The FINRA Auction Market for Regulatory Fines and Suspensions

December 7, 2017

At first blush, today's Blog presents two somewhat mundane FINRA regulatory settlements. Upon further examination, our publisher Bill Singer, Esq. sees these two settlements as examples of a troubling trend in Wall Street regulation. As Bill would explain, imagine that we're on a hypothetical "Main Street" and we have two cars both parked at expired meters. When the cop on the beat comes upon both vehicles, one has been at an expired meter for one-hour beyond its time and the other for 45-minutes. Bottom line: both vehicles haven't fed the meter and both get a ticket. You'd sort of expect that each driver would pay the same fine -- let's say $100. How would you feel if, after negotiations with a City traffic cop, one driver paid $75 and the other paid $100? To add to that hypothetical, it turns out that both drivers have $1,000 in unpaid parking tickets but one driver's license is suspended for 30 days and the other's for 45 days. 

Case In Point #1 (Baird)

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, Nolan Dudley Baird, Jr submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Nolan Dudley Baird, Jr, Respondent (AWC #2017053155601, December 1, 2017).

The AWC asserts that Baird was first registered in 1987 and by July 2013, was registered with FINRA member firm Stifel, Nicolaus, & Company Incorporated, The AWC asserts that Baird "has no relevant disciplinary history."

Verbal Permission

The AWC asserts that at various times during the relevant period from April 2015 through May 2016, Baird improperly used discretion to place 27 trades in the account belonging to customer identified only as "RC." Pointedly, the AWC alleges that:

[A]lthough RC had given Baird verbal permission to use discretion in the account, Baird did not receive written authorization to use discretion from RC. In addition, Stifel had not accepted RC's account as discretionary. . .

FINRA Sanctions

FINRA deemed Baird's conduct to constitute violations of NASD Conduct Rule 2510 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Baird a $7,500 fine and a 15-business-day-suspension from association with any FINRA member firm in all capacities.

SIDE BAR: NASD Conduct Rule 2510: Discretionary Accounts

(a) Excessive Transactions

No member shall effect with or for any customer's account in respect to which such member or his agent or employee is vested with any discretionary power any transactions of purchase or sale which are excessive in size or frequency in view of the financial resources and character of such account.

(b) Authorization and Acceptance of Account

No member or registered representative shall exercise any discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer or manager, duly designated by the member, in accordance with Rule 3010.

(c) Approval and Review of Transactions

The member or the person duly designated shall approve promptly in writing each discretionary order entered and shall review all discretionary accounts at frequent intervals in order to detect and prevent transactions which are excessive in size or frequency in view of the financial resources and character of the account.

(d) Exceptions

This Rule shall not apply to:

(1) discretion as to the price at which or the time when an order given by a customer for the purchase or sale of a definite amount of a specified security shall be executed, except that the authority to exercise time and price discretion will be considered to be in effect only until the end of the business day on which the customer granted such discretion, absent a specific, written contrary indication signed and dated by the customer. This limitation shall not apply to time and price discretion exercised in an institutional account, as defined in Rule 3110(c)(4), pursuant to valid Good-Till-Cancelled instructions issued on a "not-held" basis. Any exercise of time and price discretion must be reflected on the order ticket;

(2) bulk exchanges at net asset value of money market mutual funds ("funds") utilizing negative response letters provided:

(A) The bulk exchange is limited to situations involving mergers and acquisitions of funds, changes of clearing members and exchanges of funds used in sweep accounts;

(B) The negative response letter contains a tabular comparison of the nature and amount of the fees charged by each fund;

(C) The negative response letter contains a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased; and

(D) The negative response feature will not be activated until at least 30 days after the date on which the letter was mailed

Case In Point #2 (Abbate)

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, Joseph Abbate submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Joseph Abbate, Respondent (AWC #2016051173901, December 1, 2017).

The AWC asserts that Abbate was first registered in 1995, and from 2003 until August 24, 2017, was registered with Wells Fargo Clearing Services, LLC. The AWC asserts that Abbate does not have "any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA or any other self-regulatory organization."

