An irreverent Wall Street Blog
Wall Street Compliance Professionals Need FINRA Like A Heart Attack
April 22, 2021
HSBC Holdings Plc contractor Jonny Frostick, 45, who manages over 20 employees working on regulatory projects, had a heart attack. In a post that has gone viral, Frostick explains that he was working himself to death: https://www.linkedin.com/posts/activity-6787207960864014336-juUs Thankfully, Frostick responded to his wake-up call and is implementing a more realistic and healthier work-life balance.
My April 14th blog criticized "FINRA Regulatory Notice 21-15: "Options Account Approval, Supervision and Margin / FINRA Reminds Members About Options Account Approval, Supervision and Margin Requirements" (FINRA Regulatory Notice 21-15 /April 9, 2021) https://www.finra.org/sites/default/files/2021-04/Regulatory-Notice-21-15.pdf. I argued that FINRA thoughtlessly adds unnecessary burdens upon the industry's COVID-beleaguered compliance professionals:
Imagine that you are a Wall Street compliance officer and you're trying, really giving it your all, to do your job during the last year. The pandemic has been a horror. Some of your staff took ill and that meant more work fell on your shoulders. Some of the folks that you were supervising yelled at you because they felt you were being a jackass when you complained about late reports or unanswered questions -- they all screamed at you about how they were working out of their basement or second bedroom and didn't have bandwidth or their printer was on the fritz. You understood. Still, you had a job to do and you were going to do it as best you could.. . .Despite all of the above, FINRA wasted its time and that of its members and their compliance staff with Regulatory Notice 21-15. The sheer idiocy of this Notice is made apparent in the very first sentence of the document:
With the recent increase in the number of customers seeking to open brokerage accounts and trade options, FINRA reminds members of the requirements for determining whether to approve a customer to trade options.
Submitted for you disapproval is a FINRA Regulatory Notice that does nothing more than "reminds members" that they are required to do something.
. . .And as you read through each and everyone of those reminders, you realize that you're being reminded about how to do your job, which you most likely don't need FINRA to do because the regulator never just reminds you to do anything -- it always ends badly with an AWC, a Complaint, or a Hearing. Under your breath, you mutter something about "gotcha regulation." Worse, the reminders that do flow from FINRA are so insipid and generic as to be useless. You're told to remember to perform supervisory reviews. Duh. You're reminded that various FINRA supervisory rules pertain to, of all things, supervision. Duh, again. You are reminded that there are supervisory requirements involving margin and options accounts, which, is like what, a newsflash?I'm sorry but shame on FINRA. This is not regulation. This is make-work and an unnecessary imposition upon the limited time of the industry compliance men and women. All of which is exacerbated by these pandemic times.
Adding insult to injury, FINRA publishes yet another unnecessary Regulatory Notice: "FINRA Reminds Members About Requirements When Using Predispute Arbitration Agreements for Customer Accounts" (FINRA Regulatory Notice 21-16 / April 21, 2021)
https://www.finra.org/sites/default/files/2021-04/Regulatory-Notice-21-16.pdf In this latest bit of reminding, FINRA explains that it believes that its member firms are using predispute arbitration agreements in violation of FINRA's rules.
Wow -- imagine that! We are reminded about what the self-regulator believes.
