How Can I Be Sure In A FINRA World That's Constantly Changing?

May 2, 2016

As the song asks: How can I be sure? In a world that's constantly changing, how can I be sure, where I stand with you? Much the same is often asked by me and many members of the FINRA community when it comes to the self-regulator. We don't always understand what FINRA wants from us. We don't always understand what FINRA says or means. As a recent FINRA regulatory settlement shows, sometimes it's the regulator's fault (and, okay, to be fair, it's often the fault of wayward firms and inventive scamsters). If only Ed Sullivan was still alive and he could have all the regulators and the regulated appear on his Sunday night show and we could wear really brightly colored, shiny outfits with dancers in the background and all sing together and remain in tune.

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, World Equity Group, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of World Equity Group, Inc., Respondent (AWC  2014039231401, April 25, 2016).

Since 1992, World Equity Group, Inc. ("WEG") has been a full-service broker-dealer with about 186 registered representatives and 83 branch offices. Under the heading "RELEVANT DISCIPLINARY HISTORY," the AWC asserts:

In FINRA Matter No. 20120307347, WEG entered into an AWC, which found that between 2009 and 2012 WEG had an inadequate supervisory system reasonably designed to detect and prevent rule violations related to the suitability of transactions in non-traditional ETFs, due diligence in connection with private placements, and maintenance of account records, among others. WEG neither admitted nor denied these findings, and consented to a censure and a $225,000 fine for violations of NASD Rules 3010, 3310, 2310, 2110, and FINRA Rule 2010.


During the relevant period from November 2009 to September 2012, the AWC alleges that in order to identify potentially unsuitable excessive trading, Respondent WEG relied on its compliance staff to review trade blotters during both daily reviews and periodic internal branch inspections. The AWC asserts that:

These blotters, however, did not specifically address traditional indicators of excessive trading in customer accounts, such as turnover and/or cost-to-equity ratios, nor did these blotters aggregate the trading or commissions generated by a customer accounts over any period of time.

SIDE BAR: I sort of get where the AWC is going with this allegation but, geez, could FINRA have used more tortured language in setting forth its point? For starters, what's the difference between an assertion that trade blotters did not address excessive-trading indicators versus did not "specifically" address excessive-trading indicators? Is FINRA asserting that the blotters were totally bereft of any data that should have alerted WEG's compliance staff to the likely indicia of excessive trading in customer accounts -- or is FINRA asserting that the blotters did not present the trading data with headings (perhaps in the form of exception reports) indicating signals of possible excessive trading? I'm inferring from the AWC's language that the trading blotters failed to present turnover ratios and cost-to-equity ratios but I'm unclear as to whether those ratios were provided to WEG on another form or as some supplement to the blotters. To be clear, the AWC is likely on very firm regulatory ground if, in fact, the blotters failed to present the subject trading data in a manner that would have highlighted the likely signs of excessive trading. As an in-house compliance tool, a trading blotter is a wealth of information and should include break-outs alerting a member firm to potential trouble signs. That being said, I just wish that the AWC had added one or two more sentences to clarify what was or was not in the cited blotters.

Exception Reports

Also, the AWC alleges that during the relevant period, Respondent WEG failed to utilize exception reports provided by its clearing firms for the purpose of detecting unsuitable excessive trading patterns. Pointedly, the AWC asserts that it was not until October 2012 (nearly three years from the relevant period's inception in November 2009) when WEG begin using exception reports that identified turnover and commission-to-equity ratios in customer accounts.

SIDE BAR: Yet again, the AWC could have benefited from some FINRA quality control in the form of better review and editing. Although the AWC alleges that it was only in October 2012 when WEG used the pertinent exception reports, that does not address an equally important issue: Were the exception reports provided to and transmitted to WEG prior to that date? The fact that a clearing firm "provides" various exception reports does not necessarily mean that those reports are routinely transmitted on a daily basis. Sometimes an introducing firm has a menu of "available" reports provided by its clearing firm but for whatever reason, the full array of such reports is not selected for daily delivery.  Additionally, some in-house compliance staffs create their own proprietary reports sourced from trade blotters provided by clearing firms and, as a consequence, may not see the need to request or reference the clearing firm's exception reports for a specific review. Frankly, I find it difficult to imagine that any compliance department would not be utilizing any exception reports as part of a daily and episodic trading review but few things surprise me after some three decades on the Street. FINRA is correct in citing any member firm for failing to reference exception reports as part of ongoing trading analyses.


Finally, the AWC alleges that during the relevant period, Respondent WEG's written supervisory procedures:
  • provided inadequate guidance on how its trade blotters should be reviewed and analyzed by staff, and
  • failed to provide the supervisory measures that would be implemented with a view towards detecting and preventing potentially unsuitable excessive trading activity.
The Failed Detection

In citing the failed use of blotters, exception reports, and WSPs, the AWC asserts that the combined impact of the deficiencies was that Respondent WEG had failed to identify a certain customer's account, which had an annualized turnover ratio that should have caused further investigation by the firm's Compliance Department.

Accordingly,, FINRA deemed Respondent WEG's cited deficiencies as constituting violations of NASD Conduct Rule 3010 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Respondent WEG a Censure and $50,000 fine.

Bill Singer's Comment

This AWC is pretty much a head shaker. Assuming the allegations are correct (which I do), you have to wonder what WEG was actually doing as part of its trading review protocol. Hopefully, this regulatory settlement will serve as a wake-up call for other FINRA member firms.

Quibble Time

As of May 2, 2016, when you search "World Equity Group" on FINRA's online Disciplinary Actions site,  you are informed that "5 documents found." In pertinent part as presented in the found documents field, we are directed to: 

  1. AWC 2008012099101 (12/13/2011) (the "2011 AWC"):
  2. AWC 2010024306501 (01/24/2012) (the "2012 AWC");
  3. AWC 2012030734701 (02/03/2015) (the "2015 AWC");
  4. AWC 2013036895301 (09/25/2014) (the "2014 AWC"); and
  5. AWC 2014039231401 (04/25/2016) (the "2016 AWC").

