There is none so blind as those who will not see; and on Wall Street, the industry's regulators are blinded by their refusal to see the disparity between their sanctioning of associated persons versus larger firms. Suspending or barring a stockbroker/advisor is as powerful an arrow as there is in the regulatory quiver. In contrast, conglomerates tend to get fined, and those dollars are more likely paid by public shareholders. No, I am not arguing for lesser sanctions for the industry's human beings, but I sure as hell am asking why large corporations get off so much lighter. Why aren't we closing down Wall Street's entities for the same durations and with the same frequency as we place its employees in the penalty box?
August 2018: $97 Million SEC Settlement
A few years ago, the SEC announced Transamerica Entities to Pay $97 Million to Investors Relating to Errors in Quantitative Investment Models (SEC Press Release 2018-167 / August 27, 2018) (the "2018 SEC Settlement Release") https://www.sec.gov/news/press-release/2018-167. As asserted in the 2018 SEC Settlement Release, investors put billions of dollars into mutual funds and strategies using faulty models developed by investment adviser AEGON USA Investment Management LLC ("AUIM"), its affiliated investment advisers Transamerica Asset Management Inc. ("TAM") and Transamerica Financial Advisors Inc. ("TFA"), and its affiliated broker-dealer Transamerica Capital, Inc ("TCI"). Although representations were made that investment decisions would be based on AUIM's quantitative models; infact, the models were purportedly developed solely by an inexperienced, junior AUIM analyst. Further, the SEC alleged that the models contained numerous errors, and did not work as promised. When AUIM and TAM learned about the errors, they allegedly stopped using the models without telling investors or disclosing the errors.
Without admitting or denying the SEC's findings, Aegon USA Investment Management, LLC, Transamerica Asset Management, Inc., Transamerica Capital, Inc., and Transamerica Financial Advisors, Inc. agreed to settle the SEC's charges and pay nearly $53.3 million in disgorgement, $8 million in interest, and a $36.3 million penalty, and will create and administer a fair fund to distribute the entire $97.6 million to affected investors. Transamerica Order https://www.sec.gov/litigation/admin/2018/33-10539.pdf;
Without admitting or denying the findings in respective SEC Orders, AUIM's former Global Chief Investment Officer, Bradley Beman, and AUIM's former Director of New Initiatives, Kevin Giles agreed to settle the SEC's charges and pay, respectively, $65,000 and $25,000 in penalties that also will be distributed to affected investors. In separate orders, the SEC found that Beman did not take reasonable steps to make sure the mutual funds' models worked as intended; and that Beman and Giles both contributed to AUIM's compliance failings related to the development and use of models.
December 2020: $8.8 Million FINRA Settlement
About 28 months after the 2018 SEC Settlement, the folks at FINRA apparently concluded their own investigation of some potential misconduct at a Transamerica entity and published:
The December 2020 FINRA TFA AWC asserted in part that:
TFA has been a FINRA member since 1985, maintaining its home office in St. Petersburg, Florida. The firm currently has approximately 3,400 registered representatives and over 350 branch offices. It conducts a general securities business with an emphasis in annuity and mutual fund products.
December 2020 FINRA TFA AWC Cites Alleged Misconduct from 2009 to 2016
As asserted in part in the December 2020 FINRA News Release:
FINRA announced today that Transamerica Financial Advisors, Inc. (TFA) has agreed to pay approximately $4.4 million in restitution to approximately 2,400 customers for failing to supervise its registered representatives' recommendations of three different products - variable annuities, mutual funds, and 529 plans. FINRA also fined TFA $4.4 million.
First, FINRA found that from May 1, 2010 through May 15, 2016, TFA failed to reasonably supervise representatives' variable annuity recommendations. During this period, the firm's commissions from the sale of variable annuities comprised more than 40 percent of the firm's total revenue yet TFA's system for supervising variable annuity sales and exchanges was deficient, resulting in various sales practice violations. Most significantly, the firm failed to detect that certain of its representatives made thousands of misstatements to customers in recommending variable annuity exchanges, understating the benefits of the existing variable annuity, and overstating the benefits of the new variable annuity.
Secondly, from January 1, 2009, through November 15, 2016, TFA failed to reasonably supervise representatives' sale of certain mutual funds. FINRA found TFA relied on its representatives to determine the applicability of sales charge waivers to customers' mutual fund purchases, but the firm failed to provide guidance to representatives to help them make this determination, and failed to establish a system to verify whether waivers were properly applied. As a result, TFA failed to apply approximately $438,239 in available sales charge waivers to customers.
