It's not exactly a scene from Mary Poppins when the Financial Industry Regulatory Authority sings about kites. The grumpy self-regulatory organization warns registered reps that they may get snagged in the old regulatory tree if they try to fly too many NSF checks.
Case In Point
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, Jon DeBow
submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which
FINRA accepted. In the Matter of Jon DeBow,
Respondent (AWC 2015045674901, December 27, 2016).In pertinent part, the AWC asserts
DeBow entered the securities industry in December
2004 when he became registered with FINRA as a General Securities
Representative ("GSR") through an association with J.P. Morgan
Institutional Investments, Inc. .
Online FINRA BrokerCheck records as of January 18, 2017,
dispute the AWC's assertion that DeBow was first registered in 2004. BrokerCheck states that DeBow was first registered in April 2005 with J.P. Morgan
Institutional Investments Inc. and that he had passed his Series 7 on April 15,
2005 and his Series 63 on August 18, 2005. BrokerCheck discloses that DeBow was
first "employed" (in contradistinction to "registered")
with J.P. Morgan Investment Management in October
The AWC asserts that DeBow does
not have any prior disciplinary history with FINRA, any state securities
agency, the Securities and Exchange Commission, or any other self-regulatory
organization. Check Kiting Scheme
The AWC asserts that from
December 11, 2012, to November 4, 2014, DeBow wrote 38 checks totaling $46,280
from two of his personal JP Morgan bank accounts. At the times when DeBow wrote
the 38 checks, the AWC alleges that he knew that he had insufficient funds in
The AWC characterizes DeBow's conduct as a "check kiting scheme,"
and further asserts that after writing the cited checks, DeBow deposited the
checks into a second personal bank account from which he immediately withdrew a
portion or the entire amount of the deposit. Shortly After
Of the 38 purported
check-kiting episodes, the AWC asserts that in 34 instances, the personal
account against which DeBow wrote checks had a negative balance and in 4 instances, the account had a positive
balance but one that was less than the amount for which the checks were
written. The AWC concedes
Shortly after the checks were returned, DeBow
deposited sufficient funds into his bank accounts to cover the deficit created
by his check kiting scheme.
BrokerCheck records as of January 18, 2017, disclose under
the heading "Employment Separation After Allegations," that JP Morgan
Investment Management "discharged" DeBow on April 16, 2015 based upon
INAPPROPRIATE HANDLING OF PERSONAL FINANCES IN VIOLATION OF PARENT COMPANY'S
CODE OF CONDUCT
FINRA deemed DeBow's
alleged check-kiting scheme to constitute a violation of FINRA Rule 2010. In accordance with the terms of the
AWC, FINRA imposed upon DeBow a $10,000 fine and an 18-month suspension from
association with any FINRA regulated firm in all capacities.
Somewhat lost in the mess of 38 returned checks is the fact the DeBow covered the $46,200 short-fall "shortly" after the checks were returned. As such, no
bank ate a penny of loss. Moreover, we should note that the
misconduct extended over nearly two years, which means that we're considering,
on average, about $2,000 a month in dubious checking
deposits. Not one iota of the aforementioned factors should be considered mitigating. The inescapable fact is that DeBow wrote 38 bounced checks over two years notwithstanding that he promptly covered the debits.
no allegation in the AWC that any criminal charges were filed, that any civil litigation ensued, or that DeBow pled guilty to any criminal charges or settled any civil litigation.
Further, there is no allegation of any securities, customer, or customer account
being involved during the 23 months of purported check kiting. Do any of those
factors excuse DeBow's NSF check writing?In my opinion, no. There is, however, a larger issue and one that does merit some serious consideration: Do 38 NSF checks that were "shortly" covered over some 23
months rise to the level of FINRA Rule 2010's concerns with commercial dishonor
and just and equitable principles of trade?
If you believe that
NSF checks are proper concerns for FINRA (and to be clear, under some, if not
many circumstances, I do so believe), then also consider what you would
believe if DeBow was driving
to meet with a JP Morgan customer and charged with wrongfully
parking in a handicap-only parking spot or driving under the influence.
As recent headlines disclose, Too-Big-To-Fail
financial institutions have been charged with and pleaded guilty to all sorts of financial shenanigans involving fraudulent
mortgages and bogus account openings. Do you recall anyone from any C-Suite
being suspended by FINRA for such conduct? Do you recall any bank or brokerage
firm being suspended from accepting new customers or required to cease trading on a specific desk as a result of any marketplace misconduct? We got a
lot of small-fry getting cooked but the big-fish are left to
frolic in the ocean.
Finally, let me pose these questions:
If DeBow's alleged check-kiting scheme did not involve a FINRA member firm's affiliated bank's checking account, do you think the self-regulatory organization would have proposed charges?
If FINRA initiates regulatory action only when an associated person engages in NSF activity in a member firm's affiliated bank, does that transform FINRA from a regulator into a questionable collection agency (or the threat of one) for its member firms?
Does FINRA routinely and regularly review the checking activity of its own employees and, if so, does the self-regulatory organization fine and suspend its employees when they engage in check