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In a regulated industry such as Wall Street, there is a tension between the regulated and the regulator. It's not unique to the securities industry. Wherever you have a regulatory scheme, there is the same dynamic. The purpose of a regulator is to regulate but to do so fairly and effectively. The regulated are businesses entitled to make a fair buck as a result of providing a legal product or service.The regulated were not created, however, in order to justify the existence of their regulators.
A recent FINRA regulatory settlement shows that regulators need to be careful that their own prior conduct doesn't undermine their best efforts to police the industry. Nothing worse than a regulator's hypocrisy. Nothing worse than Sideshow Bob being undone by Lisa Simpson. Nothing worse than FINRA being hoisted with its own BrokerCheck petard.
Case In PointFor 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, Voigt C. Kempson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter Voigt C. Kempson, Respondent (AWC 2016050476301, May 5, 2017).The May 5, 2017, AWC asserts that Kempson entered the securities industry in 1984 and in 2007, he was registered with FINRA member firm Commonwealth Financial Network until his June 14, 2016, termination by that firm. The AWC asserts that Kempson had no prior relevant formal disciplinary history with the Securities and Exchange Commission, any self-regulatory organization or any state securities regulator.Customer NV and His Two Advisory Accounts.The AWC asserts that a customer identified only as "NV" opened two investment advisory accounts with Kempson at Commonwealth. At the inception of the accounts' openings, NV purportedly granted Kempson discretionary trading pursuant to a signed agreement with Commonwealth.June 13, 2015, Death of NVFollowing NV's death on June 13, 2015, the AWC asserts that Kempson became aware of the client's demise as early as June 29th but the registered representative did not so inform his firm and continued to exercise discretionary trading. In fact, the AWC asserts that between June 29, 2015, and April 5, 2016, Kempsn effected 40 trades in NV's accounts in violation of FINRA Rule 2010. DischargeOnline FINRA BrokerCheck files as of May 9, 2017, disclose the Commonwealth "discharged" Kempson on June 14, 2016, based upon allegations that:
RR failed to provide notification to the firm of the death of two advisory clients in violation of firm policy and industry standards of conduct.
In response to his former employer's disclosure, Kempson allegedly stated on the BrokerCheck file that:
"Followed directives of executors, unaware of requirement to notify broker dealer of death."
FINRA SanctionsIn accordance with the terms of the AWC, FINRA imposed upon Kempson a $5,000 fine and a 30-day-suspension from association with any FINRA member in any capacity. Bill Singer's CommentCounting the DeadI wish that FINRA would reconcile the online BrokerCheck disclosure posted by Commonwealth that Kempson had failed to notify his firm about the deaths of "two advisory clients;" with the AWC disclosure about the death of NV (who had two accounts). Which assertion is correct: Commonwealth's BrokerCheck filing about two dead clients or the AWC's reference to only one? Criminal MatterOnline FINRA BrokerCheck files as of May 9, 2017, also disclose under the heading "Criminal - Pending Charge" that on February 4, 2017, Kempson was charged with the Felony of "Unlawful Possession of Weapons Devices." He is noted as having pled "Not Guilty" and the matter seems to have been sent to pre-trial intervention and remains pending.Matters of ConcernWhether Kempson failed to disclose the death of one or two customers, his recent 2017 felony charge, and the May 5, 2017, FINRA AWC involving alleged trading in the account of a deceased customer -- those background issues pertaining to Kempson present matters of concern to the investing public. Sort of stuff that someone might want to know about, right? In fact, according to FINRA's public relations efforts, exactly the type of information found on its much-publicized BrokerCheck database. As proudly trumpeted on BrokerCheck's homepage:
BrokerCheck is a free tool to research the background and experience of financial brokers, advisers and firms.BrokerCheck helps you make informed choices about brokers and brokerage firms-and provides easy access to investment adviser information.
The BrokerCheck Experience
Wonderful! BrokerCheck allows you to "research the background and experience" of someone like Kempson and will enable you to "make informed choices." Comforted by such assurances from Wall Street's self-regulatory organization, I logged on to its free tool and entered the very name used in Kempson's AWC "Voight C. Kempson."After entering "Voight C. Kempson," I was surprised to read that there were "No Results." I re-typed the name, slowly, as set forth for the Respondent in today's AWC. Again: "No Results." I figured that maybe someone got the middle initial wrong, so I entered "Voight Kempson." Again, "No Results." Once this BrokeAndBroker.com Blog is posted, FINRA may quickly move to correct this search error but, if they don't move quickly enough, you can verify my search results at http://brokeandbroker.com/PDF/KempsonNoResults.pdf
Having failed to locate on BrokerCheck the very Respondent who had been fined and suspended by FINRA on May 5, 2017, I then located Kempson's "CRD No. 1280887," as disclosed on the published regulatory settlement agreement and entered that number into BrokerCheck. The CRD number resulted in a result for a "V. Cullen Kempson III."
