Today's BrokeAndBroker.com Blog covers a fairly mundane bit of self regulatory esoterica in the form of a FINRA member firm's failure to update its Membership Agreement. As esoteric as the issue is, however, there are aspects of the regulatory settlement that raise questions: What is meant by "relevant" and who gets to make that determination? Then there's that bit of hypocrisy on the part of FINRA that renders the settlement as more than a bit . . . hmmm . . . what's the word that I'm looking for . . . oh, yeah . . . hypocritical.
RELEVANT DISCIPLINARY HISTORY
In October 2014, pursuant to a Letter of Acceptance, Waiver and Consent in Matter No. 2013035122101, CV Brokerage was censured and fined $5,000 for, in addition to another rule violation, conducting a research business without first filing a continuing membership application to engage in a research business.
NASD Membership and Registration Rule 1017: Application for Approval of Change in Ownership, Control, or Business Operations(a) Events Requiring ApplicationA member shall file an application for approval of any of the following changes to its ownership, control, or business operations:(1) a merger of the member with another member, unless both are members of the New York Stock Exchange, Inc. or the surviving entity will continue to be a member of the New York Stock Exchange, Inc.;(2) a direct or indirect acquisition by the member of another member, unless the acquiring member is a member of the New York Stock Exchange, Inc.;(3) direct or indirect acquisitions or transfers of 25% or more in the aggregate of the member's assets or any asset, business or line of operation that generates revenues comprising 25% or more in the aggregate of the member's earnings measured on a rolling 36-month basis, unless both the seller and acquirer are members of the New York Stock Exchange, Inc.;(4) a change in the equity ownership or partnership capital of the member that results in one person or entity directly or indirectly owning or controlling 25 percent or more of the equity or partnership capital; or(5) a material change in business operations as defined in Rule 1011(k) . . .
The addition of a research business constitutes such a "material change in business operations."
1. In the Matter of CV Brokerage, Inc., Respondent (AWC 2012035026501,August 30, 2016):In Matter No. 20120350265, the Department of Market Regulation reviewed the firm's compliance with Rule 203(b)(1) of Regulation SHO during the period of January 1, 2011 through March 31,2013 (the "Review Period"). The review resulted in certain findings of violations of Rule 203(b)(1) of Regulation SHO, NASD Rule 3010, and FINRA Rule 2010, as described below.2. In the Matter of CV Brokerage, Inc., Respondent (AWC 2013035122101,October 27, 2016):From June 2013 to August 2013, CV failed 10 file an application with FINRA for approval of a material change of its business operations involving conducting a research business. Based on the foregoing, CV violated NASD Membership and Registration Rule 1017 and FINRA Rule 2010.From May 2013 to August 2013, CV failed to report 33 customer-side transactions to the Real-time Transaction Reporting System in the manner prescribed by Municipal Securities Rulemaking Board ("MSRB") Rule G-14. Based on the foregoing, CV violated MSRB Rule G-14.3, In the Matter of CV Brokerage, Inc., Respondent (AWC 2013037285201, March 18, 2017)During the review period, the firm failed to transmit 874 Reportable Order Events ("ROEs") to OATS on 114 business days. The 874 ROEs represented 15.3 percent of all ROEs (5,711) that the firm was required to transmit to OATS during the review period, The conduct described in this paragraph constituted separate and distinct violations of FINRA Rule 7450(a).4. In the Matter of CV Brokerage, Inc., Respondent (AWC 2015043384601, January 18, 2017)[Discloses #2 above]:RELEVANT DISCIPLINARY HISTORY/ In October 2014, pursuant to a Letter of Acceptance, Waiver and Consent in Matter No. 2013035122101, CV Brokerage was censured and fined $5,000 for, in addition to another rule violation, conducting a research business without first filing a continuing membership application to engage in a research business.
(k) "material change in business operations"The term "material change in business operations" includes, but is not limited to:(1) removing or modifying a membership agreement restriction;(2) market making, underwriting, or acting as a dealer for the first time; and(3) adding business activities that require a higher minimum net capital under SEC Rule 15c3-1;
Not that I would ever think of calling FINRA a hypocritical self-regulatory organization (I mean, you know, "hypocritical self-regulatory organization" lacks a certain flow, a certain poetic color, if you will) but FINRA is a hypocritical self-regulatory organization (oops, so much for flow and poetry) when it charges CV Brokerage for failing to update its Membership Agreement to reflect a material change in the firm's business operations but FINRA has failed for 10 years to update its rules to reflect the material change of its name!