August 24, 2021
A recent FINRA AWC regulatory settlement looks like a case where an employer threw an employee under the bus, and the regulator gunned the engine and drove over him with relish and delight. There was a time when Wall Street's employers had their employees' backs. Some say that was a problem. Some look back upon those days with wistfulness. Be that as it may, there's no going back, but if this regulatory settlement is any indication, we're not necessarily moving forward but going off the rails.
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, Garrett Scott Neubart submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Garrett Scott Neubart, Respondent (FINRA AWC 2019062347901)
The AWC asserts that Neubart was first registered in 2000 and by April 2006, he was registered with Deutsche Bank Securities Inc. ("DBS"). During the relevant period from September 2017 through November 2018, Neubart was a Director in DBS' Institutional Equity Sales Group, and in that role he serviced institutional clients.
The AI Company
The AWC alleges in part that:
From September 2017 through November 2018, Neubart scheduled and attended
meetings between an artificial intelligence (AI) company and his institutional clients at
Deutsche Bank in an effort to market the AI company's products and services to the
clients. In preparation for these meetings, Neubart, using his Deutsche Bank email
address, sent the clients pitch books, marketing decks, and other information on the AI
company. During the same period, Neubart arranged for introductions between the AI
company and employees in Deutsche Bank's Research Department to discuss the AI
company's products and services. In January 2018, as compensation for his efforts,
Neubart received Incentive Units from the AI company, for a nominal price, entitling
Neubart to purchase shares of the company for a fixed price at any time of his choosing.
Previously, the AI company had only given its employees and contractors the opportunity
to own Incentive Units.
at Page 2 of the Neubart AWC
The AWC alleges that in November 2017, Neubart orally sought DBS' approval to engage in outside business activities ("OBA") involving the AI company but his Compliance Department told him that "he could not engage in any outside activities with the AI company or receive compensation in connection with outside business activities." at Page 2 of the Neubart AWC.
SIDE BAR: FINRA Rule 3270: Outside Business Activities of Registered Persons
No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of Rule 3280 shall be exempted from this requirement.
*** Supplementary Material: ***
.01 Obligations of Member Receiving Notice. Upon receipt of a written notice under Rule 3270, a member shall consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person's responsibilities to the member and/or the member's customers or (2) be viewed by customers or the public as part of the member's business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Based on the member's review of such factors, the member must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including where circumstances warrant, prohibiting the activity. A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of Rule 3280. A member must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).
The AWC alleges that in December 2017, Neubart submitted a disclosure to DBS in which he "characterized his receipt of Incentive Units from the AI company as a "passive investment" . . ." at Page 3 of the Neubart AWC. Additionally, the AWC alleges that in his annual compliance questionnaires ("ACQs") for 2017 and 2018, Neubart inaccurately certified to the firm that he had disclosed all OBA.
In accordance with the terms of the AWC, FINRA found that Neubart had violated FINRA Rules 3270 and 2010, and imposed upon him a two-month suspension from associating with any FINRA member in all capacities. In imposing sanctions, FINRA considered in part that DBS "disciplined Neubart for his conduct involving the AI company by reducing his 2018 bonus." At page 3 of the Neubart AWC.
Bill Singer's Comment
Online FINRA BrokerCheck disclosures as of August 24, 2021, stated that before joining DBS, Neubart was registered with Goldman, Sachs & Co. from September 2000 through May 2006. Of course I'm still wondering if this is the same Garrett Neubart who played for the Binghamton Mets (a New York Mets Affiliate) and graduated from Columbia University with an economics degree. You don't see all that many professional baseball players from the Ivy League and even fewer of them find their way to Goldman and DBS. His 1997 Bowman Colorado Rockies Baseball Card says that he was a former Ivy League Player of the Year, drafted 17th in 1995, and was a "game-disrupting speedster" with "Great range in CF." Then again, maybe it's not the same Neubart?
Regardless of whether Neubart could hit a major league curveball, he managed to put together a pretty impressive Wall Street career. Which makes me wonder just what the hell is going on here with DBS and FINRA. After my first read-through of the AWC, I pretty much thought, okay, ya got him but it's not that big a deal. Then I read the AWC a second time and things started to pop out at me. And then I read it a third time and it got me wondering why the fuss.
