FINRA, or any other corporate name or facility owned by FINRA, or any other regulatory organization endorses, indemnifies, or guarantees the member's business practices, selling methods, the class or type of securities offered, or any specific security, and provided further that any reference to the Department's review of a communication is limited to either "Reviewed by FINRA" or "FINRA Reviewed";
(2) in a confirmation statement for an over-the-counter transaction that states: "This transaction has been executed in conformity with the FINRA Uniform Practice Code"; and
(3) on a member's website, provided that the member provides a hyperlink to FINRA's internet home page, www.finra.org, in close proximity to the member's indication of FINRA membership. A member is not required to provide more than one such hyperlink on its website. If the member's website contains more than one indication of FINRA membership, the member may elect to provide any one hyperlink in close proximity to any reference reasonably designed to draw the public's attention to FINRA membership. This provision also shall apply to an internet website relating to the member's investment banking or securities business maintained by or on behalf of any person associated with a member.
During the relevant time, in alleged violation of NASD Rule 3010(a) and NASD Rule 2711(i), OAM's written supervisory procedures ("WSPs") allegedly failed to:
establish reasonable criteria to identify registered representatives who should be placed under heightened supervision;
establish reasonable procedures for how to supervise someone on heightened supervision;
address supervisory responsibilities for allocation of exercise assignment notices in violation of NASD Rule 3010(b).
address the types of disclosures that were lacking in research reports published between January 2010 and September 2010.
Further, from April 2010 through September 2010, OAM allegedly failed to establish written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information between the member firm and an affiliated hedge fund co-located with OAM, as required by Section 15(f) of the Securities Exchange Act of 1934: As a result of the foregoing conduct, Olympia purportedly violated Section 15(f) of the Securities Exchange Act of 1 934 and NASD Rule 3010(a).
In accordance with the terms of the AWC, FINRA imposed upon Olympia a Censure and $22,000 fine.