January 15, 2019
Nuance is lost in today's era of bombast. Live long enough and you realize that few things in life are black or white -- maybe it's my failing eyesight, but as I get older, I'm noticing lots of shades of gray. In today's featured FINRA AWC regulatory settlement, the self-regulatory-organization sanctions a member firm for inadequate supervision of outside email usage. Without question, FINRA is on point and presents its case with merit. On the other hand, there's a bit of so-called gotcha regulation at play here, and that needs to be called out. On the other hand (yes, the dreaded "third" other hand), it's not FINRA's job to run a member firm's compliance department. On the other hand (oh my, the rare "fourth" other hand), there are times when FINRA has to be more energetic in preemptively inserting itself into any firm's compliance structure and insisting that the public is protected. Reading toe-tags in the morgue is not effective Wall Street policing.
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, Advisory Group Equity Services Ltd. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Advisory Group Equity Services Ltd., Respondent (FINRA AWC 22017052216701, January 14, 2019).
The AWC asserts that Advisory Group Equity Services Ltd. ("AGES") has been a FINRA member since 1984 with over 100 registered representatives and over 50 branch offices. The AWC asserts that AGES "has no formal relevant disciplinary history with the Securities and
Exchange Commission, any state securities regulator, or any self-regulatory
The AWC alleges that from February 2017 through August 2017, after another member firm withdrew from FINRA, about 70 of that firm's registered representatives migrated to AGES. Attendant to that migration, the AWC asserts that:
At that time, FINRA staff
stressed to AGES the importance of carefully managing the transition of the
representatives to AGES, particularly in light of the disciplinary history of the
former firm, which included supervisory deficiencies. . .
Given my penchant for cynicism and fondness for irony, it came as no surprise to me that notwithstanding FINRA Staff's warnings about handling the transition from the apparently troubled firm, the AWC laments that during a routine firm examination, Staff found that:
AGES nonetheless failed
to capture the business-related emails of a number of the newly hired
representatives for retention and review. Indeed, many of the representatives
continued to use their prior firm email addresses after they joined AGES, but
those email addresses were not approved or supervised by AGES.
So much for "carefully managing the transition."
In drilling down into the details of the not-so-carefully-managed transition and the apparent email fiasco, the AWC offers this detail about what transpired from February to August 2017:
with AGES, at least 11 representatives sent a total of at least 2,000 emails from
their former firm email addresses to their securities customers. Among other
things, the emails discussed investment ideas, stock prices, and securities
transactions, such as the purchase and sale of bonds and stocks; forwarded
account-opening documents, account transfer forms, and trade confirmations; and
provided account balance information. AGES did not capture those emails for
contemporaneous review or retention.
The good news is that a footnote in the AWC assures us that after FINRA examined AGES and uncovered the email issues cited above that "AGES obtained and reviewed the emails at issue."
To Exchange Emails
Moving along, the AWC further asserts that:
Furthermore, FINRA staff's review of a sample of emails revealed several
instances in which representatives had used their former firm email addresses to
exchange emails with approved AGES email addresses. As a result, a reasonable
supervisory review of emails sent to or from the approved AGES email addresses
should have put the Firm on notice that a number of its representatives were still
using their former firm email addresses to conduct securities business.
Nonetheless, the Firm did not identify this issue on its own and claims that it was
unaware of it until FINRA staff advised AGES of the issue. In addition, even
though AGES purportedly required associated persons to sign attestations that
they would abide by the Firm's policies regarding electronic communications
(which required associates to use Firm-approved email addresses), at least 20
representatives who joined AGES did not complete the email attestation when
they joined AGES.
I'm not trying to be difficult here but let's parse through that first sentence in the quoted paragraph immediately above -- particularly the part that says that "representatives had used their former firm email addresses to exchange emails with approved AGES email addresses." To exchange emails? I understand how to SEND an email. I understand how to OPEN an email. I even understand how to DELETE an email. Just what, exactly, does the AWC mean when it describes exchanging an email? Does FINRA mean that the reps were CCing or BCCing their former email addresses in their AGES emails?
Frankly, I'm not quite sure that I understand what misconduct is being cited here -- which is NOT to suggest, even remotely, that I disagree with FINRA's allegations that a member firm must stay on top of its reps' email usage. In this day and age, that's a critical compliance function and I applaud FINRA for its focus. That being said, I don't understand what is the purported misconduct of "exchanging" emails -- ultimately, its seems that the reps were using an unauthorized email address, and I would have preferred that FINRA kept its allegations simple and not injected a fuzzy term of "exchange."
FINRA alleged that AGES' cited misconduct constituted violations of Section 17(a) of the Exchange Act,
Rule 17a-4 of the Exchange Act, and FINRA Rules 3110, 4511, and 2010. In accordance with the terms of the AWC, FINRA imposed upon Advisory Group Equity Services Ltd. a Censure and a $20,000 fine.
Bill Singer's Comment
Not sure why the AWC didn't disclose the name of the former FINRA member firms whose reps migrated over to AGES in 2017. I did some online sleuthing and came up with "Advisory Group Equity Services, Ltd. Expands Assets with Addition of RHK Team" (Accesswire, February 17, 2017) https://www.accesswire.com/455359/Advisory-Group-Equity-Services-Ltd-Expands-Assets-with-Addition-of-RHK-Team As set forth in part in the Press Release:
Advisory Group Equity Services, Ltd. (AGES), part of the holding company TAG Group, Inc., today announces that it has scooped up a team from Source Capital Group, an independent broker dealer with an investment banking unit. The team will bring the total assets of AGES and its affiliates to $1.1 billion. . .
Something about this FINRA regulatory action doesn't sit well with me. I don't disagree with the findings. I don't take any issue with the importance of a rigorous compliance oversight of email usage. Frankly, I like this settlement because it focuses industry attention on an important area of supervision. Similarly, the Censure and $25,000 fine seem proportionate and fair. What isn't sitting well with me is the sense that this case incorporates aspects of "Gotcha" regulation that I detest. Precisely, the AWC makes a big deal about how"
[F]INRA staff stressed to AGES the importance of carefully managing the transition of the representatives to AGES, particularly in light of the disciplinary history of the former firm, which included supervisory deficiencies.
That's nice: FINRA staff stressed the importance of compliance oversight of the migration of reps from a former FINRA member firm with a "disciplinary history." Which begs the question as to why FINRA allowed the migration of such reps in the first place. Which begs the question as to why FINRA staff wasn't engaged in a more hands-on oversight of the migration to ensure that the very mail usage at issue did not occur. Keep in mind that: "11 representatives sent a total of at least 2,000 emails from their former firm email addresses to their securities customers." That may well be an indictment by FINRA of AGES' misconduct; however, it is also an indictment of FINRA for having the situational awareness to issue a warning but then not doing much to prevent the misconduct warned about.
After FINRA staff issued its admonition, did those regulators just vanish? Did any FINRA regulator stay on top of the migration of reps from a purportedly troubled firm? Did any FINRA regulator ask for a sampling of AGES emails -- even just one of the 2,000 cited? Seems to me that if FINRA is aware that it has a so-called Bad Boy firm, and that reps from that firm are relocating to another member firm, and if FINRA feels the spirit moves it to the extent that it warns the firm acquiring the reps to keep its eyes and ears open for warning signs, that FINRA should not simply issue the warning, go around the corner to the nearby donut shop, order a couple of cups of coffee, order several donuts, dunk said donuts into said cups of coffee, and then mosey on back to the member firm and express shock and dismay that things went awry.
FINRA is not a firm's Compliance Department, and the first line of defense is with the firm's supervisory and compliance staff. Moreover, even if FINRA doesn't bring vigor to its regulatory role, that's not excuse for a member firm to sleepwalk through its compliance obligations. Nonetheless, despite all the good achieved in this AWC, FINRA comes off a bit smug when it holds its hand out for $25,000 from AGES. Maybe a bit of onsite FINRA regulation (even if only a weekly follow-up for a couple of months) might have caught the email problem months earlier?