FINRA Tackles Insurance Claim Allowable Assets. But Is It Relevant?

November 3, 2017

Brokerage firms get sued and, sometimes, the lawsuit is covered by an insurance policy. When the ensuing settlement or award becomes a liability on the firm's books, there is often a belief that the anticipated insurance payment may be treated as an allowable assets. As far as Wall Street accounting goes, the Devil is often in the details. All of which explains why lawyers love the billable hour!

In today's featured Blog, our publisher Bill Singer, Esq. presents a recent FINRA AWC involving the issue of how to recognize an anticipated insurance company payment for Net Capital purposes. It may strike you at first blush as a bit of Wall Street arcana. At second blush, you may be catatonic after delving into this bit of bookkeeping. At third blush, we may be trying to revive you with paddles. If you hang in there to the end of the article, however, you may find a truly intriguing puzzle. What does FINRA mean by the term "relevant"  . . . as in disclosing one of its member firm's "relevant disciplinary history"? 

All of which prompts us to ask, yet again, whether there is any quality control at FINRA when it comes to reading and fact-checking its published materials. Assuming that this "relevant" issue was just the byproduct of a lapse of review, okay -- it happens and even the pages of BrokeAndBroker have similar misses. On the other hand, if  someone is fact-checking FINRA's published materials and today's AWC disclosures comport with the self-regulatory-organization's policy, then that raises some troubling questions.

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, Brickell Global Markets, Inc., Respondent submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Brickell Global Markets, Inc., Respondent (AWC  2016050832201, November 1, 2017).

The AWC asserts that Brickell Global Markets, Inc.("BGM") has been a FINRA member firm since 2001 and that:

BGM has no relevant disciplinary history with the Securities and Exchange Commission, FINRA, any other self-regulatory organization or any state securities regulator.

Net Capital

The AWC asserts that Section 15(c) of the Exchange Act and SEC Rule 15c3-1 promulgated thereunder require broker-dealers to minimum levels of net capital. In furtherance of that Net Capital Rule, broker dealers are required to file accurate Financial and Operational Combined Uniform Single ("FOCUS") Reports demonstrating their levels of net capital and the basis for calculation pursuant to SEC Rule 17a-5(a)(2). Further, Section 17(a) of the Exchange Act and SEC Rule 17a-3 promulgated thereunder (and FINRA Rule 4511(a)) require broker-dealers to make and keep accurate books and records relating to its business.

During the relevant period from December 7, 2015, through March 14, 2016, the AWC asserts that while conducting its securities business, BGM's required regulatory minimum net capital ranged from $354,184 to $488,686. In computing its Net Capital for the subject dates, BGM allegedly had improperly treated as an allowable asset a $2.4 million insurance receivable related to its settlement of a customer lawsuit. If that receivable is backed out of BGM's Net Cap computation, the AWC asserts that the firm's had net capital deficiencies for the relevant period ranging from $706,857 to $995,874.

Two-Prong Test

Insurance claims which, after seven (7) business days from the date the loss giving rise to the claim is discovered, are not covered by an opinion of outside counsel that the claim is valid and is covered by insurance policies presently in effect; insurance claims which after twenty (20) business days from the date the loss giving rise to the claim is discovered and which are accompanied by an opinion of outside counsel described above, have not been acknowledged in writing by the insurance carrier as due and payable; and insurance claims acknowledged in writing by the carrier as due and payable outstanding longer than twenty (20) business days from the date they are so acknowledged by the carrier; and . . .

