FINRA Fines Firm For Miscommunication Between Compliance And Payroll

March 13, 2015

Ya got a left hand. Ya got a right hand. Talk to enough folks who work at brokerage firms and you will often learn that the left hand (fill in the name of a department) frequently doesn't know what the right hand (fill in the name of another department) is doing. When this disconnect really gets bad, the word around the firm is that management doesn't know jack about what goes on in the back office or branches. In a recent FINRA regulatory settlement, it appears that the self-regulatory organization was concerned that the men and women in a member's Compliance Department and in its Payroll Department were't exactly on the same page when it came to communicating about disclosable events. 

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, Vanguard Marketing Corporation submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Vanguard Marketing Corporation, Respondent (AWC #2013038325801, March 6, 2015).

Vanguard Marketing Corporation ("VMC"), a subsidiary of The Vanguard Group, Inc., has been a FINRA member firm since 1977. VMC has about 6,000 registered representatives operating out of 12 registered branch locations, and they are not paid transaction-based compensation. The AWC asserts that VMC had no prior relevant disciplinary history.

Garnishment Orders

The AWC asserts that from January 2011 through December 2012, as a result of judgments from creditors, child support orders, federal and state tax levies, and bankruptcy wage withholding orders, VMC's Payroll Department received garnishment orders for certain registered representatives -- and those orders often required internal and regulatory disclosure reports.  According to the AWC, however, before February 2013, VMC did not:
  • have any supervisory procedures in place to ensure that the Payroll Department notified the Compliance Department of garnishments; and 
  • review the garnishments to determine whether they triggered a reportable event for the registered representatives. 
As a result of that policy hole, the AWC alleges that VMC failed to disclose or timely disclose unsatisfied judgments and liens of which it had notice by reason of the garnishment orders. 

Amended Procedures

In February 2013, VMC became aware of its supervisory system deficiencies and voluntarily amended its Written Supervisory Procedures ("WSPs') and implemented policies by which the Payroll Department would notify the Compliance Department of garnishment orders. The AWC asserts that VMC failed to properly implement the amended procedures, however, until July of 2014; and, as a result, the firm persisted in not properly disclosing judgments and liens. Pointedly, during the relevant time, the AWC asserts that VMC received 80 garnishment orders that triggered reportable events on the Uniform Application for Securities Industry Registration or Transfer ('Form U4"). Of those 80 reportable events, VMC completely failed to file U4 amendments for 60 of those matters and untimely filed U4 amendments for 20. 

Summing It All Up

FINRA deemed that VMC's conduct violated Article V, Section 2(c) of the FINRA By-Laws, NASD Rule 3010(a) and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon VMC a Censure and $350,000 fine. Additionally, VMC agreed to the the following undertaking:

In September of 2014 the Firm retained an independent consultant to review and suggest revisions to its policies, procedures, and internal controls relating to reporting disclosures on Form U4s for its registered representatives. Within 45 days of the issuance of the Notice of Acceptance of this AWC, an officer of the Firm shall certify in writing to FINRA's Department of Enforcement that (i) the Firm has implemented the improvements to its procedures and garnishment process suggested by the independent consultant; and, (ii) as of the date of the certification, the Firm has established and implemented policies, procedures, and internal controls sufficient to comply with its obligations as set forth in this AWC. Within 45 days of the issuance of the Notice of Acceptance of this AWC, the Firm shall provide to FINRA's Department of Enforcement a copy of the independent consultant's report on its review of VMC's procedures and garnishment process. The Department of Enforcement may in its discretion, upon a showing of good cause, extend the dates for compliance with any of the terms of this provision. 
Bill Singer's Comment

Modern-day Wall Street regulation is little more than idiots in Congress passing endless numbers of laws, which are implemented by idiots in regulation passing endless numbers of rules and regulations, which are supposedly translated and implemented by idiots in compliance, and then prosecuted, defended, and litigated by idiot lawyers.  No one actually reads anything. No one actually makes sure if any of this nonsense makes sense or will work. The whole point of the exercise is to be able to point at words on paper and to produce reports about those words. It's an entire cottage industry based upon a faulty premise. For a sense of this absurdity, the next time one of those insurance commercials pops up on your television, try reading all the small print at the bottom of the screen.

Geez, Bill, you are one helluva cynic.  Yeah . . . ya got that right!

In any event, the $350,000 fine in this AWC  certainly seems like a awfully large number for what is depicted as failed internal communication. FINRA does have a point, however, when you consider the fumbled manner in which the firm move forward after it was on notice of its compliance shortcomings in February 2013.  Sort of makes you wonder how much more of a fine would have been imposed but for AWC's hiring in September 2014 of an independent consultant.