SEC Rejects Appeal By Failed Buyer of FINRA Broker Dealer

October 1, 2015

Few things are more frustrating for lawyers and their FINRA-member-firm clients than the self-regulatory organization's Continuing Membership Application ("CMA") process. The CMA is a frequent source of aggravation for those looking to sell/buy an existing brokerage firm or to expand that business. The source of discontent is the occurrence of what many industry participants deem unnecessary delays in processing their applications. 

20 Years Ago

I have been through these wars over the years. I have personally been jerked around by Staff and seen my clients nearly financially bled to death as the regulator dithered -- and sometimes the motivation did not seem purely regulatory in nature but involved inappropriate influence from powerful membership cliques. In fact, I was victorious legal counsel in one of the seminal cases on this issue; See, In the Matter of the Application of Domestic Securities, Inc. for Review of Denial of Access by the National Association of Securities Dealers, Inc. (Opinion and Order, Securities and Exchange Commission, '34 Act Rel. 34-37559 / August 13, 1996). As noted in that now-historic, two-decade old Opinion:

Where registered securities association denied request by member to have restrictive agreement modified to permit market making by the member in unlimited number of securities without articulating basis for decision, held, action set aside.

Not Always FINRA's Fault

In fainess to FINRA, I concede that many CMA delays are not the self regulator's fault but must fairly be laid at the doorstep of buyers and sellers who fail to get their paperwork in order and have unrealistic expectations as to how quickly it takes for a regulator to "reasonably" discharge its obligations to review such membership matters. This frustration is a bane for both FINRA and the applicants' lawyers. Moreover, when it comes to the sale of a brokerage firm or its expansion, many applicants don't perform their own in-house due diligence and are often shocked to learn that a proposed owner, officer, or employee has some disqualifying background. Finally , we have the age-old problem of presenting "good capital" that passes the sniff test.

Not Owning The Problem

On the other hand, I have had some epic battles with the old NASD and FINRA because of what I will unflinching characterize as the incompetency and bureaucratic crapola that too often manages to find its way into the deliberations over the sales and expansion of member firms. I'm talking about nonsense where different regulators and regulatory employees ask for the production of the same information and documents over and over - and when confronted with these multiple requests for the same things that have already been produced, respond to such complaints with shrugs and the advice that it would be better to just produce again than prompt the likely delay that will arise if you protest.  On top of that frustration are frequent examples of a lack of reasonable communication from staff as to the status of an application and the ever-infuriating circumstance where it is apparent that the ball has been dropped by FINRA and no one, and I mean no one, gives a damn or takes responsibility for fixing the problem. Delays are costly not only in terms of money but lost opportunities. Sometimes, a regulator needs to own a problem and do what's necessary to remediate past delays.

WD Clearing Appeals

A recent appeal to the Securities and Exchange Commission ("SEC") concerning FINRA's CMA process sheds some light on the current nature of the process. In the Matter of the Application of WD CLEARING, LLC, a Nevada limited liability company; WDMC Trust d/t/d September 18, 2013; WDJJ Trust d/t/d September 18, 2013; WDCHUM Trust d/t/d September 18, 2013; and WDPOP TRUST d/t/d September 18, 2013 For Review of Action Taken by Financial Industry Regulatory Authority (Order Dismissing Application For Review; Securities and Exchange Commission; '34 Act Rel 75868; Admin.Proc 3-16209 / September 9, 215). 

The Wells Notice

On September 17, 2014, FINRA member firm Wilson-Davis & Co ("WDCo") apparently notified FINRA via email of its decision to withdraw its CMA whereby it was attempting to obtain approval of its sale to WD Clearing, LLC. Apparently, the withdrawal was precipitated by a warning from a FINRA staffer that the CMA might not be approved because of perceived impediments. Turns out the FINRA wasn't thrilled with the source of funding for the proposed acquisition of the member firm. On September 12, 2014, FINRA sent a Wells Notice advising of a planned disciplinary action against an individual and firm involved in the funding behind WD Clearing's purchase of WDCo.

It Ain't Final Till It's Final

WD Clearing petitioned the SEC to review the "de facto denial of the CMA" by FINRA - which is an interesting tactic given that WDCo had withdrawn its application. The Petitioner argued that the reality behind the withdrawal was that it was essentially a "final" action by FINRA, and, hence, appealable. WD Clearing argued that FINRA's actions had denied it the ability to become a FINRA member, prohibited or limited its access to FINRA's services, and barred it from associating with a FINRA-member firm. In sum, WD Clearing presented itself as a "person aggrieved" and, as such, eligible to seek redress of FINRA's actions by the SEC.

Whatever WD Clearing hoped to accomplish, it failed because the SEC concluded that it lacked:

jurisdiction to entertain this challenge because Wilson-Davis withdrew its CMA before FINRA issued a final decision on the matter. As a result, there is no FINRA action for us to review. We thus dismiss WD Clearing's application and find it unnecessary to address whether WD Clearing has standing under Section 19(d)(2).

In offering some rationale for its findings, the SEC explained, in part:

1. FINRA did not deny membership or participation to WD Clearing.

FINRA did not take any action regarding Wilson-Davis's CMA that qualifies as a denial of membership or participation under Exchange Act Section 19(d). This jurisdictional basis for review is directed at SRO decisions actually denying applications for membership or imposing restrictions on business activities as a condition of membership.19 In this case, FINRA did not render any decision on the CMA or render a decision that denied, altered, or otherwise affected membership. Wilson-Davis continues to be a FINRA member, notwithstanding the withdrawal of its CMA; and WD Clearing-which has never applied for FINRA membership-remains a nonmember. 20 Even if Wilson-Davis withdrew its application in response to a request from a FINRA staff member, an informal staff request does not constitute a final decision or an official FINRA action. FINRA staff cannot force an applicant to withdraw a CMA and there is no evidence that it did so in this case. Wilson-Davis was free to decline a request to withdraw and proceed with its application process.

Nor can FINRA's actions in reviewing the CMA pursuant to its authority under NASD Rule 1017-including its imposition of interim restrictions on Wilson-Davis to address specific concerns about whether the Firm, under the proposed change in ownership, would satisfy the membership standards set forth in NASD Rule 1014(a)-be construed as a reviewable condition placed upon Wilson-Davis's membership. As we have previously held, "the requirement that SRO members comply with SRO rules does not constitute a condition on membership providing a basis for jurisdiction."21

Page 6 of the SEC Decision