Keeping Up With the Kempsons
Is "V. Cullen Kempson III" the same individual as "Voight C. Kempson, Respondent?" After all, FINRA is a well-financed and well-staffed regulatory organization and you wouldn't think that there would be one individual permitted to operate under multiple names --particularly when those multiple names seem to escape detection by a simply query using the very name FINRA used for a settling Respondent less than one week ago! As such, my first inclination was that "V. Cullen Kempson III" was possibly "Voight C. Kempson's" father or brother.
I looked more carefully at the "V.Cullen Kempson III" result and, lo and behold, I noted that the dates of V. Cullen Kempson III's registration history with Commonwealth match those of Voight C. Kempson. Still, father and son or brothers could have started on the same dates at the same firm.
Then it struck me: I used the CRD number to locate "V. Cullen Kempson III" and that number was posted by FINRA on the AWC for "Voight C. Kempson." You can't have two different folks using the same CRD --or so it would seem.
I went back to the very first page that was provided in response to my CRD number search and noted in smaller text under the name of "V. Cullen Kempson III":
(V CULLEN KEMPSON, Voight C. Kempson III)
Are you kidding me?!!! CRD No. 1280887 was issued to one registered person using the names of V. Cullen Kempson III, V Cullen Kempson, and Voight C. Kempson III but the AWC issued on May 5, 2017, by FINRA uses yet another name "Voight C. Kempson," (no "III").
Why does all of that name confusion matter? Consider that public customers are unable to locate via a search of FINRA's BrokerCheck any information for the named Respondent in FINRA's May 5th AWC. Did anyone at FINRA even bother to confirm that it would be possible to obtain BrokerCheck search results using the name of a Respondent in one of the regulator's own settlements? That strikes me as something that should be in any post-AWC checklist used by FINRA.
During a standard server refresh in July of 2013, the email retention and supervision program utilized by Respondents was not properly reloaded on two of 87 email servers. The failure was due to human error. NISC, who maintained and administered the system, first discovered the issue in the spring of 2014 as part of an internal compliance review of emails.
As set forth in the above BrokeAndBroker.com Blog article, I noted that:
[T]he AWC concedes that when the Respondents discovered the improper reload, fully investigated the issue, self-reported all the embarrassing details to FINRA, corrected the deficiencies, and implemented significant new policies.
What did the AWC conclude caused this digital dilemma? Ah yes, let me quote the AWC: The failure was due to human error.
Did someone at NISC or NFD awake one fine day in July 2013 with the intent to cause the improper reload of an email program on 2.3% of the firms' servers? Likely not. What, then, could NISC and/or NFD have reasonably done to detect the improper reload issue any sooner than they had? What helpful advice does FINRA offer to all of its member firms as a way to avoid a recurrence of this problem?
Sadly, as is too often the case, FINRA's AWCs are more about alleging this and asserting that and imposing sanctions than offering anything in the way of an ounce of prevention. This AWC makes FINRA look petty and doctrinaire. Respondents' conduct comes off as likely caused by human error and the inherent unreliability of technology. Is there any point in punishing firms and individuals for such missteps? I think not. If FINRA believes that there was some debugging protocol in widespread use that the Respondents should have followed and that protocol would have sooner detected the reloading failure, then the regulator should have stated that fact in the AWC -- and if an AWC is not the proper vehicle for such education, then issue something on a timely basis. . .
I hope that the good folks at FINRA will learn a valuable lesson from their BrokerCheck glitch -- a lesson beyond the dangers of playing with petards. Programming is fickle. Human error is part of the human condition. When humans and programming combine, we inevitably witness various forms of failure. Not every failure needs to be punished. Human error is likely immune to eradication. Lisa Simpson is often both annoying and right. In more vulgar terms: shit happens.
Oh, and next time you folks at FINRA want to go after a member firm for some online glitch, please re-read today's BrokeAndBroker.com Blog about your own online failures. Maybe it will be a humbling experience?
"GUEST BLOG: Are Decepticons Duplicitous? By Stephen Kohn" (BrokeAndBroker.com Blog, April 28, 2017): I know what I am talking about from personal, painful experience. I got slapped around and charged with a Rule 2010 violation for a ministerial oops. I didn't intend to make a mistake. No clients or anyone else for that matter were harmed. Why did FINRA charge me? Why did they demand a fine? I was told in these very words: "Because we can; that's how it is."