November 24, 2014
This is Part 3 of a three part BrokeAndBroker Blog commentary. If you've started here, you need to go back and first read Part 1 and then Part 2, where you will be advised to get a cup of coffee and find yourself a nice donut. Okay . . . now, sit down and make a modest investment of your time. By way of spoiler alert: FINRA settled charges involving records that were altered during an in-house audit at UBS. It's not so much what's said by FINRA about this misconduct that has Bill Singer apoplectic (after all, it doesn't take that much to get Bill upset), it's what is not said by FINRA that underscores so much of the nonsense and silliness that has become Wall Street regulation. READ Part 1 and Part 2 BEFORE Proceeding.
The Lo Grasso 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, Jennifer L. Lo Grasso submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jennifer L. Lo Grasso, Respondent (AWC # 2013035537602, November 17, 2014).
In 2004, Respondent Lo Grasso first became registered and on February 19, 2009, she was both a General Securities Representative and General Securities Sales Supervisor with FINRA member firm UBS Financial Services Inc. The AWC asserts that she had no prior formal disciplinary history with the Securities and Exchange Commission, any self-regulatory organization or any state securities regulator.
The UBS Branch Audit
In November 2012, UBS staff was auditing the branch where Lo Grasso worked, and, at that time, she was a Complex Administrative Manager. In her managerial role, Lo Grasso was supervising a Branch Control Officer (who was also a member of the firm's compliance group) identified in the Lo Grasso AWC only as "SC." The audit staff asked the Branch to produce, among other items, copies of marketing materials used by registered representatives for client events. In response to said requests, Lo Grasso "delegated" the task to SC.
As the UBS audit progressed, the AWC alleges that Lo Grasso and Branch Control Officer SC became aware that the requested marketing materials were missing necessary information, including certain disclosures. Apparently, SC worked in conjunction with other unnamed employees to add the missing information, and the altered documents were then submitted by Lo Grasso and SC to the audit staff, which mislead said staff into believing that they had received marketing materials as prepared and maintained by the Branch.
SIDE BAR: This is a direct quote from the Lo Grasso AWC:
[I]n November 2012, Lo Grasso was responsible for supervising SC, Lo Grasso knew that during the audit, SC was working with the other UBS employees to have the missing information added to the marketing materials which would be produced to the audit staff. . .
On November 26,2012, UBS filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") disclosing that Lo Grasso's employment was voluntarily terminated on November 16, 2012.
Fine And Suspension
FINRA asserts that in violation of NASD Conduct Rule 3010 and FINRA Rule 2010, Lo Grasso failed to make a reasonable inquiry or conduct an adequate follow-up or review as to whether SC's conduct in that regard was permissible. Lo Grasso also failed to take action to prevent SC from engaging in the conduct described above. In accordance with the terms of the AWC, FINRA imposed upon Lo Grasso a $10,000 fine and a three-month suspension from association with any FINRA member firm in any principal capacity
Bill Singer's Comment
Who the hell is "SC" ? Who the hell were the "other UBS employees"? I don't know because FINRA didn't disclose those names. To be clear, very clear, there is not a single reference to SC's full name or that of to any other individual in the Lo Grasso AWC. Moreover, we don't even have a reference to another AWC, if such exists, pertaining to the same underlying matters as set forth in the Lo Grasso AWC. Alas -- Wall Street's largest self-regulatory organization doesn't seem to think that we need to know that. So much for content and context.
Bill Singer: Regulatory Detective
When I started writing about this UBS audit story, I had only read the FINRA AWC about Respondent Curnyn, which had the FINRA file number of 2013035537601. As I was reading through additional FINRA AWCs, I noticed a similar fact pattern involving Respondent Lo Grasso, and saw that her AWC had the FINRA file number of 2013035537602.
Was there a -600 or a -603? I searched for both and, lo and behold, I discovered 2013035537603 for Respondent Santiago.
What I don't understand and have complained about in the past is why FINRA presents such related AWC under such a cloud of secrecy concerning the identities of related participants in the same underlying violation. See the source materials and blogs for the three related matters presented in today's three BrokeAndBroker Blogs:
SEC v. FINRA -- sound familiar?
The disconcerting aspect of these "hidden" identities in FINRA AWCs is that they are eerily reminiscent of a 2011 Securities and Exchange Commission ("SEC") proceeding against FINRA itself, in which the SEC instituted cease-and-desist proceedings against FINRA and, in anticipation of that action, but without admitting or denying the findings, the self-regulatory organization submitted an Offer of Settlement, which the SEC accepted. As part of the settlement, FINRA accepted the cease and desist and agreed to a wide range of undertakings. In the Matter of the Financial Industry Regulatory Authority, Inc., Respondent
(Order Instituting Cease-And-Desist Proceedings Pursuant To Section 21c of the Securities Exchange Act Of 1934, Making Findings, And Imposing A Cease-And-Desist Order / 1934 Act Release 65643, October 27, 2011).
