A little known and fairly useless fact is that in 1971, rock band Grand Funk Railroad (which is to be confused with the same band by the name of Grand Funk) sold out 55,000 seats at Shea Stadium in 72 hours whereas the Beatles' 1965 Shea concert took weeks to sell out. What does that have to do with Wall Street regulation? Frankly, I think the connection is fairly obvious. If you don't quite see it, though, please read today's BrokeAndBroker.com Blog.
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, GrandFund Investment Group, LLC, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of GrandFund Investment Group, LLC, Respondent (AWC 2014039162101, May 31, 2018).
The AWC asserts that FINRA member firm GrandFund Investment Group, LLC became a member firm in
2007, and its Membership Agreement limited the firm to conducting
direct private placement business with institutional customers and broker-dealers.
GrandFund maintains two branch locations with 15 registered individuals. The AWC asserts that the firm "has no relevant disciplinary history. "
Expense Sharing Agreement
The AWC asserts that during the relevant period between January 2013 and June 2014, GrandFund incurred $1.4 million in marketing and compensation expenses, including travel,
meals, and entertainment in support of its marketing activities. The AWC asserts that a GrandFund affiliate paid these expenses on GrandFund's behalf. During the relevant period, GrandFund allegedly did not have a formal expense sharing agreement with its affiliate.
Both NASD and the New York Stock Exchange (NYSE) (collectively, the self-regulatory
organizations or the SROs) have become increasingly concerned that some broker/
dealers are using expense-sharing agreements as a basis for not recording expenses and
liabilities on the broker/dealer's books and records. In such circumstances, the books
and records of the broker/dealer may not accurately reflect its operating performance
and financial condition and may appear to artificially inflate its profitability and,
ultimately, cause it to appear to be in capital compliance when it is not. Further, such
firms may continue to conduct a securities business when not in capital compliance,
which is a violation of the SEC's Net Capital Rule, as well as a violation of NASD Rule
2110. In addition, as the party paying the expenses of the broker/dealer is usually not
a member of an SRO, obtaining books and records related to the broker/dealer's
operations can be problematic. As a result, the SROs requested guidance from the
DMR concerning the application of the financial responsibility rules when a third party,
which may include a parent, holding company, or affiliate of a broker/dealer, agrees
to assume responsibility for payment of the broker/dealer's expenses.
Also, the AWC asserts that during the relevant period between January 2013 and June 2014, GrandFund's affiliate made about $180,000 in charitable contributions, including contributions to organizations with
ties to entities solicited by GrandFund for investment business. During this
period, GrandFund allegedly lacked an adequate system/procedures to supervise/document its marketing expenses or charitable contributions
or to reasonably ensure that GrandFund's marketing expenses and charitable
contributions that were paid by its affiliate were paid in compliance with
applicable laws and rules, including those pertaining to gifts and gratuities,
including FINRA Rule 3220 (Influencing or Rewarding Employees or Others).
(a) No member or person associated with a member shall, directly or indirectly, give or permit to be given anything of value, including gratuities, in excess of one hundred dollars per individual per year to any person, principal, proprietor, employee, agent or representative of another person where such payment or gratuity is in relation to the business of the employer of the recipient of the payment or gratuity. A gift of any kind is considered a gratuity.
(b) This Rule shall not apply to contracts of employment with or to compensation for services rendered by persons enumerated in paragraph (a) provided that there is in existence prior to the time of employment or before the services are rendered, a written agreement between the member and the person who is to be employed to perform such services. Such agreement shall include the nature of the proposed employment, the amount of the proposed compensation, and the written consent of such person's employer or principal.
(c) A separate record of all payments or gratuities in any amount known to the member, the employment agreement referred to in paragraph (b) and any employment compensation paid as a result thereof shall be retained by the member for the period specified by SEA Rule 17a-4.
Additionally, the AWC asserts that during the period December 2012 through January 2015, GrandFund did not
conduct adequate testing of supervisory control policies and procedures. Specifically, neither the firm's 2013 test nor its 2014
test reviewed any procedures dealing with the firm's active business lines; and the ensuing reports failed to
document testing of the firm's supervisory procedures to verify that they were
reasonably designed to achieve compliance with applicable rules with respect to
the firm's active business lines. Accordingly, the cited inadequacies rendered the CEO certifications deficient (and the 2014 CEO certification was not timely filed within 12 months following the 2013 certification).
Feelin' Mighty Sick Over FINRA Sanctions
FINRA deemed that between approximately:
December 2012 and June 2014, GrandFund failed to establish and implement a supervisory system for marketing expenses and charitable contributions in violation of NASD Rules 3010(a) and 3010(b) and FINRA Rule 2010; and
December 2012 and January 2015, GrandFund failed to conduct adequate supervisory control system testing as required by NASD Rule 3012, and for 2014, failed to certify its supervisory controls in a timely fashion in violation of NASD Rule 3012 (for conduct before December 1, 2014), FINRA Rule 3120 (for conduct on or after December 1, 2014), and FINRA Rules 3130 and 2010.
In accordance with the terms of the AWC, FINRA imposed upon GrandFund a Censure and $30,000 fine.
Bill Singer's Comment
Ummm . . . do you good folks at FINRA realize that you charged GrandFund with making untimely filings but you're only first settling in 2018 misconduct that purportedly took place in 2012, 2014, and 2015? Talk about irony! In fact, FINRA is so late in the scheme of things that the self-regulatory-organization is charging a FINRA member firm with having violated NASD Rules that were, in part, replaced in 2014. Going from the sublime to the ridiculous, the AWC asserts that GrandFund failed to timely file its 2014 certification within 12 months of the firm's 2013 certification. At some point in 2014, it must have -- or should have -- become apparent to the mathematical geniuses at FINRA that 12 months had expired without GrandFund filing another annual certification. All of which prompts me to ask what the hell took until 2018 for FINRA to figure out and settle? Was someone in FINRA's Washington office asking someone in the district office to check and double check that more than 12 months had passed when the 2014 certification was finally filed -- and did that rigorous reconciliation require four years?
On the other hand, I sincerely thank both FINRA and its member firm GrandFund for reminding me of Grand Funk Railroad and all that hair way back when old men like me still rocked. By the way, in the video below, that's me on guitar, FINRA Small Firm Governor Stephen Kohn on bass, and FINRA CEO Robert Cook on drums: