FINRA Sanctions Firm and CCO in Texting Settlement

April 28, 2016

Today's Blog considers a recent FINRA regulatory settlement involving texting. At first blush, it all comes off quite badly for the firm and Chief Compliance Officer; however, as you think it over, the violations don't truly rise to a momentous level. Was FINRA too lenient with its sanctions? Was the self-regulatory-organization overstating the facts in order to build a more impressive case? You be the judge.

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, Dakota Securities International, Inc. and Bruce Martin Zipper submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Dakota Securities International, Inc., and Bruce Martin Zipper, Respondents (AWC  2013035303301, April 22, 2016) (the "2016 DSI/Zipper AWC").

Dakota Securities International ("DSI") has been a FINRA member firm since 2005, conducting a retail securities business from one branch office with about six registered representatives. 

Zipper entered the industry in 1981, and has ben associated with DSI since 2004. Zipper had served as DSI's President and Chief Compliance Officer.

A Bit Of History

Under the heading of "RELEVANT DISCIPLINARY HISTORY" as set forth in the 2016 DSI/Zipper AWC, we are presented with the following:

In March 2010, FINRA issued an AWC (2008011681701) wherein DSI was censured and fined $5,000 for failing to retain outside emails exchanged between a DSI registered representative and a DSI customer that related to DSI's business and for inadequately enforcing its written supervisory procedures for the retention and review of emails, from July 26, 2006 through July 31, 2007, in violation of Section 17 of the Securities Exchange Act of 1934. Exchange Act Rule 17a-4, and NASD Rules 3110, 3010 and 2110. 

On or about January 27, 1989, FINRA accepted an Offer of' Settlement wherein Zipper was censured and fined $1,000, jointly and severally, with Vanguard Securities. The firm, acting through Zipper, effected transactions in non-exempt securities while failing to maintain sufficient net capital to conduct a securities business. 

On or about October 31. 1994. FINRA imposed a censure. $5,000 fine and suspension from association with any FINRA member in any capacity for five business days, for Zipper's failure to honor an arbitration award. On or about April 17,1995, the U.S. Securities and Exchange Commission sustained the sanctions. 

On or about November 17. 1995, the Florida Department of Banking and Finance entered into a Stipulation and Consent Agreement. Zipper agreed to cease and desist from any and all future violations of Chapter 517, Florida statutes, and the rules thereunder, and pay a $1,000 fine. Zipper violated the terms of his registration agreement, failed to timely notify the Department of a FINRA action, and failed to satisfy margin deficiencies in a manner prescribed by the Federal Reserve. 

On or about November 24, 2009, the Florida Office of Financial Regulation entered into a Stipulation and Consent Agreement. DSI and Zipper were jointly and severally fined $5,000 and required to amend DSI's written supervisory procedures to be consistent with its practices and comply with the independent testing requirements pursuant to NASD Rule 3011. DSI and Zipper had failed to provide independent testing of DSI's anti-money laundering compliance program in 2006 when Zipper had tested the program and failed to enforce DSI's written supervisory procedures.

2016 DSI/Zipper AWC

The 2016 DSI/Zipper AWC alleges that during the relevant time period from September 1, 2011, through September 18, 2013, DSI failed to preserve and maintain all business related electronic communications. 

Specifically, the 2016 AWC asserts that a DSI registered principal used text messages in connection with the firm's securities-related business. Notwithstanding the principal's business communications via text, the AWC alleges that DSI failed to:

  • capture the text messages;
  • retain the text messages for the required time; and
  • preserve the text messages in non-rewritable and non-erasable format,

The AWC further alleges that both DSI and Zipper knew that the principal was using text messages to conduct firm business. Given Zipper's role as the firm's Chief Compliance Officer, he was purportedly responsible for ensuring that the firm preserved the text messages. The AWC asserts that Zipper failed to 

  • establish, maintain, and enforce an adequate supervisory system to ensure that business-related text messages were subject to retention and supervision; and
  • preserve all business-related text messages. 

In addition to Zipper's cited misconduct, the AWC asserts that DSI's  written supervisory procedures failed to require capturing, retention,m and preservation of all securities business-related electronic communications. 

FINRA deemed Respondents DSI and Zipper's conduct to constitute violations of NASD Rule 3010. NASD Rule 3110 (from September 1, 2011 through December 4, 2011), FINRA Rule 4511 (from December 5, 2011 through September 18, 2013), and FINRA Rule 2010. Moreover, such misconduct further resulted in DSI's violation of Section 17(a) of the Securities Exchange Act of 1934 and Exchange Act Rule 17a-4. and Zipper's violation of FINRA Rule 2010 by causing DSI to violate Exchange Act Rule 17a-4.

In accordance with the terms of the AWC, FINRA imposed upon:

  • Respondent DSI: a Censure and $10,000 fine
  • Respondent Zipper: a $10,000 fine and a one-month suspension from association with any FINRA member firm in a principal-capacity only

The AWC informs us that:

Pursuant to the General Principles Applicable to all Sanction Determinations contained in the Sanction Guidelines, FINRA imposed a lower fine in this case after it considered, among other things, the firm's revenues and financial resources. See Notice to Members 06-55.

Bill Singer's Comment

This AWC is a bit of a chameleon because it has an ability to change colors depending upon how you look at it. At first blush, that's quite a bit of regulatory background presented under the "RELEVANT DISCIPLINARY HISTORY." Not blaming FINRA one whit for setting forth the history because it is what it is and not all of the cited misconduct was charged by the self-regulatory organization. Frankly, you make your bed, you sleep in it. When you look through the priors, you must take note that there were three settlements involving Zipper in 1989, 1994, 1995, and those matters involved Net Capital and margin issues, and his failure to honor an arbitration award. More pertinent to the 2016 DSI/Zipper AWC was the 2010 settlement involving DSI, which was cited for violations involving WSPs and emails; and a 2009 settlement involving DSI and Zipper, who were cited for violations involving WSPs and anti-money-laundering issues. 

After reading the 2016 AWC, you come away with the initial impression that DSI and Zipper aren't quite getting the message about maintaining adquate WSPs and electronic communications -- particularly when you consider the 2009 and 2010 settlements both involved WSPs. On the other hand, if you boil the 2016 AWC down to its essence, we seem to have a regulatory case involving one principal's use of text messages, and the firm's and CCO's failure to retain those electronic communications. I'm not downplaying the seriousness of that failure. I'm not even suggesting that FINRA was heavy-handed. In light of the prior regulatory history and the use of texting to conduct firm business, I actually concur with the need to cultivate better compliance policies. What I am saying, however, is that you need to keep the facts here in context.

Ultimately, I was a bit shocked at what I deemed the relatively light sanctions imposed by FINRA upon the firm and the individual.  DSI pays a $10,000 fine and takes a slap-on-the-wrist Censure; and Zipper pays a $10,000 fine and takes a one-month-principal-only vacation. Frankly, the two respondents should be thankful for FINRA's apparent sensitivity here; and, more pointedly, the respondents sure as hell better be careful not to stray over the line again when it comes to WSPs and electronic communications.