An irreverent Wall Street Blog
by Bill Singer
by Bill Singer
FINRA Says Brokerage Fee An Undisclosed Commission
May 15, 2014
The cost of doing business on Wall Street explains why the total number of FINRA member firms has plummeted in recent years. If you ask the former and present members of FINRA's small-firm community to cite the costs that typically press heavily upon them, they frequently complain about regulatory fees; excessive fines; the costs of non-production staff (typically back-office compliance and processing); and the lack of leverage in negotiating reasonable clearing fees. At first, some brokerage firms resort to cost-cutting, but there's only so many folks you can lay off before you just can't keep up with the paperwork. When the competitive landscape prevents smaller firms from passing rising costs on to their customers, it's often a death sentence. For better or worse, for the sake of progress or the lack of intelligent market regulation, we have fewer FINRA member firms, more power concentrated in larger firms, and an increasing lack of quality customer service. Consider the quandary posed to one smaller FINRA member firm when dealing with some of these day-to-day issues.
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, Blackbook Capital LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Blackbook Capital LLC, Respondent (AWC 2011025700901, May 5, 2014).
Since 2003, Blackbook has been a FINRA member firm with three offices employing about 35 registered representatives engaging in a general retail and investment banking business. The AWC asserts that the firm had no prior formal disciplinary history with any federal, state, or self-regulatory organization.
$60.50
The AWC alleges that between April 8, 2010 and June 10, 2011, Blackbook issued certain customer trade confirmations that indicated a "miscellaneous" and/or "additional fee" in the amount of $60.50. Allegedly, this charge was added to some 4,515 separate transactions in addition to or in place of a designated commission.
NASD Conduct Rule 2430: Charges for Services PerformedCharges, if any, for services performed, including miscellaneous services such as collection of moneys due for principal, dividends, or interest; exchange or transfer of securities; appraisals, safe-keeping or custody of securities, and other services, shall be reasonable and not unfairly discriminatory between customers.Securities Exchange Act Rule 10b-10: Confirmation of TransactionsPreliminary Note.This section requires broker-dealers to disclose specified information in writing to customers at or before completion of a transaction. The requirements under this section that particular information be disclosed is not determinative of a broker-dealer's obligation under the general antifraud provisions of the federal securities laws to disclose additional information to a customer at the time of the customer's investment decision.Disclosure requirement. It shall be unlawful for any broker or dealer to effect for or with an account of a customer any transaction in, or to induce the purchase or sale by such customer of, any security (other than U.S. Savings Bonds or municipal securities) unless such broker or dealer, at or before completion of such transaction, gives or sends to such customer written notification disclosing:The date and time of the transaction (or the fact that the time of the transaction will be furnished upon written request to such customer) and the identity, price, and number of shares or units (or principal amount) of such security purchased or sold by such customer; andWhether the broker or dealer is acting as agent for such customer, as agent for some other person, as agent for both such customer and some other person, or as principal for its own account; and if the broker or dealer is acting as principal, whether it is a market maker in the security (other than by reason of acting as a block positioner) . . .
In analyzing whether Blackbook's charge was reasonable and fairly disclosed to its customers, FINRA apparently determined that:
[A] substantial portion of the $60.50 charge was not attributable to any specific cost or expense incurred by the Firm or service performed by the Firm in executing each transaction or determined by any formula applicable to all customers. A substantial portion of the charge represented a source of additional transaction based remuneration or revenue to the Firm, and was effectively a minimum commission charge. . .
Accordingly, FINRA concluded that Blackbook mischaracterized and understated the amount of the total commissions charged in violation of NASD Conduct Rules 2430, FINRA Rule 2010, and Rule 10b-10 of the Exchange Act.
AML
In addition to the allegations about the non-compliant commissions, the AWC alleged that in 28 instances between August 10, 2010 and August 9, 2011, Blackbook failed to expeditiously search its records to determine whether the firm had or presently maintained accounts for or engaged in transactions with any individual, entity, or organization named on the Financial Crimes Enforcement Center's ("FinCEN's") Section 314(a) bi-weekly lists of persons/entities of interest to law enforcement. FINRA deemed such non-compliance to constitute a violation of FINRA Rules 3310(b) and 2010.
FINRA Anti-Money Laundering Rule 3310: Anti-Money Laundering Compliance ProgramEach member shall develop and implement a written anti-money laundering program reasonably designed to achieve and monitor the member's compliance with the requirements of the Bank Secrecy Act (31 U.S.C. 5311, et seq.), and the implementing regulations promulgated thereunder by the Department of the Treasury. Each member's anti-money laundering program must be approved, in writing, by a member of senior management. The anti-money laundering programs required by this Rule shall, at a minimum,(a) Establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under 31 U.S.C. 5318(g) and the implementing regulations thereunder;(b) Establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act and the implementing regulations thereunder;(c) Provide for annual (on a calendar-year basis) independent testing for compliance to be conducted by member personnel or by a qualified outside party, unless the member does not execute transactions for customers or otherwise hold customer accounts or act as an introducing broker with respect to customer accounts (e.g., engages solely in proprietary trading or conducts business only with other broker-dealers), in which case such "independent testing" is required every two years (on a calendar-year basis);(d) Designate and identify to FINRA (by name, title, mailing address, e-mail address, telephone number, and facsimile number) an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program (such individual or individuals must be an associated person of the member) and provide prompt notification to FINRA regarding any change in such designation(s); and(e) Provide ongoing training for appropriate personnel.Supplementary Material:.01 Independent Testing Requirements(a) All members should undertake more frequent testing than required if circumstances warrant.(b) Independent testing, pursuant to Rule 3310(c), must be conducted by a designated person with a working knowledge of applicable requirements under the Bank Secrecy Act and its implementing regulations.(c) Independent testing may not be conducted by:(1) a person who performs the functions being tested,(2) the designated anti-money laundering compliance person, or(3) a person who reports to a person described in either subparagraphs (1) or (2) above..02 Review of Anti-Money Laundering Compliance Person InformationEach member must identify, review, and, if necessary, update the information regarding its anti-money laundering compliance person designated pursuant to Rule 3310(d) in the manner prescribed by NASD Rule 1160.
Also, the AWC alleged that Blackbook violated FINRA Rule 3310(c) and Rule 2010 because the firm's 2010 AML test was performed by the firm's bookkeeper, who the AWC characterized as
[N]ot qualified to perform the test as he did not have a working knowledge of the applicable requirements under the Bank Secrecy Act and its implementing regulations. The AMI. test was not independent because RV reported directly to the Firm's AMI, compliance officer and took instruction from the compliance officer in how to perform the AMI, test and which documents to review. The test was not adequate as RV failed to actually test the adequacy of the Firm's AML compliance systems and instead relied on what he was told by the AMI compliance officer.
Email
Finally, the AWC alleged that from July 2009 through August 25, 2011, Blackbook failed to preserve hundreds of business-related email, principally internal emails, in a rewritable, non-erasable format when personnel used personal email addresses outside of the Firm's email domain to send or receive business-related emails. Pointedly, the AWC cited the practice of the firm's Compliance Officer, who retained copies of those emails on his personal email account platform - and FINRA criticized that practice because the emails could have been erased or altered on that platform. The AWC alleged that such practices violated Section 17(a) of the Exchange Act and SEC Rule 17a-4(b)(4) and (D), NASD Conduct 3110 and FINRA Rule 2010.
Sanctions
In accordance with the terms of the AWC, FINRA imposed upon Blackbook a Censure, $50,000 fine, and an undertaking to implement corrective measures addressing the commission issues cited.
Bill Singer's Comment
FINRA AWCs permit the attachment of a Corrective Action Statement to demonstrate the steps taken by a respondent to prevent future misconduct subject to the understanding that such an attachment may not deny the charges or make any statement that is inconsistent with the AWC. Further the Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.
I am no fan of Corrective Action Statements and rarely, if ever, advocate their use. Given that the premise of an AWC is a settlement made without admitting or denying the findings, I don't understand why anyone would prepare a statement that tends to typically make admissions, promises to correct situations that have not necessarily been acknowledged, and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statement, then you may want to pause before signing the AWC and ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal afterwards.
If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it. There's no need whatsoever to engage in a post-game, public analysis. Some think that this after-the-fact statement gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. Keep in mind that a Corrective Action Statement may actually set you and your firm up for heavier sanctions down the road if you acknowledge wrongdoing and propose a set of remedial actions. If during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in the statement, or, it is alleged that you failed to implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission. Notwithstanding my opinion, Blackbook apparently determined that it was advisable to submit a Corrective Action Statement and hopefully that step will prove favorable to the firm:
Also READ:STATEMENT OF CORRECTIVE ACTIONExamination No. 20110257009THIS CORRECTIVE ACTION STATEMENT IS SUBMITTED BY THE RESPONDENT. IT DOES NOT CONSTITUTE FACTUAL OR LEGAL FINDINGS BY FINRA, NOR DOES IT REFLECT THE VIEWS OF FINRAThis submissions in respectfully transmitted for purposes of identifyihg the various remedial measures undertaken by Blackbook (the "Firm") in furtherance of its ongoing objective to maintain supervisory systems reasonably designed to achieve compliance with respect to the applicable securities laws and regulations and rules of FINRA.1:FINCEN ReportsFINCEN Reports are now transmitted by email on a bi-weekly basis from fincen.gov to Blackbook's President Franklin Ogele's firm issued email address and have been contemporaneously reviewed by him since November 15, 2011.Mr. Ogele's reviews are evidenced by way of the FINCEN system's generation of search self-verification memoranda containing the details of such access including the corresponding date and time.2: Email PreservationAny and all business-related email communications - whether involving the Firm's customers, internal correspondence or otherwise -- are being archived by Global Relay and have been captured as such since September 2011.Global Relay is notably the market leader in compliance archiving and message management.3: AML TestThe Firm has been utilizing the services of reputable third parties with no prior nexus to it (i.e. Quadrant Compliance LLC and VMB Consulting Services, Inc.) for purposes of conducting its annual Independent AML tests for the years 2011, 2012 and 2013.4: Miscellaneous Fee ChargesContemporaneous with Blackbook having been freed of Penson's rather onerous five thousand dollar ($5.000) per month minimum charges in favor of Stern Agee's more reasonable one thousand dollar ($1,000) per month minimum fee structure, the Firm's prior $60.50 minimum ticket charge was initially reduced to $45.00 in May of 2012 and then promptly reduced yet again to $29.99 in July 2012.Moreover, upon approval of the Letter of Acceptance, Waiver and Consent, the Firm will timely implement its undertaking set forth in §B (1), (2) and (3) with respect to any remaining transaction based charge or fee that may be imposed for services performed or costs incurred by the Firm that is not specifically included as part of reported commissions or markup/markdowns.5: ConclusionWe respectfully submit that the above referenced remedial measures undertaken by Blackbook Capital stand testament to the firm's ongoing objective of maintaining supervisory systems reasonably designed to achieve compliance with respect to the applicable securities laws and regulations and rules of FINRA.Thank you for your continued consideration in this matter . . .