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Edward D. Jones Fails To Timely or Fully Produce Phone Records to FINRA
December 14, 2022
Whether realistic or merely imagined, the mere perception of bias or favoritism within any regulatory sphere is corrosive. In a recent regulatory settlement, FINRA, Wall Street's most important self-regulatory-organization, responds to the alleged misconduct of one its largest member firms, Edward D. Jones & Co., with tepid sanctions, among which is the laughable imposition of a Censure, which has virtually no impact and amounts to whipping someone with a wet noodle. Yes, FINRA also imposed a $1.1 million fine on the firm; except, that's about the cost of a day's worth of toilet paper for Edward Jones. In the end, this comes off less as effective regulation and more as a folded $10 bill in someone's palm that is then pressed, somewhat surreptitiously, into the receiving palm of someone else. All of which renders FINRA's approach to regulation as an act akin to tipping someone who gets you a better table at a busy restaurant.
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, Edward D. Jones & Co., L.P., submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.
https://www.finra.org/sites/default/files/fda_documents/2020066649301
%20Edward%20D.%20Jones%20%26%20Co.%2C%20L.P.%20
CRD%20No.%20250%20AWC%20gg.pdf
The AWC asserts that Edward D. Jones & Co., L.P., has been a FINRA member firm since 1939 with about 22,000 registered persons at 15,000 offices. In accordance with the terms of the AWC, FINRA alleged that that the firm violated FINRA Rules 8210 and 2010; and imposed upon Edward Jones a Censure, $1.1 million fine, and an undertaking to certify the compliance of its policies, procedures, processes, and internal controls as cited.
Four Years. Ten Investigations. Crickets
The AWC asserts in part that:
Edward Jones failed to timely, completely, and accurately respond to certain FINRA requests for call detail records.In February 2017, the firm implemented a policy of purging (i.e., deleting) call detail records older than 18 months from the internal network drive where such records were stored (Location A). The call detail records were logs showing phone calls made to a branch landline, including the number originating or receiving the call, the time and date of the call, and the duration of the call.2 Location A was where the firm typically searched for call detail records responsive to regulatory, litigation and arbitration requests.At the time the firm implemented the purge protocol, the firm was aware that call detail records were also stored in a separate location for use with an analytics tool for business planning, not retention or production, purposes (Location B). Although the firm decided that it would not apply the purge protocol to the call detail records contained in Location B, it did not search, or implement a procedure to search, Location B when responding to document requests for call detail records that went back in time more than 18 months.From May 2017 to March 2021, Edward Jones received or had pending document requests from FINRA seeking call detail records going back in time more than 18 months in ten separate investigations. Five of the investigations requested the documents pursuant to FINRA Rule 8210, and five of the investigations made requests without citing Rule 8210. The investigations involved allegations of potential misconduct, including unauthorized trading, discretionary trading, and excessive trading. In responding to these requests, the firm failed to search Location B, which contained call detail records older than 18 months and thus housed responsive documents. In addition, in eight of the investigations, the firm inaccurately represented in the text of its responses or in a legend attached to its productions, that records older than 18 months were not available.In July 2019, members of the firm's group responsible for responding to regulatory requests learned of Location B, realized that Edward Jones should be searching Location B when responding to certain requests for call detail records, and understood that it was likely that some of Edward Jones's past responses to requests from regulators and others were incomplete. Notwithstanding the firm's awareness of this issue in July 2019, the firm failed to fulfill its obligations, as follows:First, in two of the FINRA investigations, one in 2019 and one in 2020, the firm failed to search Location B for call detail records despite receiving new requests calling for such records after July 2019 that extended back more than 18 months. In both instances, responsive documents that should have been produced were in Location B. In addition, in both instances, the firm continued to include a legend attached to its productions of call detail records stating that only 18 months of phone records were available.Second, the firm failed to promptly advise FINRA of its production failures, doing so only in March 2020, eight months after learning of the issue, and after FINRA Enforcement staff raised questions about what appeared to be an incomplete production of phone records in another matter it was then investigating.Third, the firm failed to identify all affected investigations where its responses were likely incomplete until more than a year after discovery of the issue and failed to contact most affected parties until more than two years after discovery of the issue. Notably, five of the FINRA investigations that had called for call detail records greater than 18 months old were still pending in July 2019. Although the firm had an obligation under Rule 8210 to supplement its prior responses once it learned that such responses were incomplete, it failed promptly to do so.Edward Jones failed to preserve certain responsive call detail records from Location A during the pendency of regulatory requests.After February 2017, in seven FINRA investigations, the firm also failed to make a complete production of call detail records from Location A, which was the firm's source for production of such records during that time. In these investigations, although the firm received a request for call detail records going back 18 months or more, it did not take action to prevent responsive records from being deleted pursuant to the firm's purge protocol. As a result, call detail records continued to be purged between the time the firm received the request and the time that members of the firm's response team pulled the records from Location A, which resulted in responsive records being deleted and not included in the firm's response.3 Depending on the delays involved, the amount of missing call detail records ranged from several days to several weeks.By reason of the foregoing, Edward Jones violated FINRA Rules 8210 and 2010.= = =Footnote 2: Call detail records are not required broker-dealer books and records pursuant to Rules 17a-3 and 17a-4 of the Securities Exchange Act of 1934.Footnote 3: The documents separately existed in Location B.