According to the AWC, for about 14 months in 2017 and 2018, Neubart apparently attended meetings in an effort to market the AI company's products/services to his clients. Like that's a federal crime? Keep in mind that Neubart's clients are likely not some mom-and-pop-investors but sophisticated institutions. I'm sure that institutions deal with marketing efforts all the time and have the ability to discern something of interest from garbage. More to the point, if Neubart perceived that the AI company offered value to his institutional clients, that strikes me as enhanced customer service.
Then we got the AWC allegation that Neubart "arranged for introductions" between the AI company and employees in DBS' Research Department. How is arranging for introductions on behalf of his firm's Research Department even remotely anything akin to an "outside" business activity. Don't see it. Not convinced. Seems like someone's trying to make sumthin' outta nuthin'.
As far as FINRA's rules go, its OBA Rule (Rule 3270) ain't all that complicated. A registered person can't hold the proscribed titles. A registered person can't be compensated or have the reasonable expectation of compensation attendant to "any business activity outside the scope." If the registered person wants to hold the proscribed titles or accept compensation from an OBA, then prior written notice must be submitted to the member firm.
In attempting to shoehorn Neubart's conduct into a FINRA Rule 3270 violation, the AWC alleges that in January 2018, as "compensation" for his efforts, he had received Incentive Units from the AI company. Note that the AWC does not assert that Neubart was "gifted" the units; to the contrary, this was no freebie because the AI company offered Neubart the units at "a nominal price, entitling Neubart to purchase shares of the company for a fixed price at any time of his choosing. What we seem to have here is that FINRA decided that the sale of the units was "compensation," which triggered the Rule 3270 violation -- but if that sale to Neubart was not compensation, then you sort of have the regulator looking a purchased horse in the mouth and saying it's a gift horse. As I see it and would argue, the "sale" of the units from the AI company to Neubart was not "compensation." The whole point about not looking a gift horse in the mouth is that it's a gift -- if you're paying for that same horse, you sure as hell better pry open its mouth and look in.
Perhaps the most troubling aspect of this AWC is why it even came before FINRA, which the AWC explains as follows: "This matter originated from a filing by Deutsche Bank under FINRA Rule 4530 in April 2019." at Page 2 of the AWC. In pertinent part, FINRA Rule 4530: Reporting Requirements provides that "(a) Each member shall promptly report to FINRA, but in any event not later than 30 calendar days, after the member knows or should have known of the existence of any of the following: . . ." There's a whole host of reportable events but since the AWC didn't specify which prompted DBS' filing, I'm not going to speculate.
You know, DBS comes off a being idiotic for allowing this nonsense to rise to the level of a reportable event. Instead of dealing with a minor issue that, at best, seems like a debatable in-house "infraction," DBS allowed this to mushroom into an allegedly reportable regulatory event, which resulted in FINRA imposing a two-month suspension on one of the firm's Directors. Notably, in imposing sanctions, FINRA considered in part that DBS had "disciplined Neubart for his conduct involving the AI company by reducing his 2018 bonus." Oh, so, DBS didn't fire or suspend Neubart -- which would have been absurd given the nonsense at issue -- but merely reduced his bonus. And that wasn't enough for FINRA? Oh no, FINRA had to impose a two-month suspension on Neubart in 2021 -- for conduct that DBS had sanctioned in-house in 2018, and for which the underlying events occurred in 2017 and 2018. Like I said, it looks like DBS threw Neubart under the bus and FINRA drove over him.
As I always admonish: I don't know what I don't know. AWCs are often creatures of negotiation and the first draft tends to get eviscerated by compromises and the final, executed agreement often bears little resemblance to the initial version. Perhaps, FINRA knows more than it has said or, in the alternative, perhaps FINRA is saying far more than is warranted. I don't know. I can only base my comments on the published AWC. Similarly, it is not my place to second guess Respondent Neubart's decision to settle FINRA's allegations and to accept a two-month suspension. Again, based upon what I don't know, his decision may make compelling sense. Accordingly, my remarks are more critique and criticism.