In the SEC's Order Instituting Proceedings, the federal regulator alleged that on August 7, 2008, the Director of FINRA's Kansas City District Office caused the alteration of three records of staff meeting minutes just hours before producing them to the SEC's Chicago Regional Office inspection staff. The Director's actions rendered the regulatory production inaccurate and incomplete. Oddly, the SEC's Order doesn't name the FINRA Director beyond repeating that individual's title. In jaw-dropping fashion, we learn from the SEC's Order that:
The Director's misconduct is the third instance during an eight year period in which a FINRA employee, or an employee of its predecessor, the National Association of Securities Dealers, Inc. ("NASD"), provided altered or misleading documents to the Commission. Although FINRA has endeavored to improve its procedures and training since document integrity issues came to light in May 2006 and December 2007, those efforts were not effective in preventing the Director's misconduct.
The Order explains that on July 28, 2008, FINRA's Kansas City District Office received an SEC document request relating to a previously announced inspection of the office, which is responsible for conducting FINRA's regulatory programs in seven states. Among the various items of information sought from FINRA by the SEC:
Item 36 of the document request letter asked for "Minutes of District staff meetings conducted between November 1, 2005 and the present." On August 7, 2008-hours before furnishing the Commission inspection staff with FINRA's response to Item 36-the Director caused the minutes for meetings that took place on August 28, 2006, September 22, 2006 and January 31, 2007 to be altered. Specifically, certain information was deleted or edited, while in other instances, entire passages were removed or changed. With respect to all three altered documents, the original author's signature was changed to the Director's.
FINRA Staff In No Rush
Apparently, no FINRA regulatory employee came forward in a timely fashion to disclose the improper production. FINRA only learned about the altered document production through a June 11, 2010 whistleblower complaint submitted on the organization's "EthicsPoint System." As explained by the SEC, the Whistleblower alleged that FINRA's Kansas City Director instructed another FINRA employee to alter Staff Meeting Minutes before they were burned to a CD and provided to the SEC. The SEC asserted that FINRA's Kansas City Director resigned on September 20, 2010; and, on that same day, FINRA notified the SEC's Chicago Regional Office and its Division of Enforcement about the issue.
Not The First Time
In reviewing the Kansas City productions, the SEC noted that in 2004, an unnamed NASD Director misled SEC examiners by providing misdated or otherwise altered documents. In 2005, misleading documents, purportedly intended for internal-use only, were again produced to the SEC. Although the SEC notes that the NASD took corrective action, it doesn't appear that the steps were successful.
Regulatory Cooperation v. Transparency
"The fabric of [the] American empire ought to rest on the solid basis of the consent of the people." THE FEDERALIST NO. 22 (Alexander Hamilton). That at times delicate weave risks coming undone where vague principles of regulatory cooperation are allowed to inevitably trump the public's interest in transparency.
Nowhere in the SEC's rebuke of FINRA is the name of the Director of FINRA's Kansas City Office mentioned. Nowhere in the SEC's Order do we find the names of any NASD regulators responsible for producing the 2004 and 2005 misleading documents. At least in the three AWCs involving the UBS production of altered documents to FINRA, one of the respondents is mentioned by name in his or her specific AWC.
Name, Rank, and Idiocy
To underscore the idiocy of this "name by title but not by name" policy, if you simply do a simple online search trying to ascertain the name of FINRA's Kansas City Director in, say, 2010, you come up with numerous hits. Taking one by way of example:
we would simply go to Page 7 of that online document, come upon the roster for FINRA's District #4, and learn of the existence of Thomas D. Clough, Associate Vice President and District Director. I mean, geez, was that some top secret bit of information that the SEC didn't think it should disclose to the investing public and industry? Will Wall Street be brought to its knees by my revelation?
What exactly was going on here? Was the SEC protecting FINRA's employees under the guise of "regulatory cooperation?" Does this policy still exist at the SEC in 2014? Similarly, why does FINRA - in 2014 - persist in hiding the names of individuals who are clearly referenced in an AWC in what appears the role of an accessory or conspirator in underlying misconduct?
Of Geese And Gander
In trying to tie up the three FINRA AWCs involving the UBS in-house audit and the SEC's case against FINRA involving the self-regulatory organization's Kansas City District, we are presented with a similar bit of misconduct involving altered documents but a marked disparity in how a federal regulator treats a self-regulatory organization that it oversees; and, in contrast, how that same self regulator treats employees of one of its largest member firms. Up front, let me acknowledge that the SEC matter dates back to 2011 and may no longer represent that regulator's policies and protocols for such resolutions.
It is a fair question -- a very fair question -- to ask how is it that FINRA fined and suspended each and every UBS individual Respondent (Santiago, Curnyn, and Lo Grasso) for altering records but the SEC did not fine and suspend the unnamed FINRA Director?
Continuing with our inquiry, how does one justify the total non-disclosure of Director Clough's name by the SEC whereas FINRA at least disclosed the names of three respondents (albeit without cross-references to the other AWCs)?
Finally, what interests are being furthered and what interests are being hindered by FINRA's policy of not including references and links to what any reasonable reader would consider companion AWCs?