FINRA Fines Firm Over Research Reports Practices

January 26, 2018

Today's Blog presents a concise regulatory settlement from FINRA about research reports violations. Research reports? Yeah, you're right, we haven't seen a lot in recent years about research violations. The Europeans have been rolling out some new disclosure rules about research via their Markets in Financial Instruments Directive or MiFID, but that's them and not us. Seems only yesterday that the newspapers were filled with headlines about the horrors of bought-and-sold research and front-running. These days -- what's a newspaper? On the other hand, maybe Wall Street's regulators don't have enough to do and are looking for a new target of opportunity and, go figure, what's old is new and research practices may be under scrutiny again. 

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, C.L. King & Associates, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of C.L. King & Associates, Inc., Respondent (AWC 2014039030201, January 22, 2018). 

The AWC asserts that C.L. King became a FINRA member in 1972, and characterizes the firm as employing about 60 registered representatives and providing investment research, equity and fixed income trading, and corporate finance to institutional and high net worth clients and other broker-dealers. The AWC asserts that the firm "does not have any relevant disciplinary history."

Research WSP

During the relevant period from January 1, 2014 through November 1, 2014, the AWC assert that C.L. King employed approximately five research analysts, who collectively, covered some  80 subject companies in the restaurant, industrial, auto, consumer finance, and specialty retail sectors. The firm's written supervisory procedures ("WSP") prohibited its research analysts from "discussing pending research reports with trading personnel prior to public dissemination,  and required that research be "distributed to all accounts and other recipients at the same time," 

SIDE BAR: FINRA Rule 5280: Trading Ahead of Research Reports

(a) No member shall establish, increase, decrease or liquidate an inventory position in a security or a derivative of such security based on non-public advance knowledge of the content or timing of a research report in that security.

(b) A member must establish, maintain and enforce policies and procedures reasonably designed to restrict or limit the information flow between research department personnel, or other persons with knowledge of the content or timing of a research report, and trading department personnel, so as to prevent trading department personnel from utilizing non-public advance knowledge of the issuance or content of a research report for the benefit of the member or any other person.

The Routine

During the relevant period, the AWC alleges that C.L. King's research department routinely sent finalized copies of research reports to its sales and trading personnel before such research was publicly disseminated via its internet research distribution platform, as was required in the WSP.

Also the AWC alleges that C.L. King's research department routinely sent completed but not yet disseminated "finalized" research reports to its trading and sales personnel. Upon receipt, the in-house staff emailed the reports to a select group of customers, who were chosen based on their likely interest in receiving the reports, in apparent violation of the WSP provision mandating "same time" dissemination to all accounts and other recipients.


FINRA deemed that C.L. King failed to enforce procedures regarding the distribution of research between the Firm's research and its trading and sales personnel, and failed to adequately supervise the process by which the Firm distributed research reports to customers, in violation of NASD Rule 3010 and FINRA Rules 5280 and 2010. In accordance with the terms of the AWC, FINRA imposed upon C.L. King a Censure and $75,000 fine.

Bill Singer's Comment

A nice, tight FINRA AWC that admirably wastes few words on getting to the point and explaining the violations. 

As we move into a new year and the markets hit new highs, it would be wise for industry compliance departments to revisit their policies and procedures for disseminating research reports. As is often the case with these types of matters, you have an industry rule, you have in-house written procedures, you have a batch of memos and bulletins that accumulated over the years, and you have a disconnect between what the compliance department thinks is going on and what has become the default policies. Frequently, the violations take on the hue of what I call "Yes Buts." Daily, weekly, monthly, quarterly, and yearly, a compliance officer may speak with someone in trading or research and ask if they are following a given procedure or remaining in compliance with a given practice. The quick reply is a "yes." When a customer complains or a regulator begins an investigation, compliance actually goes downstairs or across the hall and puts eyeballs on the problem -- uh oh!,  lo and behold, what they "thought" was going on and what they were told was going on isn't exactly what was going on. Now, face-to-face they ask the same question about the same policy that they had been asking for days, weeks, months, quarters, and years. This time they again get the old "yes" except it's a variation on that theme: It's a "yes, but . . ." Now, when all hell is breaking loose, the compliance officer learns that a given department or group was following a policy but, you know, for this customer, we made an exception or, sure, we never do this or, okay, we do it but we don't actually tell you about it but, to get back to your question, when we were working that deal last year and the word came down to push it, well, you know, we followed the policy but for this . . . and, oh, I forgot, for that too and maybe a few other things.

FINRA sends a well-timed warning with  C.L. King AWC. On the other hand , if the front office decides that it's worth paying a lousy $75,000 fine as the cost of flying under the old regulatory radar, well, I guess that's the cost-benefits analysis that's Wall Street's dirty little secret. Be that as it may, read today's AWC and see what's really going on at your shop.