Bill Singer's Comment
So . . . lemme see if I got this. From 2017 to 2021 (some four years), FINRA conducted 10 -- count 'em: 10 -- investigations of one of its largest, best known member firms; and, in response to the regulator's requests for documents, Edward Jones failed to timely/completely produce phone records. As to the nature of FINRA's underlying investigations, the AWC characterizes them as involving "allegations of potential misconduct, including unauthorized trading, discretionary trading, and excessive trading." Seems to me that those are serious allegations and involve potentially dangerous misconduct. Despite the prolonged period on non-response and the seriousness of the regulatory investigations, even after Edward Jones knew that it had failed to comply with the regulator's document requests, the firm failed to immediately alert FINRA to its failures.
Now, let's all imagine that instead of Edward Jones, this non-compliant behavior over four years and 10 investigations involved, say, a FINRA Small Member Firm. Y'know, one of the so-called mom-and-pops that FINRA seems to be socially engineering out of business. Y'all think that FINRA would have just censured and fined the small firm? Y'all believe that someone's head would not have rolled via a suspension or bar? And before you're too quick to answer, consider this:
FINRA Rule 9552. Failure to Provide Information or Keep Information Current(a) Notice of Suspension of Member, Person Associated with a Member or Person Subject to FINRA's Jurisdiction if Corrective Action is Not TakenIf a member, person associated with a member or person subject to FINRA's jurisdiction fails to provide any information, report, material, data, or testimony requested or required to be filed pursuant to the FINRA By-Laws or FINRA rules, or fails to keep its membership application or supporting documents current, FINRA staff may provide written notice to such member or person specifying the nature of the failure and stating that the failure to take corrective action within 21 days after service of the notice will result in suspension of membership or of association of the person with any member. . . .
FINRA had the teeth to take a bite out of Edward Jones but the self-regulatory-organization just didn't have the desire to chomp down. NOWHERE in the Edward Jones AWC is any assertion by FINRA that it had invoked Rule 9552 against Edward Jones in response to the firm's failure to timely produce and in consideration that the firm had demonstrated a "failure to take corrective action within 21 days" of the service of a Rule 9552 Notice of Suspension of Membership.
Did FINRA have a basis for threatening a Rule 9552 suspension? Sure as hell seems so. I mean, c'mon, you tell me what to make of these allegations in the AWC:
Second, the firm failed to promptly advise FINRA of its production failures, doing so only in March 2020, eight months after learning of the issue, and after FINRA Enforcement staff raised questions about what appeared to be an incomplete production of phone records in another matter it was then investigating.Third, the firm failed to identify all affected investigations where its responses were likely incomplete until more than a year after discovery of the issue and failed to contact most affected parties until more than two years after discovery of the issue. Notably, five of the FINRA investigations that had called for call detail records greater than 18 months old were still pending in July 2019. Although the firm had an obligation under Rule 8210 to supplement its prior responses once it learned that such responses were incomplete, it failed promptly to do so.
When all is said and done, FINRA has had its say but it hasn't done much in terms of meaningful regulation.