To which many veteran industry regulatory/compliance lawyers and staff would respond: Who gives a crap what FINRA merely believes? If it's a rule, enforce it. If it's an interpretation, publish it. Say what you mean and mean what you say. We can't run Wall Street compliance departments by attempting to read FINRA's mind and divine its beliefs. By way of example, consider this idiotic paragraph on Page 5 of FINRA Regulatory Notice 21-16:
In addition, a well-developed line of case law has held that it is contrary to public policy for a person to seek indemnity from a third party for that person's own violation of the federal securities laws.17 Accordingly, FINRA believes that it would be unethical and not in compliance with FINRA Rule 2010 for a member firm or associated person to attempt to seek indemnity from customers of costs or penalties resulting from the firm's or associated person's own violation of the securities laws or FINRA rules.18 For example, FINRA believes that a member firm would violate FINRA Rule 2010, and be subject to disciplinary action, if it sought to recover from a customer the attorney's fees that it incurred as a result of a regulatory investigation into the member firm's own misconduct.= = = = =Endnote 17: See, e.g., First Golden Bancorporation v. Weiszmann, 942 F.2d 726, 728-29 (10th Cir. 1991) (describing how "[c]ourts have rejected indemnity for a variety of securities violations because indemnity contravened the public policy enunciated by the federal securities laws") (citations omitted).Endnote 18: FINRA Rule 2010 requires a member, "in the conduct of its business," to adhere to "high standards of commercial honor and just and equitable principles of trade." The rule "states broad ethical principles and centers on the ethical implications of conduct [and] serves as an industry backstop for the representation, inherent in the relationship between a securities professional and a customer, that the customer will be dealt with fairly and in accordance with the standards of the profession." Steven Robert Tomlinson, Exchange Act Release No. 73825, 2014 SEC Lexis 4908, at *17 & nn.17-19 (December 11, 2014) (citations omitted), aff'd, 637 F. App'x. 49 (2d Cir. 2016).
Making things even more absurd, if you read Endnote 17, you will see that FINRA's April 2021 Notice seeks to remind you about a 1991 federal case -- let that sink in. In 2021, FINRA is publishing a Regulatory Notice (in the midst of a killer pandemic) in order to remind you about what the regulator itself describes as a well-developed line of cases going back 30 years to 1991.
Not exactly a newsflash.
Not exactly the stuff of urgency during the COVID pandemic.
Even more ridiculous, the Notice cites to FINRA Rule 2268 as likely proscribing the indemnification and hold-harmless provisions at issue. So you're not only being reminded about a 30-year-old line of cases but you're also being reminded that there's a rule on FINRA's books that probably addresses the issue.
All of which suggests that FINRA is offering an answer to a question that no one is asking.
In a final flourish of foolishness, FINRA Notice 21-16 asserts that the 1991 case "held that it is contrary to public policy for a person to seek indemnity from a third party for that person's own violation of the federal securities laws. . ." From that launching pad, FINRA seeks to impress upon you that:
[A]ccordingly, FINRA believes that it would be unethical and not in compliance with FINRA Rule 2010 for a member firm or associated person to attempt to seek indemnity from customers of costs or penalties resulting from the firm's or associated person's own violation of the securities laws or FINRA rules.18 For example, FINRA believes that a member firm would violate FINRA Rule 2010, and be subject to disciplinary action, if it sought to recover from a customer the attorney's fees that it incurred as a result of a regulatory investigation into the member firm's own misconduct.
FINRA believes some conduct may be a violation of its rules. FINRA "believes"? Believes?? That's it??? Not that it is a violation. Not that it isn't. Merely that FINRA believes it would be. Talk about wiggle room.
If FINRA believes that the cited conduct rises to the level of misconduct, then prosecute the rule violation. If FINRA believes that the cited conduct "should" constitute a rule violation but that there is no extant rule that clearly proscribes the conduct, then FINRA should amend its rulebook or propose a new rule. Instead of doing its job, FINRA prefers to shoot the breeze rather than engage in the serious business of regulation. Will FINRA roll out a hotline so that we can call up and inquire as to what the regulator's "belief" is today, or tomorrow, or next week, or at 11 a.m. versus 2:15 p.m.?
If FINRA's management won't shut off the spigot from which this endless stream of silliness continues to spew, is there a chance, remote as the possibility may seem, for one of FINRA's Governors to propose a time-out? After all, we got 22 folks who are sitting on the Board of Governors, getting paid, and, as best I can tell, going through the motions but not much else.
I've said it before and I will say it again. Shame on FINRA for issuing such useless Notices and imposing upon the limited time of the industry's men and women. And, more to the point, shame on FINRA's Board of Governors for permitting this practice.
How many more heart attacks are needed to send the message?
And you wonder why Wall Street's Jonny Frosticks are dropping like flies?