Oral Permission

The AWC asserts that between the relevant time of January and September 2015, while registered through Wells Fargo, Abbate placed about 100 securities transactions in five customers' accounts without first communicating with the customers about each transaction. Pointedly, the AWC alleges that:

Although the customers had given him oral permission to use discretion in their accounts, he did not receive prior written authorization from the customers to use discretion and Wells Fargo had not accepted the accounts as discretionary. . .

FINRA Sanctions

FINRA deemed Abbate's conduct to constitute violations of NASD Conduct Rule 2510(b) and F1NRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Abbate and $5,000 fine and a 20-business-day suspension from association with any FINRA member in any capacity.

Corrective Action Statement

The Abbate AWC includes a provision under "III. OTHER MATTERS" that states:

I may attach a Corrective Action Statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct. I understand that I may not deny the charges or make any statement that is inconsistent with the AWC in this Statement This Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.

As more fully explained in a 1998 NASD (FINRA's predecessor) document: "Regulatory Short Takes: NASD Clarifies Policy On Corrective Action And Mitigation Statements":

Respondents in a settled disciplinary action may submit a Corrective Action Statement and/or a Mitigation Statement to NASD Regulation. This article clarifies the NASD policies regarding such Statements.

A Letter of Acceptance, Waiver and Consent (AWC) permits a respondent in an NASD Regulation disciplinary action to settle the matter prior to the filing of a formal complaint. A Corrective Action Statement may be attached to the AWC, which is filed with the SEC and available to the public, provided such statement is: (1) limited to demonstrable steps taken to correct a problem associated with the disciplinary action; (2) generally no longer than 2-3 pages; and (3) contains the following legend:

This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by NASD Regulation, Inc., nor does it reflect the views of NASD Regulation, Inc., or its staff.

Separately, respondents may submit a Mitigation Statement for consideration by NASD Regulation and the National Adjudicatory Council. Generally, such Statements are used to describe mitigating circumstances surrounding the violation for the decision maker to consider in its review of the terms of a settlement. Unlike Corrective Action Statements, Mitigation Statements are not attached to the AWC or public order.

Respondents may also settle a matter after the complaint is filed by submitting an Offer of Settlement. While both Corrective Action and Mitigation Statements may be submitted to NASD Regulation in connection with Offers of Settlements, these Statements are not attached to the final Order Accepting the Offer of Settlement, which is filed with the SEC and available to the public.

NASD Regulation will not accept Corrective Action or Mitigation Statements that deny the allegations or are inconsistent with the findings in the settlement. . .

FINRA AWCs permit the attachment of a Corrective Action Statement to demonstrate the steps taken by a respondent to prevent future misconduct subject to the understanding that such an attachment may not deny the charges or make any statement that is inconsistent with the AWC. Further the Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.

I am no fan of Corrective Action Statements and rarely, if ever, advocate their use.  Given that the premise of an AWC is a settlement made without admitting or denying the findings, I don't understand why anyone would voluntarily submit a statement that typically make admissions of facts and findings; promises to correct situations that have not necessarily been acknowledged or admitted to; and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statement, then ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal. If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it.

Some think that a Corrective Action Statement gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. As with any post-game analysis, it's just not going to change the score. Moreover, if during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in your statement, or, it is alleged that you failed to  implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission.

I notice that some settling Respondents submit a Corrective Action Statement that details a proposed or in-place supervisory scheme at a current FINRA member firm -- which takes on the trappings of a proposed scheme of enhanced supervision of a statutorily disqualified individual attendant to the filing of a FINRA Membership Continuance Application (the "Form MC-400"). I find this written proposal an ill-advised practice because most AWC Respondents are merely suspended and fined and are not subjected to any further regulatory constraints after their time is served and the dollars paid. If FINRA wants to impose specific supervisory conditions upon a settling Respondent or require the submission of an undertaking by the registered rep or member firm, then so be it. On the other hand, why any member firm would draft an extensive list of compliance Do's and Don'ts to which a suspended rep would be subjected upon his or her return to production baffles me. Frankly, I'm old school: Don't volunteer anything and don't answer questions that weren't asked.

