In my opening remarks in "Check Kiting Hypocrisy Flies High At FINRA" (BrokeAndBroker.com Blog, May 23, 2014), I questioned why the self-regulatory organization seems so quick to act when an employee of a member firm engages in check kiting or business expense fraud. Pointedly, I asked "how come there seems to be a double standard when the same type of conduct involves the employer firms?" As I more fully noted in that 2014 article:
The other aspect of this case that upsets me -- frankly, often outrages me -- is that turnaround doesn't always seem to quite generate "fairplay" from FINRA. I mean, you know, just what exactly does FINRA do when the shoe is on the other foot?Y'all ever see any active enforcement against FINRA member firms when they don't cut checks or wires in order to timely transfer funds from our brokerage accounts?Anyone note any FINRA enforcement action against its member firms when they delay the transfer of securities from one broker-dealer to another?Someone want to show me a bank that was whacked by FINRA for trying to charge me some bogus fee or penalty -- or when the damn ATM isn't working and the institution is holding my money hostage?Anyone recall a FINRA "collection" effort on behalf of stockbrokers stiffed by their employer firms when it came to the timely payment of earned commissions or bonuses?
All of which brings us to today's BrokeAndBroker.com Blog, in which we consider a FINRA intra-industry arbitration where a former employee sues a member firm for not paying him his earned commissions.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in October 2014, associated person Claimant Jones (representing himself pro se) asserted a claim seeking to be paid commissions allegedly earned during the months of June 2014 and July 2014 while employed as a registered representative with Respondent St. Bernard Financial Services. Ultimately, Claimant Jones sought $49,000.00 in damages plus all FINRA fees and costs. In the Matter of the FINRA Arbitration Between Victor Dwain Jones, Claimant/Counter-Respondent, v.. St. Bernard Financial Services, Inc., Respondent/Counter-Claimant (FINRA Arbitration 14-03196, June 29, 2015).
Respondent St. Bernard generally denied the allegations and filed a Counterclaim. Although Respondent St. Bernard did not dispute that it owed commissions to Claimant Jones, the firm asserted in its counterclaim that it was entitled to offset the internal costs engendered by a FINRA investigation into Claimant Jones' trading activities. Moreover, the firm alleged that its independent contractor agreement with Jones provided for such an offset. Ultimately, Respondent St. Bernard sought a net of $16,322.00 in damages after deducting its investigation costs plus all FINRA fees and costs.
The sole FINRA Arbitrator hearing the case found
St. Bernard is liable for and ordered by the Arbitrator to pay to Jones the net sum of $8,928.82.
Bill Singer's Comment
Stripped down to its basics, we have a former associated person seeking payment of two months of earned commissions.The former employing firm does not dispute that the commissions were earned and owing; instead, the firm asserts that its former employee engaged in conduct that attracted FINRA's interest and, as a consequence, the firm incurred $16,322 in costs and expenses arising from its cooperation in that self-regulatory organization investigation.
According to online FINRA BrokerCheck documents as of July 6, 2015, Claimant Jones, who was first registered in 1990, was associated with St. Bernard from October 2011 to July 2014. The online records do not disclose any litigation or regulatory history, which is commendable given Jones'24 years of industry experience. Whatever FINRA was or wasn't investigating, it does not appear that the self-regulatory organization charged Jones with anything. In fairness to Claimant Jones, I believe that the FINRA Arbitrator should have noted those relevant background facts in the Decision.;
Consequently, I am more than a bit puzzled as to why the Arbitrator dinged Jones for $6,200 in compensatory damages. There is no explanation offered other than the conclusory finding of liability for that amount. Given the lack of reportable history on Jones' BrokeCheck, it's difficult to make a reasonable inference as to the source of that alleged damage. It may well be that the Arbitrator was presented with evidence of a FINRA investigation but no such explanation is provided in the Decision. Similarly, there may well be a justifiable basis upon which the Arbitrator calculated $6,200 in compensatory damages owed by Jones but none is provided in the Decision.
In my three decades of lawyering on Wall Street, I find it a fairly common occurrence for FINRA member firms to withhold payment of commissions based upon a whole host of allegations concerning potential customer complaints or potential regulatory investigations. Frequently, when I ask to see invoices of settlement payments, I am told that none have yet been made. When I ask to see copies of customer complaints alleging monetary damages, I am often told that the firm is looking into the matter and no hard-copy exists. When I ask why compensation is being withheld from a registered person who has not been (or was not) charged by a regulator, I'm told that the investigation may still be ongoing -- or a new investigation could be opened up in the future.
Now, don't get me wrong, at times there are legitimate reasons to withhold compensation pending the filing of customer litigation or the imposition of regulatory fines. On the other hand, an employer cannot indefinitely retain an employee's earned compensation simply because of the "possibility" that something might occur. After a period of time (which I acknowledge may be of debatable length), you cross the line between having a reasonable right to retain a payment pending an anticipated event and unreasonably retaining a payment simply because you feel like it.
The incident in the May 24, 2014, BrokeAndBroker.com Blog was a FINRA regulatory investigation that ended with an Acceptance, Waiver and Consent ("AWC") settlement involving a former employee. The incident under discussion in this blog is a FINRA arbitration. Regulation and arbitration are two different things. In the former, FINRA is an active party in the role of investigator and potential Complainant. In arbitration disputes, FINRA is merely providing a forum.
What I'm not quite understanding is why FINRA so quickly dons its regulatory hat when it comes to collecting employee debts or damages purportedly owed to its member firms but seems to punt similar matters involving industry employer debts or damages owed to employees into arbitration -- where the employee has to bear the burden of the time and costs inherent in litigation?
If former employee Jones had presented his unpaid commission grievance to FINRA, would the self-regulatory organization have opened an investigation and pressured the member firm to pay up?
As a member organization, is FINRA hopelessly conflicted because only member firms are enfranchised on matters of elected office and rule proposals, and registered representatives are disenfranchised on those same matters?