September 21, 2017
The other day I read "TD Ameritrade Closes Acquisition of Scottrade Financial Services, Inc." (TDAmeritrade Press Release, September 18, 2017), which announced that TD Ameritrade Holding Corporation had completed its acquisition of Scottrade Financial Services, Inc. The acquisition will result in a firm with some 11 million customer accounts with $1.1 trillion in assets. As explained in the release:
[I]mmediately prior to the closing of the acquisition, TD Bank, N.A., a subsidiary of The Toronto-Dominion Bank("TD"), purchased Scottrade's bank subsidiary, Scottrade Bank, from Scottrade for approximately $1.4 billion in cash, subject to a customary post-closing adjustment process. TD Ameritrade then acquired Scottrade for approximately 28 million shares of TD Ameritrade stock and approximately $1.7 billion in cash (net of the cash consideration paid by TD Bank, N.A., for Scottrade Bank).
Spending billions of dollars, using millions of shares, maintaining millions of customers with trillions of assets -- sort of sounds like a Carl Sagan voice-over for a new series about Space. I will be watching how quickly this acquisition gets approved by Wall Street's regulators and what, if any, review and conditions comes out of that venerable self-regulator FINRA.
My experience is that when a FINRA Small Firm indicates its interest in buying another small FINRA member firm or in opening up another measly branch office, why, gee, the zealous regulators at FINRA might take weeks and months just to vet the whole small-firm-buys-another-small-firm-or-opens-another-branch. Don't take my word for it. Ask owners of broker-dealers in FINRA's Small Firm community about their experience in obtaining "timely" reviews and approvals to expand. You're not going to hear a lot of glowing stories. Of course, a lot of folks might not say anything out of fear of reprisal but, hey, that's just an example of how warm and fuzzy self regulation is.
Oops . . . sorry . . . I must have made a mistake. "NASD" Rule 1017? Why there hasn't been an NASD since 2007 when FINRA came into existence. Lemme check that citation.
What the hell?
All of the seminal rules involving approving FINRA member firms' proposed changes in ownership, control, and operations are still subject to an NASD Rule?
Wow, lets take a gander at FINRA's online "Continuing Membership Guide." Holy crap, FINRA's entire membership rulebook is so outdated that it only references NASD Rules! That sort of gives me a chuckle. I note that the online FINRA Continuing Membership Guide admonishes in fairly stern language that:
NASD Rule 1017(g)(2) requires FINRA to issue a written decision for CMAs "within 30 days after the conclusion of the membership interview or the filing of additional information or documents, whichever is later. If the Department does not require the Applicant to participate in a membership interview or request additional information or documents, the Department shall serve a written decision within 45 days after the filing of the application under paragraph (a) . . .." However, the biggest factor that causes a delay in processing an application is whether sufficient information is supplied to support the request.
Ummm, you folks at FINRA, you ever hear that line about those who live in glass houses shouldn't throw bricks? Talk about complaining about delays and insufficient information: What the hell is your excuse about delaying the revision of the NASD Rulebook?
Let's all read "NASD and NYSE Member Regulation Combine to Form the Financial Industry Regulatory Authority - FINRA" (FINRA Press Release, July 30, 2007). You notice the date of the publication of FINRA's press release: July 30, 2007. As in more than a decade ago! Ten years and FINRA couldn't update its Membership Rules? I mean, seriously? Shouldn't that have been among the first rules to be revised? And before FINRA's public relations machinery starts sputtering with an explanation, excuse, and defense, let me quote from that July 30, 2007 press release:
"The creation of FINRA is the most significant modernization of the self-regulatory regime in decades," said Mary L. Schapiro, Chief Executive Officer of FINRA. "With investor protection and market integrity as our overarching objectives, FINRA will be an investor-focused and more streamlined regulator that is better suited to the complexity and competitiveness of today's global capital markets. By eliminating overlapping regulation and establishing a uniform set of rules placing oversight responsibility in a single organization, we will enhance investor protection while increasing the competitiveness of our financial markets."
The most significant modernization of the self-regulatory regime in decades.
By eliminating overlapping regulation and establishing a uniform set of rules . . .
I know a lot of senior folks at FINRA have been running around the country on some listening tour and that FINRA is promising some 360 degree review and overhaul of its rules, but, c'mon, you can't take over a decade to eliminate your predecessor's Membership Rules. How ironic that FINRA is hoisted with its own petard by referring to the event of its very own creation as the most significant self-regulatory modernization in decades." Does it really take over a decade to modernize? Does it really take over a decade to deliver on the promised elimination of overlapping regulation? Does it really require over a decade to establish a uniform set of rules? And for godsakes, leave poor Mary Schapiro out of this discussion because as best I remember, she left FINRA in 2009. You've had eight years since her departure to clean this up. This failure to implement modernization and uniform rules ain't her fault.
