July 8, 2019
In today's blog we come across yet another Small FINRA Member Firm running afoul of the self-regulatory-organization's rules. It's another one of those woulda, coulda, shoulda matters in which FINRA has the firm dead to rights. Our publisher, Bill Singer, doesn't argue the point; however, Bill does use this case as an opportunity to take FINRA to task for playing hide-and-seek with some "BS".
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, CV Brokerage, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of CV Brokerage, Inc., Respondent (FINRA AWC 2017052325902, July 2, 2019)
The AWC asserts that FINRA member firm CV Brokerage has one branch office and about 16 registered representatives. The AWC asserts that the firm "does not have any relevant financial disciplinary history."
A Lot of "BS"
The AWC alleges that during the relevant period from February 2016 through June 2019, a registered representative referenced only as "BS" participated in multiple private securities transactions ("PSTs"), of which at least two involved CV Brokerage customers.
In pertinent part, the AWC alleges that:
[I]n February 2016, BS formed an investment
fund that was managed by BS's registered investment advisory firm. The
investment fund traded hundreds of millions of dollars at multiple financial
institutions and exchanges during the Relevant Period, and BS received
substantial selling compensation related to her participation in the fund.
CV Brokerage's WSPs during the Relevant Period required the Firm's pre-approval of all PSTs, and further stated that in the event an associated person
participates in an approved PST for compensation, "the transaction shall be
recorded on the books and records of [CV Brokerage] and [CV Brokerage] shall supervise the person's participation in the transaction as if it were executed on
behalf of [CV Brokerage]." However, the Firm's WSPs also permitted BS, who
was a principal of the Firm, to supervise her own compliance with the Firm's PST
procedures. The Firm had or could have hired other principals who could have
reviewed and supervised BS' participation in approved PSTs, or disapproved her
participation in PSTs. Moreover, the Firm failed to perform the necessary
analysis and create the necessary documentation prior to allowing BS to self-supervise her own participation in PSTs. The Firm therefore violated FINRA
Rule 3110(b)(6)(C)(i) and its WSPs were not reasonably designed to achieve
compliance with FINRA Rule 3280(c).
Additionally, during the Relevant Period, CV Brokerage, in fact, failed to
supervise BS' participation in PSTs. CV Brokerage failed to supervise the
securities trading conducted by the investment fund as if it was executed on
behalf of the Firm. The Firm also failed to record the securities transactions for
the fund on the Firm's books and records. As noted, BS received selling
compensation from transactions conducted by the investment fund, all of which
were conducted away from the Firm. Accordingly, the Firm failed to establish
and maintain a supervisory system reasonably designed to achieve compliance
with FINRA Rule 3280(c).
The AWC advises that BS had refused to respond to various FINRA Rule 8210 requests for documents and information, and, thereafter, BS entered into an AWC in which she was Barred from the industry. FINRA deemed that the above-cited conduct by CV Brokerage constituted violations of FINRA Rules 3110(a) and (b),
3280(c), and 2010. In accordance with the terms of the AWC, FINRA imposed upon CV Brokerage a Censure and a $100,000 fine.
Bill Singer's Comment
Without question it is never advisable to implement a compliance protocol by which Principals supervise their own compliance. To that extent, FINRA is correct and this AWC spot on. But we always need to be mindful that as the number of rules expand, so does the cost of compliance -- even if only to enter "N/A" on form after form after form. Some argue that if a Small FINRA Member Firm can't afford to follow the rules, it should be expelled from the regulatory organization. Others argue that FINRA is socially engineering its small firms out of business in favor of a handful of financial superstores. A few thousand small FINRA BDs are not likely to bring down our economy. A few Large FINRA Member Firms nearly accomplished that goal with the Great Recession.
The AWC depicts CV Brokerage as a small firm with one office and 16 reps. The cited misconduct in the AWC was this small firm's dubious policy of allowing one of its Principals (BS) to self-review and self-approve her PST activities. Under such circumstances, it feels appropriate for FINRA to disclose BS's name. She's the apparent cause of the very allegations and sanctions at issue in the AWC. In fact, the only footnote in the AWC asserts that:
BS refused to respond to a request for documents and information pertaining to one of the PSTs in which she participated; the request was issued pursuant to FINRA Rule 8210. BS has agreed to an AWC in which she consents to a permanent bar from the securities industry.
Who is FINRA protecting with its non-disclosure of BS's name? Apparently, FINRA is defending the privacy of an individual who refused to cooperate in one of its investigations and, as a result, was barred! BS is also the individual whose misconduct provided the underlying issues for which CV Brokerage was investigated, charged, and sanctioned. Not sure I understand what FINRA's scales are balancing here.
Discovering BS's Name
How difficult a task is it to discover BS's name? Took me under a minute. I typed in "CV Brokerage" into FINRA's Disciplinary Actions Online Database, which yielded eight results at http://www.finra.org//industry/disciplinary-actions/
Among those results were two for a "Brenda Smith." Was she the "BS" referenced in the AWC -- or could it have been that debonair man of mystery "Bill Singer"?
2014 Smith AWC: Fine and Suspension
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, Brenda Smith submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Brenda Smith, Respondent FINRA AWC 2012034900402, January 9, 2014)
The 2014 Smith AWC asserts that FINRA member firm Smith was first registered in 2006 and since May 2010, she was registered with CV Brokerage, and, at the time, had no prior relevant formal disciplinary history with the Securities and Exchange Commission, any sell-regulatory organization or any state securities regulator. In accordance with the terms of the AWC, FINRA imposed upon Smith a $5,000 fine and a 10-business-day suspension for her alleged failure to timely amend her Form U4 to disclose a 2012 tax lien.
2019 Smith AWC: Bar
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, Brenda Smith submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Brenda Smith, Respondent (FINRA AWC 2017052325901, July 2, 2019) http://www.finra.org/sites/default/files/fda_documents/2017052325901
The 2019 Smith AWC asserts in part that:
In accordance with the terms of the AWC, FINRA imposed upon Smith a Bar from associating with any FINRA member firm in any capacity. As set forth in part in the 2019 Smith AWC:
[S]mith subsequently became registered with FINRA through CV Brokerage as an Investment Banking Representative, Municipal Securities Principal, Operations Professional, Investment Banking Principal, and Compliance Officer. She remains registered through CV Brokerage, and currently serves as its Chief Executive Officer and Chief Compliance Officer, among other roles.
On May 23, 2019, in connection with an ongoing FINRA investigation into
potential misstatements about the financial performance of an investment fund
that were made during the course of private securities transactions in which Smith
participated, FINRA staff sent to Smith, pursuant to FINRA Rule 8210, a request
for documents and information. As stated by Smith's counsel in a telephone call
on June 4, 2019, and by this agreement, Smith acknowledges that she received
FINRA's request but will not produce the requested documents and information at
By refusing to provide documents and information requested pursuant to FINRA
Rule 8210, Smith violates FINRA Rules 8210 and 2010.