December 15, 2018
On stage is a lonely registered representative who doesn't appear to have done anything wrong. It's pretty much a Compliance Department screw-up and he's the victim. Our victimized rep likely figured that his firm would own up to its error and clear his industry record of some undeserved negative comments. Oddly, the firm sort of agrees that it was all a mistake -- a misunderstanding. In part, the problem was caused by a profanity score. Yeah, a profanity score! Then there's the mistake about the mistaken name and the mistaken characterization of a customer complaint. Unfortunately, from that point, the firm seems to have done little more than shrug. Come down off your Compliance throne, he says. Somebody must change. You are the reason I've been waiting so long. You hold the key. No matter how frequently the rep sings that refrain, no one budges and nothing gets done. Eventually, he gets angry and says, I just ain't got the time. I'm wasted. I can't find my way home or to Compliance or to FINRA. As the chorus swells, we find ourselves at a FINRA expungement arbitration.
I'm a veteran securities lawyer who has spent years dealing with the SEC, both defending clients in enforcement actions and shepherding various ventures through the agency. I know enough to know that, with all the bullshit in Blockvest's whitepaper, the SEC just couldn't wait to burst in and rooster-block its ICO. So, of course the SEC sued for an injunction. Its case was simplicity itself: Blockvest admitted receiving money for its unregistered blockchained tokens ("BLVs,") from 32 investors. And also, even if unsaid, the SEC had never before failed to get an injunction against an unregistered securities offering. Talk about feeling entitled! But all that depended on the BLVs being securities. If they weren't, then Blockvest's shenanigans didn't violate any securities laws, whatever else they may have done, and the SEC would have no basis for its injunction. I don't think it ever dawned on the SEC that the BLVs might not be securities, and that's why this is interesting.
They will try to convince you that Wall Street has an effective two-tier system to protect investors. First, there's the in-house Compliance Staff. Second, there's the federal, state, and self regulators. If the first line of compliance defense fails, you have the Imperial Guard regulators held in reserve. It all sounds good. The problem is that it's all nonsense. It's not so much that the system doesn't work, as much as it is that the system is not designed to work but only to give so much of an appearance as necessary. Wall Street's brokerage firms underpay, understaff, and undercut their compliance departments. As far as compliance goes, it's pretty much viewed as window dressing. When it comes to Wall Street's regulators, well, recent history pretty much speaks volumes on that subject. All in all, Wall Street's approach and dedication to effective investor protection amounts to little more than reading toe tags at the morgue. More after-the-fact than preventative medicine. In a recent FINRA regulatory settlement, we see the futility of compliance and regulation at its worst. Where were Wall Street's cops during the years when this one investor was victimized? All the warning signs were there and mounting -- year after year, lost dollar after lost dollar. Did no one notice? Or did no one care?
There may come a time if you are a FINRA member firm or associated person when the self-regulatory-organization comes a knockin' and asks you some questions. In addition to that chit chat, FINRA may also ask that you provide documents. A tad less politely, FINRA may tell you to stand aside and make way as its Staff enters your premises to inspect your records and make copies of various materials. What gives FINRA the right to demand answers to its questions and to barge into your professional and personal lives? Generally, it all starts with FINRA Rule 8210 and may end with FINRA Rule 9552.
For those caught up in a FINRA investigation, there often comes a moment when you open a letter from Staff and it asks for numerous written explanations and what you envision to be tons of documents. In such a moment, you may feel overwhelmed. It may strike you as an effort to force you out of the industry not for any wrong that you did but simply as a ploy. You may not have the resources to assemble everything needed to respond. FINRA knows that. And you think that they're simply playing hardball and want you to agree to a Bar. No matter how you ask Staff for relief from the onerous production demands, their response is either give us what we want or we'll bar you. Produce or Bar. Produce. Bar. That's the choice it almost always comes down to. Of course, FINRA has a job to do and it often starts with an investigation, and such an inquiry depends upon the cooperation of brokerage firms and their associated persons. You would no more expect FINRA to simply withdraw a demand in the face of a mere objection than you would a criminal prosecutor. It's how the system works. That being said, let's consider a recent FINRA investigation in which a respondent pushed back against Staff production demands.