Paperwork. On Wall Street when it comes to compliance and regulation, it often comes down to paperwork -- or whatever passes for that now-quaint term in this digital age. You got to collect information. You got to review information. You got to store information. You got to produce information when a regulator wants to see that you collected, reviewed, and stored. Sometimes you just never got around to writing stuff down; and sometimes, well, just between us, you figured it was a waste of time and who the hell is ever going to need to see this crap anyway -- which, as such logic goes, doesn't quite help you out of the fix you're now in because someone from FINRA or the SEC is sitting in the conference room going through boxes of paperwork and that one damn thing that you didn't collect, review, and store is what those regulators are now asking to see.
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, Rainmaker Securities, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Rainmaker Securities, LLC, Respondent (AWC 2016048232401, January 10, 2018).
The 2018 AWC asserts that Rainmaker Securities has been a FINRA member firm since 2005 and has about nine branches with 55 registered persons. The firm is described as:
An investment-banking firm that focuses on private offerings and secondary transactions involving securities that are exempt from registration.
FINRA Sets Fire To Rainmaker: 2015 AWC
Under the heading "Relevant Disciplinary History," the 2018 AWC discloses that:
In July 2015, in disciplinary proceeding number 2013035059001, FINRA fined Rainmaker $125,000 and censured the firm for fourteen supervisory and other violations, including violations of NASD Rule 3010(b) and FINRA Rule 2010 by failing to use reasonable efforts to obtain information about eight investors' financial status, tax status, securities holdings, and investment objectives.
Have You Ever See The Information?
The 2018 AWC asserts under the heading "Facts and Violative Conduct" that during the relevant period from September 2015 to June 2016, Rainmaker did not:
record, or make reasonable efforts to obtain, required information about its customers participating in approximately sixty primary and secondary transactions involving securities that are exempt from registration. That practice reflected Rainmaker's supervisory system and written procedures, which were not reasonably designed to achieve compliance with Exchange Act Rule 17a-3 and FINRA Rule 4512.
In something of a backwards approach to presenting the fact pattern, the 2018 AWC sets forth in more detail under the prior heading of "Overview" that the unrecorded information pertained to:
customers' age, employment status, occupation, income, net worth, investment objectives, and other required subjects in the firm's files for those customers on dozens of occasions.
A Hard Fine's Gonna Fall
In accordance with the terms of the 2018 AWC, FINRA imposed upon Rainmaker a Censure, $30,000 fine, and a "written certification, " in which the firm "agrees to review and revise, as necessary, its systems, policies, and procedures (written and otherwise) with respect to collecting and recording required information about its customers. . . "
Bill Singer's Comment
At first blush, the 2018 AWC ain't that big a deal. Similarly, as set forth in the 2018 AWC, the 2015 AWC ain't that big a deal. Going by the brief characterization in the 2018 AWC, the 2015 settlement cited a mere 14 violations involving eight, investors' information. Of course, hmmmm, wasn't the 2015 AWC cited faiures to collect and record investors' information also the subject of the 2018 AWC? How is it that a repeat violation only generated a $30,000 fine versus the earlier $125,000?
Being the curious fellow that I am, I went back to the 2015 AWC. 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, Rainmaker Securities, LLC and Glen Anderson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Rainmaker Securities, LLC, and Glen Anderson, Respondents (AWC 2013035059001 / July 15, 2015). https://www.finra.org/sites/default/files/fda_documents/2013035059001_FDA_JMX1716.pdf
The 2015 AWC asserts that Respondent Anderson was first registered in 2005 and by January 2010, was registered with Rainmaker and became the firm's President. As set forth under the heading "Overview," the 2015 AWC asserts that (Ed: footnote omitted]:
From June 2011 through September 2014, Rainmaker, acting by and through its President, Anderson (collectively Rainmaker and Anderson will be referred to as Respondents') failed to devote adequate time. attention and resources toward compliance and supervision. As a result of the Firm's lack of a "culture of compliance," both Rainmaker and Anderson (who. during significant portions of the relevant time periods. served as the Firm's CCO and AMLCO) have repeatedly violated NASD and FINRA rules. including NASD Rule 3010 which, among other things, requires FINRA registered firms to: (i) establish and maintain a supervisory system reasonably designed to achieve compliance with securities laws and regulations, and with NASD and FINRA rules; and, (ii) establish, maintain and enforce written supervisory procedures ("WSPs") to supervise its registered and associated persons. These violations, as well as others, are summarized below.
The 2015 AWC is a very extensive 20-pages and also has an additional 14-page "Corrective Action Statement." Frankly, I was quite surprised at the breadth and depth of the allegations in the 2015 AWC, which I did not expect from the fairly brief recitation in the 2018 AWC. In fact, as a veteran industry regulatory lawyer, I would have to characterize the number and nature of FINRA's allegations in the earlier settlement as serious, extensive, and troubling. Consequently, I now understand why a six-figure fine was imposed.
Here Comes FINRA Again
Having said all of that, how the hell was Rainmaker still stumbling around in late 2015 and through mid-2016 with the basic obligation to record customer information? Taking that line of inquiry a step further, where the hell was FINRA in 2015 and 2016 when it came to following up on Rainmaker's prior promises as part of its 2015 AWC settlement?
The cynic in me might conclude that FINRA has little, if any, interest in actually doing the hard work of regulating but far more interest in collecting fines. Given the nature of Rainmaker's alleged "lack of a 'culture of compliance'" in 2011, 2012, 2013, and 2014 (not my words but those in FINRA's 2015 AWC), you'd sort of think -- you'd sort of like to expect -- that FINRA would have sent its dedicated Staff back to Rainmaker in 2015 and 2016 in order to monitor a firm that was deemed so non-compliant as to have noculture of compliance.
Instead of meeting my expectations, FINRA would have us believe that it was shocked, shocked I say, by learning that Rainmaker still didn't quite figure out the whole collecting and retaining customer information thing. Just as, you know, FINRA doesn't quite seem to have figured out the whole investigating and regulating thing. Alas, at least FINRA profited from Rainmaker's lack of a culture of compliance to the tune of $155,000 in total fines. We should be able to buy a lot of umbrellas for rainy regulatory days.