In fairness to FINRA, there are a lot of bad guys in the biz and you need to be careful about unleashing them on the public. So, to that extent, sure, a regulator needs to ask questions about proposed mergers and new branches. Fine with me provided that the red or yellow or green light is turned on with the same speed or deliberative slowness for all member firms regardless of size or influence. Not my sense that that's the case but, then again, I'm a difficult fellow to please. Some might even say that I'm impossible to please. Of course, when you're making me use a rulebook from a defunct regulator, that's not helping turn me into Mr. Bubbly.
In that spirit, I want to send my very best wishes to the folks at TD Ameritrade and I also want to send my condolences to all those folks at Scottrade who may lose their jobs as part of the redundancy and new cost efficiencies arising out of the merger In any event, just as something in the way of a public service, let me refer the good folks at FINRA to two recent customer arbitrations against TD Ameritrade -- both FINRA Arbitration Decisions were published September 12, 2017.
Case In Point #1
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in March 2016, public customer Claimant Overview Productions asserted breaches of fiduciary duty, written contract, oral contract, and the covenant of good faith and fair dealing; negligence; negligent misrepresentation; professional negligence; promissory estoppel; common count; conversion; and declaratory relief. The causes of action arose in connection with alleged unauthorized sell orders and an alleged fraudulent wire transfer request. Claimant sought at least $300,000 in general and consequential damages plus punitive damages, interest, costs, and attorneys' fees. Additionally Claimant sought:
4. Declarations from the Panel that:
a. Certain provisions of the Client Agreement are internally conflicting and therefore, unenforceable;
b. The Client Agreement was not counter-signed by Respondent and therefore, is unenforceable;
c. The collateral guarantee provision of the Client Agreement is an illegal insurance policy;
d. The exculpatory provision of the Client Agreement is unenforceable; and
e. An accounting is necessary as to determine the amount of the losses suffered on the Claimant's account.
In the Matter of the FINRA Arbitration Between Overview Productions, Inc., Claimant, vs. TD Ameritrade, Inc., Respondent (FINRA Arbitration 16-00906, September 12, 2017).
Respondent TD Ameritrade generally denied the allegations and asserted various affirmative defenses.
The FINRA Arbitration Panel found Respondent TD Ameritrade liable and ordered the firm to pay to Claimant $125,000.00 in compensatory damages plus $10,100.29 interest.
Bill Singer's Comment (and heads-up to FINRA regulators)
Seems like there may have been some truth behind Claimant's allegations about breaches and negligence and unauthorized sells and fraudulent wire transfers. I'm not exactly sure what this particular panel of arbitrators found or didn't find because they didn't specify it in their published decision but, no problem, FINRA the self-regulator can pull the file and do its own inquiry. For starters, maybe investigators can give the Client Agreement a once-over to see if it's an "illegal insurance policy."
Case In Point #2
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in March 2017, the public customer Claimant IRA, appearing pro se, alleged that in connection with an investment in Banco Santander, Respondent TD Ameritrade had "failed to provide proxy statements in order to execute the option for dividends to be received in the form of additional stock allegedly causing Claimant to pay ADR fees and Spanish tax." Claimant sought $1,525.05 in compensatory damages and specific performance by requiring Respondent to provide to Claimant proxy statements. In the Matter of the FINRA Arbitration Between Merrill Knopf IRA, Claimant, vs. TD Ameritrade, Inc., Respondent (FINRA Arbitration 17-00678, September 12, 2017).
Oddly, the FINRA Arbitration Decision does not state whether Respondent TD Ameritrade denied any of the claims or asserted any affirmative defenses.
The FINRA Arbitrator found Respondent TD Ameritrade liable and ordered the firm to pay to Claimant $1,525.00 in compensatory damages and $75 reimbursement for the filing fee. Additionally, the Arbitrator ordered that Respondent shall assure that Claimant "receives the applicable proxy statement which is distributed by Banco Santander giving Claimant the option of how to receive his dividends as other custodians do."
Bill Singer's Comment (and another heads-up to FINRA regulators)
Seems like there may have been some truth behind Claimant's allegations about TD Ameritrade's failure to provide proxies. Wow, not providing disclosure documents can really, really cause problems and, come to think of it, that's pretty much a basic broker-dealer obligation in terms of customer service. Maybe FINRA the self-regulator needs to do a thorough review of TD Ameritrade's disclosure process before it digests all the new accounts from Scottrade? Apparently the FINRA Arbitrator didn't think that TD Ameritrade was getting that point because an Order was issued requiring the FINRA Large Firm to assure that in the future the customer "receives the applicable proxy statement." Obviously, yeah, obviously, I say, FINRA wouldn't want to greenlight the proposed merger of two Large Member Firms into one even larger Large Member Firm without ensuring that customers will be getting timely and required disclosure materials.