/01 Insurance Claim Extensions
Extensions of time beyond the twenty day time frames specified in the Rule might possibly be granted by the SEC, but only on a case-by-case basis. (SEC Staff to NYSE)

/02 Counsel's Opinion for Lost Certificates Generally, there is no applicable charge for lost security certificates even though opinion of outside counsel has not been obtained provided the broker-dealer takes prompt steps for replacement of the loss. These steps should include placing a stop transfer order with the transfer agent, obtaining a replacement bond from an insurance company and transmitting it to the transfer agent, and whatever other steps would be necessary to expedite the replacement. (SEC Staff to NYSE) (No. 77-2, June 1977)

The AWC alleges that not only did BGM fail to obtain the requisite opinion of counsel within the seven-business-day window but also failed to obtain the requisite written acknowledgment from the carrier within the twenty-business-day window. Notwithstanding the lack of a timely opinion of counsel and carrier's acknowledgment,  BGM continued to carry the receivable on its books when the AWC asserts that the firm was required to deduct same from its net capital.


FINRA deemed BGM's erroneous Net Capital computation, its inaccurate FOCUS Reports for December 2015 through February 2015, and its inaccurate general ledger as constituting violations of Section 15(c) of the Exchange Act, SEC Rules 15c3-1 and 17a-5 thereunder, Section 17(a) of the Exchange Act, SEC Rule 17a-3 thereunder, and FINRA Rules 4511 and 2010.

In accordance with the terms of the AWC, FINRA imposed upon BGM a Censure and $15,000 fine.

Bill Singer's Comment

Compliments to FINRA on an excellent presentation of the underlying issues and applicable rules.

Now for a troubling matter -- one that I think is important. 

Regulatory Disclsoures

If you visit the online FINRA BrokerCheck file for Brickell Global Markets, Inc., you will note five disclosures listed under the heading "Regulatory - Final." In defining the heading, FINRA's online explanation is that:

This type of disclosure event involves (1) a final, formal proceeding initiated by a regulatory authority (e.g., a state securities agency, self-regulatory organization, federal regulator such as the U.S. Securities and Exchange Commission, foreign financial regulatory body) for a violation of investment-related rules or regulations; or (2) a revocation or suspension of the authority of a brokerage firm or its control affiliate to act as an attorney, accountant or federal contractor.

In reviewing the five disclosures under Brickell's "Regulatory - Final" heading, the most recent item is the AWC under discussion here. As such, there are four other matters that FINRA characterized as "Regulatory - Final" for purposes of inclusion on BrokerCheck.

Brickell 2016 SEC OIP

Item #2 on Brickell's BrokerCheck file under the heading "Regulatory - Final" is an SEC settlement involving a Cease-And-Desist, a Censure, and a $1 million fine: In the Matter of E.S. Financial Services, Inc. n/k/a Brickell Global Markets, Inc., Respondent (Order Instituting Administrative Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-And-Desist Order, '34 Act Rel. No. 77056; Admin. Proc. File No. 3-17099 / February 4, 2016). As set forth in the "Summary" portion of that OIP:

This matter involves violations of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder, which require broker-dealers to comply with the reporting, recordkeeping and record retention requirements in regulations implemented under the Bank Secrecy Act, including the customer identification program rule (31 C.F.R. § 1023.220, the "CIP Rule") by Respondent, a Miami-based broker-dealer. In January 2003, a Central American bank (the "Central American Bank"), at the time affiliated with Respondent, opened a brokerage account with Respondent, its affiliate, purportedly for the sole purpose of brokerage trading by the Central American Bank itself. No sub-account holders or other beneficial owners were identified on the Central American Bank account application. In actuality, 13 entities that maintained accounts with the Central American Bank were sub-account holders of the Central American Bank account. These Central American Bank corporate accounts were beneficially owned by 23 non-U.S. citizens who interfaced directly with Respondent's registered representatives to solicit securities trading advice and to request account maintanenace, securities orders, and execution through the Central American Bank account. Until approximately August 2013, Respondent violated the federal securities laws by failing accurately to document its CIP procedures, comply with the Commission's CIP Rule, or create and maintain the required books and records for the Central American Bank account, the Central American Bank corporate accounts, or their beneficial owners. During this ten year time-frame, the beneficial owners of the Central American Bank corporate accounts effectuated securities transactions totaling approximately $23.8 million. 