I appreciate that some employer members think that memorializing an enhanced scheme of oversight for a settling registered person gives the firm some some edge against future misconduct but I don't agree with that premise. If a firm harbors such concerns about a particular associated person that the member feels compelled to memorialize in a FINRA settlement agreement an extensive, proposed supervisory protocol, then maybe that firm should terminate the individual. You think that's harsh? Just imagine what some customer's lawyer will do with that published list of proposed corrective actions if the stockbroker engages in disputed conduct.  A savvy claimant's lawyer will cite all that voluntary language attached to an AWC about strict supervision as proof that the employer brokerage firm knew that the stockbroker was a compliance nightmare requiring enhanced oversight, which, it will be argued, did not occur in violation of the specific representations to a self-regulatory-organization as part of a disciplinary settlement. Yeah, I know, when I put it like that, it doesn't sound so good. Trust me, it will be put like just like that.  Notwithstanding my opinions, Abbate apparently determined that it was advisable to submit this Corrective Action Statement:

October 23, 2017

Gary Chodosh

Senior Regional Counsel

Department of Enforcement


200 Liberty Street

New York, NY 10281-1003

Re: 20160511739 - Statement of Corrective Action Joseph Abbate, RR

Dear Mr. Chodosh,

Please accept this letter as my Statement of Corrective Action in connection with the Acceptance, Waiver and Consent (AWC) in this matter. This Corrective Action Statement is submitted by me as the Respondent in this matter. It does not constitute factual or legal finding by FINRA, nor does it reflect the views of FINRA or its staff.

I fully understand and appreciate the requirement of compliance with the rules and regulations of the securities industry and the policies and procedures of FINRA member firms.

As soon as I am able to become registered with another firm, I will receive a copy of their compliance policies and employee handbook. I will thoroughly review those documents and comply with them. Specifically, I will obtain contemporaneous verbal authorization from all clients before any trade is entered in their brokerage accounts. I absolutely will not accept any sort of general or standing authorization from any client to exercise discretion in their accounts. If any client asks me to exercise discretion, I will properly document that authorization pursuant to applicable policies and procedures and obtain firm approval to accept the account as discretionary.

If you have any questions or need any additional information, please contact me through my attorney, A.J. Borrelli of Riker Danzig LLP.


Joseph Abbate

Abbate BrokerCheck Disclosures

Customer Disputes

Online FINRA BrokerCheck records for Abbate as of December 7, 2017, under the heading "Customer Dispute - Settled" disclose two items:

1. On October 19, 2015, Wells Fargo received a customer complaint seeking unspecified damages based upon allegations that:

Clients verbally alleged they did not provide authorization to purchase securities in the account after January 1, 2013, nor were they disclosed of [sic] the commissions associated with the disputed purchases.

On August 5, 2016, Wells Fargo settled the above complaint for $22,500, to which Abbate did not contribute.

2. On April 15, 2001, Prudential Securities Incorporated (Abbate's employer from 1995 to July 2003) received a customer complaint seeking $600,000 in damages based upon allegations that:


On October 17, 2002. Prudential settled the above complaint for $90,000 to which Abbate contributed $7,500 and he provided the following "Broker Statement":


Employment Separation

The AWC asserts in pertinent part that:

On August 24, 2017, Wells Fargo filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") regarding Abbate. . . .

Contrast the AWC's characterization of Abbate's registration termination with online FINRA BrokerCheck records, which disclose under the heading "Employment Separation After Allegations," the Wells Fargo discharged Abbate on August 1, 2017, based upon allegations that:

Provided inaccurate information to the Firm during the Firm's handling of a customer complaint.