SIDE BAR: Why am I reporting the search results with the 2014 AWC out of chronological order? The answer is that FINRA's search results presented the order of search hits as noted above. I'm guessing that the rationale for that presentation is based upon the numerical order of the AWCs, which run in chronological order from 2008 to 2014. Given that explanation, it's odd that a 2012 FINRA investigation settled in 2015 whereas a 2013 FINRA investigation settled in 2014. Alas, the mysteries of self-regulation and the Universe are endless.

 2011 AWC

The 2011 AWC involved a settlement by Respondents WEG and Babjak for a Censure and a joint and several $50,000 fine; and by Respondent Hopkins for a $5,000 fine, 10-business-day suspension, and an undertaking  by Hopkins to complete 10 hours of training on NASD Rule 2010. The 2011 AWC allegations are summarized under the heading of "OVERVIEW" as follows:

Between December 2007 and November 2008, WEG permitted one of its registered representatives, SO, to publish advertisements that failed to provide a sound basis for a reader to evaluate the products and services being offered, contained exaggerated, unwarranted and misleading statements, and failed to disclose the member's name. SO's advertisements promoted his securities and non-securities investment related business activities and were published in regional newspapers as well as community fund-raising and dining program guides, church bulletins and Yellow Book business listings. WEG, Babjak and Hopkins were on notice that SO's advertising violated FINRA's Advertising Rule, since in June 2008, the FINRA Advertising Regulation Department issued a written notice to WEG detailing how five of SO's published advertisements violated Rule 2210 (the "2008 Comment Letter"). Babjak reviewed and Hopkins approved with the knowledge of Babjak at least 14 violative advertisements that WEG permitted SO to publish, including many published after the firm received the 2008 Comment Letter. As a result, WEG violated NASD Rules 2210, IM-2210-1, 2110 and FINRA Rule 2010.

The Firm failed to establish adequate written procedures relating to advertising and records of communications with the public, and failed to make and retain required records of such communications. Babjak reviewed and Hopkins personally reviewed and approved, with the knowledge of Babjak, approximately 14 of SO's violative advertisements. Accordingly, the Firm, Babjak and Hopkins, violated NASD Rules 2210(b)(2)(A), 3110(a), 3010(b) and 2110 and FINRA Rule 2010.

In addition, WEG outsourced responsibility for the registration and licensing of its associated persons and branch offices, and failed to provide adequate supervision of those outsourced business functions, in violation of NASD Rules 3010 and 2110 and FINRA Rule 2010.

 2012 AWC

The 2012 AWC is essentially an Order Audit Trail System ("OATS") matter involving the review period from January 1, 2009 through December 31, 2010, and resulted in a Censure and $15,000 fine, the fine was parsed between $10,000 for OATS reporting and $5,000 for supervision violations. The 2012 AWC asserts under "RELEVANT DISCIPLINARY HISTORY" the following: "None of the Respondents has any prior disciplinary history."

 2015 AWC

The 2015 AWC was settled by Respondent WEG for a Censure and a $225,000 fine. Under this AWC's "RELEVANT DISCIPLINARY HISTORY," the 2011 AWC is referenced:

In FINRA Matter No. 2008012099101, the AWC found that between December 2007 and November 2008, WEG permitted one of its registered representatives to publish advertisements that failed to provide a sound basis for a reader to evaluate the products and services being offered, contained exaggerated, unwarranted and misleading statements, and that WEG had an inadequate supervisory system relating to communications and advertising. The AWC found that WEG violated NASD Rules 3010 and 2110, and FINRA Rule 2010. WEG signed an AWC, neither admitting nor denying the allegations, but consented to a censure and a $50,000 fine.

 2014 AWC

The 2014 AWC involves the settlement of alleged trade reporting violations for the period January 1, 2013 through March 31, 2013, involving the Trade Reporting and Compliance Engine ("TRACE"). The AWC was settled with a Censure and $7,500 fine. Under the heading "RELEVANT DISCIPLINARY HISTORY" we are informed that "the firm has no relevant disciplinary history."

 2016 AWC

I concur with FINRA that the 2012 AWC (the OATS matter) and 2014 AWC (the TRACE matter) are not prior "relevant" matters when it comes to the allegations involved in the 2016 AWC, but what the hell happened to any reference to the 2011 AWC, which involved allegations of advertising violations, inadequate written procedures relating to advertising and public communications, failure to supervise? The only prior disciplinary matter disclosed in the 2016 AWC under the heading "RELEVANT DISCIPLINARY HISTORY" is the 2015 AWC . I find that a bit puzzling.

 Let me walk you through this one a tad slowly.

  1. The 2016 AWC asserts that the only prior, relevant disciplinary history for WEG was the 2015 AWC.
  2. When we read the 2015 AWC, however, that FINRA settlement presents the 2011 AWC as prior, relevant disciplinary history.
  3. If the 2016 AWC says that the 2015 AWC was prior, relevant disciplinary history, and the 2015 AWC says that the 2011 AWC was prior, relevant disciplinary history, then how come the 2016 AWC doesn't also disclose the prior, relevant disciplinary history of the 2011 AWC?

Yeah I know . . . that's a lot of questions about a fairly minor aspect of the AWC under consideration in today's Blog. On the other hand, this is the kind of crap that fascinates me and, according to my email, also intrigues my readers. In the end, it all comes down to wondering how we can be sure of what FINRA alleges and asserts.  It is my endless quest for certainty in a FINRA world that is constantly changing. I really, really wanna know: