Another Small Fish Fry on Wall Street Reeks of FINRA Insincerity

July 22, 2019

Why is it that it always seems like the individual rep and small firm never get a fair break with FINRA? As publisher Bill Singer, Esq. often argues, the so-called self regulation of Wall Street is rigged against the industry's small fry. Time and time again, when FINRA can and should show some leniency towards smaller firms or associated persons, the self-regulator never quite issues the credit. In contrast, FINRA can barely get out of its way when it comes to justifying why it hasn't shut down a too-big-to-fail firm that nearly destroyed our economy. And don't be dazzled by the large fines imposed upon Wall Street's big fish. Those bucks come out of the pockets of shareholders and not the whales in the C-Suites who caused the mess. In the end, it all reeks of insincerity. FINRA loves its daily small-fish-fry. The regulator just can't figure out what to do with blubber.

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, Cindy Maria Fuzie, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Cindy Maria Fuzie Respondent (FINRA AWC 2017055024201, July 15, 2019) 
http://www.finra.org/sites/default/files/fda_documents/2017055024201
%20Cindy%20Maria%20Fuzie%20CRD%205222145%20AWC%20jm.pdf

The AWC asserts that Fuzie was first registered in 2006 and by October 2012, she was registered with FINRA member firm Morgan Stanley.  The AWC asserts that "Fuzie has no formal disciplinary history with the Securities and Exchange Commission, any self-regulatory organization, or any state securities regulator."

Mistaken Belief

In an overabundance of caution and a desire to avoid any taint of characterization, I am extracting virtually the entire section of the AWC's "Facts and Violative Conduct":

Between 2014 and 2017, Fuzie participated in a particular reimbursement program of Morgan Stanley, the available funds for which were based on a percentage of each eligible registered representative's annual gross revenue. Fuzie mistakenly believed that, because the amount of funds available to her was derived from her annual gross revenue, the money belonged to her. That belief notwithstanding, Morgan Stanley's program in fact required that a client(s) or prospective client(s) be present in order for a meal to be reimbursable as a business expense. 

While participating in the reimbursement program, among the items Fuzie submitted to Morgan Stanley for reimbursement were certain meal receipts and related expense reports in which she falsely represented that one or more clients or prospective clients attended each meal. Morgan Stanley thus reimbursed her for the meals pursuant to the reimbursement program. 

Fuzie subsequently approached Morgan Stanley about her expense reimbursement requests, which were inaccurate. Morgan Stanley asked Fuzie for reimbursement, which she paid and Morgan Stanley accepted. 

FINRA Rule 2010 requires associated persons to observe high standards of commercial honor and just and equitable principles of trade. 

Based on the foregoing, Ms. Fuzie violated FINRA Rule 2010.

Discharge

As set forth in FINRA's online BrokerCheck records as of July 17, 2019, Morgan Stanley Smith Barney "discharged" Fuzie on July 10, 2017, based upon allegations that she had:

[r]equested and received reimbursement from the Firm for expenses described as client meal expenses, when the meals were actually personal in nature. No clients were charged for the expenses.

FINRA Sanctions

In accordance with the terms of the AWC, FINRA imposed upon Fuzie a $5,000 fine and a three-month suspension in any and all capacities with any member firm.

Corrective Action Statement

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

D. 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": http://finra.complinet.com/en/display/viewall_plain.html?rbid=1189&element_id=1159005107 :

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 Statements, 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 Statements 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") http://brokeandbroker.com/PDF/MC400.pdf. 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 employers/member firms think that memorializing an enhanced scheme of oversight for a settling registered person gives the firm a hedge 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, Fuzie apparently determined that it was advisable to submit this Corrective Action Statement:

Statement of Corrective Action

Ms. Fuzie participated in Morgan Stanley's Reimbursement Program When Ms. Fuzie realized she was incorrectly utilizing the Reimbursement program she approached management to correct the mistake and reimbursed Morgan Stanley. 

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

Bill Singer's Comment

FINRA's 2019 Cooperation Credit Guidance

On July 11, 2019, FINRA published the 12-page "FINRA Investigations / FINRA Supplements Prior Guidance on Credit for Extraordinary Cooperation" (FINRA Regulatory Notice 19-23) (the "19-23 Notice")
http://www.finra.org/sites/default/files/notice_doc_file_ref/regulatory-notice-19-23.pdf 
As set forth in the "Summary" portion of the the 19-23 Notice:

FINRA is issuing this Notice to restate and supplement prior guidance regarding the circumstances under which a firm or individual may influence the outcome of an investigation by demonstrating extraordinary cooperation. This Notice incorporates FINRA's prior guidance and provides clarification and additional information about how FINRA assesses whether a potential respondent's cooperation is "extraordinary" and distinct from the level of cooperation expected of all member firms and their associated persons. 

BrokeAndBroker Blog Cynical Commentary

On July 11 As I noted in part in "FINRA Issues An Extraordinary And Cynical Release" (BrokeAndBroker.com Blog / July 12, 2019) http://www.brokeandbroker.com/4689/finra-extraordinary-cooperation/ :

One Size Doesn't Fit All

There's really no way that the 19-23 Notice will get used to benefit the industry's working men and women, or FINRA's Small Member Firms. Like I said, this is a bit of mutual back-scratching between FINRA and its powerful Large Member Firms. Frankly, even FINRA knows what this is all about. Consider the discomfort with which the regulator posed the following question and answered it [Ed: footnotes omitted]:

Can Individuals Also Receive Credit for Extraordinary Cooperation? 

Credit for extraordinary corrective measures and cooperation is available to individuals as well as firms. FINRA believes many of the principles discussed above may apply equally to individuals. For example, although individuals may not be able to correct deficient firm procedures and systems, they may still self-report misconduct, provide substantial assistance during an investigation, and pay restitution to customers with appropriate notice to and involvement by a member firm. However, the presence of aggravating factors may weigh against credit for extraordinary cooperation, and certain aggravating factors are more likely to be present in cases involving individuals, such as intentional or reckless misconduct, attempts to conceal misconduct from a member firm, and misconduct notwithstanding prior warnings from a supervisor.

In evaluating whether to give credit to an individual, FINRA also will consider the same four general factors outlined in the SEC's policy regarding cooperation by individuals: (1) the assistance provided by the individual; (2) the importance of the underlying matter in which the individual cooperated; (3) the societal interest in holding the individual accountable for his or her misconduct; and (4) the appropriateness of credit based upon the profile of the cooperating individual.

Pages 10 - 11 of the 19-23 Notice 

I always love it when someone asserts a fact as if the mere act of stating it renders it true. Interesting that FINRA asserts that "certain aggravating factors are more likely to be present in cases involving individuals, such as intentional or reckless misconduct, attempts to conceal misconduct from a member firm, and misconduct notwithstanding prior warnings from a supervisor." So, let me get this: Aggravating factors that would cancel out credit for extraordinary cooperation are "more likely to be present in cases involving individuals" (in contradistinction to large banks or broker-dealers). Says who?  Did FINRA learn nothing from the Great Recession? Does FINRA truly believe that only an associated person would ever engage in "attempts to conceal misconduct"? Should I dredge up the Madoff and Stanford frauds? Does FINRA not understand the attempts to conceal misconduct was the cornerstone of all the illegal, unauthorized account openings by its major firms? Where does FINRA think the impetus came for bid rigging?  Where does FINRA think the idea to look the other way arises when AML concerns attach to a huge client? FINRA's bias against the little guy and in favor or its larger firms is on full display with its inept and clumsy exposition of what constitutes extraordinary cooperation and when such conduct qualifies for sanction mitigation.  What insincere crap it is for FINRA to claim that it will take into consideration "the societal interest in holding the individual accountable for his or her misconduct." The little guy and small firm never get a fair break in self regulation. The system is rigged against them. Time and time again, when FINRA can and should show some leniency with imposing sanctions against smaller firms or individuals, FINRA never quite issues the credit. For a better sense of how FINRA's scales are unfairly balanced, take a look at FINRA's dealings with the likes of; 

http://www.brokeandbroker.com/index.php?a=topic&topic=sharemaster 

http://www.brokeandbroker.com/index.php?a=topic&topic=burris 

http://www.brokeandbroker.com/index.php?a=topic&topic=botkin

Failing the Test?

So . . . let's see how Fuzie fared with FINRA's four-part test used to give some sanction credit to an individual:

(1) the assistance provided by the individual; (2) the importance of the underlying matter in which the individual cooperated; (3) the societal interest in holding the individual accountable for his or her misconduct; and (4) the appropriateness of credit based upon the profile of the cooperating individual.

Once again, let me quote excerpts from the AWC's "Facts and Violative Conduct":

Between 2014 and 2017 . . . Fuzie mistakenly believed that, because the amount of funds available to her was derived from her annual gross revenue, the money belonged to her. . . .

While participating in the reimbursement program, among the items Fuzie submitted to Morgan Stanley for reimbursement were certain meal receipts and related expense reports in which she falsely represented that one or more clients or prospective clients attended each meal. Morgan Stanley thus reimbursed her for the meals pursuant to the reimbursement program. 

Fuzie subsequently approached Morgan Stanley about her expense reimbursement requests, which were inaccurate. Morgan Stanley asked Fuzie for reimbursement, which she paid and Morgan Stanley accepted. . .

Hard to imagine a more cooperative set of facts than when a rep makes a mistake, recognizes it, disclose her error to her employer, and pays back every penny at issue. 

In other words -- and those words are FINRA's, not mine -- Fuzie thought she was spending money that belonged to her. At some point, Fuzie approached Morgan Stanley about her reimbursed expenses and when informed that she was improperly reimbursed, she paid back the disputed dollars. As Fuzie states in her Corrective Action Statement, when she "realized she was incorrectly utilizing the Reimbursement program she approached management to correct the mistake and reimbursed Morgan Stanley." Taking the AWC's allegations and Fuzie's statement into account, Fuzie misunderstood her employer's business expense reimbursement policy and when she realized her error, she made Morgan Stanley whole. 

Insincere Crap from FINRA -- yet again

Fuzie's alleged misconduct did not require the imposition of a $5,000 fine and a three-month suspension -- more to the point, I have no idea why a suspension was even appropriate. Fuzie raised the reimbursement issue on her own volition (not in response to investigations by Morgan Stanley or FINRA). Further, the alleged misconduct did not harm to any customer, did not involve a security,  and was the apparent byproduct of a misunderstanding rather than intentional fraud. There is NO societal interest in holding Fuzie accountable for a mistaken misunderstanding of a reimbursement policy. A dramatically reduced fine and suspension from what was meted out here would further the desired goal of encouraging associated person's to raise any concerns about industry rules and regulations on their own with their firms and, further, to engender the prompt repayment of any questioned advances or reimbursements. FINRA has woefully dropped the ball here by "punishing" Fuzie for what seems a mere misunderstanding. As I lamented in my earlier blog:

What insincere crap it is for FINRA to claim that it will take into consideration "the societal interest in holding the individual accountable for his or her misconduct." The little guy and small firm never get a fair break in self regulation. The system is rigged against them. Time and time again, when FINRA can and should show some leniency with imposing sanctions against smaller firms or individuals, FINRA never quite issues the credit.