Brickell 2015 FINRA AWC

Item #3 on Brickell's BrokerCheck file under the heading "Regulatory - Final" is  In the Matter of E.S. Financial Services, Inc., n/k/a Brickell Global Markets, Inc., Respondent (FINRA AWC 2015045608701 / November 11, 2015), which resulted in a Censure and $275,000 fine. As synopsized in the "OVERVIEW" heading of the 2015 AWC:

Between September 1, 2011 and October 31, 2012 (hereinafter the "postage and handling review period"), ESF charged its customers a transaction fee and a custody fee in addition to a commission on fixed income transactions. The foregoing charges were not reasonably related to any direct handling-related services performed by the firm, or handling-related expenses incurred by the firm, in processing transactions, but rather, were effectively additional commissions for the firm. Based on the foregoing, ESF violated NASD Rule 2430, FINRA Rule 2010 and Exchange Act Rule 10b-10. During the time period of February 2012 to February 2014, ESF failed to deliver prospectuses to 10 out of 40 customers who had purchased commercial paper of ESF's affiliate and failed to establish, maintain and enforce a supervisory system and WSPs to ensure prospectus delivery, in contravention of Section 5 of the Securities Act of 1933 (hereinafter the "Securities Act") and in violation of FINRA Rule 2010 and NASD Rule 3010(a) and (b). During the time period of November 2012 through December 2013, ESF also failed to establish, maintain and enforce a supervisory system and WSPs regarding email review, in violation of FINRA Rule 2010 and NASD Rule 3010(a),(b) and (d). From 2003 through 2013, ESF allowed persons without trading authority in a brokerage account opened by a Central American bank to direct trading in the account, in violation of NASD Rules 2110, 3010(a) and (b) and FINRA Rule 2010. During the time period from June 2013 through August 2013, ESF maintained inaccurate books and records reflecting that transactions were solicited, when in fact, the transactions were unsolicited, in violation of FINRA Rules 4511(a), 2010, Exchange Act Section 17(a), and Exchange Act Rule 17a-3. Last, in 2013, ESF inaccurately computed its customer reserve formula which resulted in hindsight deficiencies and filed inaccurate FOCUS reports, in violation of Exchange Act Rules 15?3-3, 17a-3. 17a-5 and FINRA Rules 4511(a) and 2010.

Brickell 2012 and 2007 FINRA AWCs

Items #4 and #5 on Brickell's BrokerCheck file under the heading "Regulatory - Final" reference a 2007 FINRA AWC and a 2012 FINRA AWC. As set forth under the 2015 AWC's heading of "RELEVANT DISCIPLINARY HISTORY":

In 2007, ESF was censured and fined $10,000 for failure to maintain accurate books and records, in violation of Section 17(a) of the Securities Exchange Act of 1934 (the "Exchange Act"). Exchange Act Rule 17a-3 and NASD Rules 31 10 and 2110, and for failing to establish and maintain adequate customer safekeeping accounts in violation of Section 15c of the Exchange Act, Exchange Act Rule 15c3-3 and NASD Rule 2110. 

On December 14, 2012, in connection with ESF's sale of commercial paper, the firm was censured and fined $200,000 for making false, exaggerated and unwarranted statements to clients, failure to conduct adequate due diligence and failure to adopt, maintain, and enforce adequate written supervisory procedures ("WSPs") pertaining to its sales of the commercial paper.

So . . . someone . . . anyone . . . ya wanna explain to me how it is that the November 1, 2017 AWC analyzed in today's Blog asserts that:

BGM has no relevant disciplinary history with the Securities and Exchange Commission, FINRA, any other self-regulatory organization or any state securities regulator.

And before you're too quick to pooh-pooh this disclosure issue as a one-off issue or just a bit of oddball esoterica, please read: "FINRA's Foolish Inconsistency" ( Blog, June 9, 2017)