Bill Singer's Comment

  • During 14 months, Baird allegedly engaged in 27 improper transactions in 1 customer's account.
  • During 9 months, Abbate allegedly engaged in 100 improper transactions in 5 customers' accounts.
  • Baird and Abbate had allegedly received verbal/oral authorization to engage in the cited trades
  • Baird and Abbate were each represented by a lawyer as noted on their respective AWCs
  • Only Abbate submitted a Statement of Corrective Action.
  • Baird was sanctioned with a $7,500 fine and a 15-business-day-suspension
  • Abbate was sanctioned with a $5,000 fine and a 20-business-day-suspension
By way of a brief recap, Baird's misconduct extended over 5 months longer than Abbate's but involved 73 fewer trades and 4 fewer customers. In percentage terms, when compared to Abbate's, Baird's misconduct extended over some 56% more time, involved only 27% of the number of trades and 20% of the number of customers. To my eyes, Abbate's conduct seems worse because it involves nearly four times the number of questioned trades and five times the number of customers albeit the misconduct occurred for five fewer months. Notwithstanding, the two fact patterns don't really involve all that much difference or distinction and I would have expected the same sanctions. That being said:

Abbate paid 2/3rds of the fine imposed upon Baird

Abbate was suspended for 1/3rd more time than Baird.

How do we reconcile FINRA's disparate sanctions on Abbate and Baird?

Perhaps we should infer that by submitting a Statement of Corrective Action, Abbate was able to avoid paying a $7,500 fine (as was imposed upon Baird) and, as such, that voluntary submission resulted in a $2,500 reduction of the fine. If we opt for that inference, however, then we must also concede that the Statement of Corrective Action resulted in Abbate incurring a 20-business-day-suspension, which was five business days (or an entire workweek) more than Baird's suspension.

Not to be too cynical here but I suspect that most stockbrokers would prefer to pay an additional $2,500 fine versus incurring an additional five-business-days of suspension.  By way of guidance, the over-under here would sort of be whether a stockbroker makes $130,000 a year, which would work out at $2,500 a week for 52 weeks. 

Ultimately, it's troubling that two substantively similar fact patterns do not produce two substantively similar sets of fines and suspensions. You may pooh-pooh the differences as merely $2,500 and five-business-days but the disparities are to the degrees of 67% and 33% -- hardly insignificant.  Further, you may argue that the sanctions were the result of negotiations and that each Respondent voluntarily signed off on the dollars and days. From my perspective, that's troubling -- very troubling -- because it suggests that FINRA sees no impropriety in coming in with a highball bid, using that ploy to scare a respondent into agreeing to pay more dollars in a fine, and then running that game with devastating effect upon respondents unable to afford legal representation. The ethical dimensions of such a practice are unsettling.  It suggests that a regulator charged with policing an industry comes to the negotiating table with a bogus initial offer of settlement with the expectation that the opening salvo will scare a respondent into ultimately paying a higher fine or serving a longer suspension than is otherwise acceptable to the regulator.

Keep in mind that I was a regulatory lawyer with two different self-regulatory-organizations. I know exactly how the settlement process works. A regulatory lawyer will come in with a proposed settlement for, say, a $20,000 fine and a 16 month suspension, knowing that he or she is fully prepared to accept a $5,000 fine and 90-days-suspension. It's all part of a game. It's part of a misguided mind-set that views regulatory settlement negotiations as designed to elicit the "highest" fine/suspension rather than to impose the most "appropriate" sanctions. It's unfair when you have well-heeled folks with savvy lawyers receiving lower fines and suspensions but those who can't afford such legal representation get saddled with higher fines and longer suspensions because they don't realize that there's "flexibility" in the settlement negotiations. If you don't think that this is a festering problem with FINRA AWC negotiations, take a look at the number of pro se respondents caught up in the process.

On Wall Street, where the private sector trades for a living, highball and lowball bidding is the stuff of competition in free markets. We talk about the "spread" between the "bid" and the "ask." We talk about liquidity and making a market. It's the stuff of a robust, auction market. Regulation is not, however, an auction market. The ultimate amount of a fine should not be a byproduct of market forces but of a reasonable set of sanction guidelines imposed in a consistent manner. When regulation is conducted via a trading screen, that approach raises questions as to whether a regulator views itself as a cash register or an organization imposing a "sanction" for misconduct. Violations of the industry's rules and regulations are not for "sale." We're not supposed to be "pricing in" the cost of non-compliance. The ultimate danger of such myopia is that we further empower FINRA's Large Members and wealthier associated persons to game the system because they can afford to pay the freight for their misdeeds.