November 14, 2022
When a government prosecutes criminal misconduct, the Defendant is protected by constitutional and due process rights. When a non-governmental actor like FINRA pursues industry misconduct, however, a Respondent is often deprived of constitutional and due process rights. That distinction explains why courts generally allow for the imposition of penalties in criminal cases but only the imposition of sanctions in civil and regulatory cases. All of which explains why alarms go off when FINRA imposes what it calls a sanction but what others might view as a penalty, as demonstrated in a recent FINRA regulatory settlement.
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, Christopher John Shaw submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.
In the Matter of Christopher John Shaw, Respondent (FINRA AWC 2020067955001)
The AWC asserts that Christopher John Shaw was first registered in 2005; and by September 2020, he was registered with Pruco Securities, LLC.
The AWC asserts in part that:
On April 23, 2020, Shaw exercised discretion without written authorization to execute 17 trades in 11 customer accounts. Although Shaw mistakenly believed he had discretionary authority for the accounts, Shaw did not have the customers' written authorization or Pruco's acceptance to trade the accounts on a discretionary basis. To the contrary, Pruco did not permit the use of discretion in its brokerage accounts.
Therefore, Shaw violated FINRA Rules 3260(b) and 2010.
In accordance with the terms of the AWC, FINRA imposed upon Shaw a $5,000 fine and a 15-business-day suspension from associating with any FINRA member in all capacities.
Bill Singer's Comment
Online FINRA BrokerCheck disclosures as of November 14, 2022, allege that Shaw was "discharged" by Pruco on September 2, 2020, based upon allegations that:
Registered Representative transacted discretionary trades in client brokerage
accounts, and inaccurately marked certain trades as unsolicited when they were
Just going by Pruco's disclosure, it appears that Shaw had engaged in discretionary trades AND marked some purportedly SOLICITED trades as UNSOLICITED. By the time we get to the FINRA AWC, the whole unsolicited/solicited issue has vanished -- which could be because FINRA never pursued it and/or it was negotiated out of the AWC.
One Day/17 Trades/11 Accounts
This whole regulatory to-do involves one day of trading (April 23, 2020) involving 17 questioned trades for 11 accounts.. A stockbroker can cause a ton of damage during only one day of trading, and sometimes during only one minute, so I'm not focusing on the duration of the alleged violation but merely noting that the cited trades were all placed on the same trade date. Given that context, FINRA's case is framed around the allegation that during one day of cited trading:
The AWC asserts that Pruco required a customer's prior written authorization to exercise discretion; and that the firm was also required to approve the use of discretion. Notwithstanding (or in spite of ) that double-barreled prerequisite, Shaw still exercised discretion on the one day at issue. Note that the AWC does not allege that Shaw acted willfully or with the intent to conceal his use of discretion. The AWC could have said that but it didn't. FINRA said what it said in the AWC; pointedly, that Shaw mistakenly believed he had discretionary authority. Unfortunately, the AWC fails to explain the basis and nature of Shaw's mistaken belief.
Shaw mistakenly believed he had discretionary authority for the accounts, Shaw did not have the customers' written authorization or Pruco's acceptance to trade the accounts on a discretionary basis.
Penalties versus Sanctions
Federal courts have held that:
[F]INRA is generally prohibited from imposing "excessive or oppressive" penalties, which we have held limits FINRA to remedial sanctions. 15 U.S.C. § 78s(e)(2); see, e.g., Siegel v. SEC, 592 F.3d 147, 157 (D.C. Cir. 2010). And in Saad III, we held that, if imposed to "protect the public," an industry bar is "remedial." 980 F.3d at 107-08. . . .
https://www.finra.org/sites/default/files/Sanctions_Guidelines.pdf , it is stated in pertinent part that:
General Principles Applicable to All Sanction Determinations
1. Disciplinary sanctions should be designed to protect the
investing public by deterring misconduct and upholding high
standards of business conduct. The purpose of FINRA's disciplinary
process is to protect the investing public, support and improve the
overall business standards in the securities industry, and decrease
the likelihood of recurrence of misconduct by the disciplined
respondent. Toward this end, Adjudicators should design sanctions
that are meaningful and significant enough to prevent and discourage
future misconduct by a respondent and deter others from engaging
in similar misconduct. . . .
at Page 2 of the FINRA Sanctions Guidelines
Dealing with a Mistake
FINRA's sanctions must be remedial rather than an excessive or oppressive penalty. As FINRA's Sanction Guidelines admonishes, any remedial discipline should protect the public, support/improve industry standards, and impede a recurrence of misconduct. Notably, the Sanction Guidelines emphasize that sanctions should "prevent and discourage future misconduct by a respondent and deter other from engaging in similar misconduct."
All of which brings us to an edgy question: Should FINRA "sanction" a human being for having a "mistaken belief?"
Let's assume that in response to FINRA's allegations, Shaw admitted that Pruco's discretionary policy had been conveyed to him and was reiterated with some regularity and despite what he knew or should have known, he went ahead and entered 17 discretionary trades on one day in violation of the employer's policies. In such a case, one would argue that Shaw knew what he was doing was wrong and that a fine and suspension would be acceptable remediation because his apparent contempt for his firm's and the industry's rules requires something designed to prevent a recurrence.
In contrast, let's assume that in response to FINRA's allegations, Shaw thought that
Further, let's imagine that the assistant forgot to send the package to Compliance for its approval and lied to Shaw as part of a cover-up. Under such circumstances, Shaw could have formed the "mistaken belief" that he had complied with Pruco's prior notice policy and was cleared to use discretion.
- the customers had previously submitted written discretionary authorizations,
- he provided the authorizations to an assistant, and
- the assistant said that the authorizations were forwarded to Compliance and had been approved by the firm.
I note the possibilities for what could have fostered Shaw's mistaken belief because the AWC offers us nothing.
A better regulatory practice would be to include in the AWC some context for FINRA's use of "mistaken belief." In the absence of such an explanation, FINRA seems to be punishing someone for having made a mistake -- and it's hard (if not impossible) to imagine human beings not making mistakes. Moreover, since the imposition of a fine and/or suspension will never likely prevent mere mistakes in contrast to negligence or reckless conduct, then there is no remedial purpose in imposing such sanctions. And if there is no remedial purpose, then such a fine/suspension seems punitive in nature. In the absence of such context, it's difficult to view the fine and suspension as a "sanction" rather than a "punishment," which FINRA is not supposed to be imposing.
In closing, I will note what I always do when it comes to FINRA AWCs. If Respondent Shaw was satisfied in signing off on the regulatory settlement and in paying the fine and doing the time, it's not my place to question his judgment. And I don't. I don't know what I don't know and the final settlement may reflect a lot of concessions in terms of the published fact pattern. More noteworthy is that Shaw was represented by a lawyer, so this is not a case where FINRA may have taken advantage of a pro se party. A 15-business-day suspension is as modest a time-out as FINRA tends to impose, and the $5,000 fine also falls at the lower end of the financial range. So . . . let's chalk my comments up to something of a critique of the lack of content/context in the AWC rather than a criticism of FINRA's case or mitigation of Shaw's alleged misconduct.