Finally, from May 1, 2010 through May 31, 2015, TFA failed to reasonably supervise representatives' recommendations to customers to purchase particular share classes of 529 savings plans. TFA did not provide adequate guidance to representatives regarding the importance of considering share-class differences when recommending 529 plans and failed to provide supervisors with the information necessary to properly evaluate the suitability of 529 share-class recommendations.
March 2023: $8.8 Million FINRA TCI Settlement
During the period December 2019 to February 2021, a cumulative total of more than 400 call center personnel were not registered, or timely registered, despite their engaging in conduct requiring registration. During this time, TCI used a contracted, third-party vendor to administer the Transamerica call centers to handle calls and requests from Transamerica variable product policy holders who had transaction requests related to securities. These securities transaction requests included customer orders for investment of additional premiums, reallocations of contract value among subaccounts, and withdrawals of contract value.
These call center personnel handling transaction requests related to securities were associated persons of TCI, and thus required to be registered in the category of registration appropriate to his or her functions. Although TCI determined to register certain of the call center personnel prior to the relevant period herein, and had advised FINRA of that fact, the firm failed to register, or timely register, these individuals before they engaged in the conduct requiring registration described above. By February 2021, the firm had made changes to the Transamerica call centers with regard to the handling of policy holder requests relating to Transamerica variable products, had approximately 175 individuals registered with TCI who handled policy holder requests relating to Transamerica variable products, and had established policies, procedures, and systems prohibiting call center personnel who were not registered from addressing transaction requests involving Transamerica variable products.
Therefore, TCI violated FINRA Rules 1210 and 2010.
TCI Promised FINRA To Register Personnel -- But Didn't!
In case you missed it, let me reiterate this somewhat troubling allegation in the 2023 FINRA TCI AWC [Ed: highlighting added]:
Although TCI determined to register certain of the call center personnel prior to the relevant period herein, and had advised FINRA of that fact, the firm failed to register, or timely register, these individuals before they engaged in the conduct requiring registration described above.
TCI told FINRA that it was going to register call center personnel; however, that promise was either not timely kept or, worse, not kept at all.
It's one thing to get caught not complying with a rule, but it's quite another when a regulator is aware of non-compliance and the non-compliant party tells the regulator that the shortcoming is going to be fixed -- and then that doesn't quite happen as quickly as expected or at all. All of that we can put on TCI.
On the other hand, given the SEC's and FINRA's prior 2018 and 2020 regulatory settlements with the Transamerica family, just what the hell was FINRA thinking when it was examining the conduct of TCI? Did FINRA just trust TCI when the firm gave the assurance equivalent to some schoolyard pledge of "cross my heart and hope to die?" Keep in mind that the March 2023 AWC was a settlement for misconduct transpiring from 2019 through 2021:
As in where the hell was FINRA for the two years of 2019 to 2021; and why was a settlement only concluded in 2023?
As in didn't FINRA have any recollection of the SEC's 2018 settlements and the whopping $97 million sanctions of which TCI's share was $12 million in disgorgement plus $1,826,022 in interest and a $4 million penalty?
As in didn't FINRA have any recollection of its own 2020 AWC with yet another Transamerica affiliate?
Ain't Wall Street regulation wonderful? Ain't it a thing to behold? Conglomerates with a whole mess of affiliates can have regulators slamming various of those affiliates with $97 million in fines in 2018 and another $8.8 million in 2020; and, gee, it turns out that one of the affiliates had engaged in over a year of troubling misconduct starting in 2019; and, gee, in 2023, FINRA gives that firm a slap-on-the-wrist-Censure and a measly $500,000 fine.
FINRA's Registration Requirements
At its best, the 2023 FINRA TCI AWC is an example of tepid regulation; and, at its worst, it is a dangerous example of disparate regulation by a biased regulator.
Pointedly, the 2023 FINRA TCI AWC alleges violations of FINRA Rules 1210 and 2010. Let's start with a consideration of the two rules:
FINRA Rule 1210: Registration Requirements
Each person engaged in the investment banking or securities business of a member shall be registered with FINRA as a representative or principal in each category of registration appropriate to his or her functions and responsibilities as specified in Rule 1220, unless exempt from registration pursuant to Rule 1230. Such person shall not be qualified to function in any registered capacity other than that for which the person is registered, unless otherwise stated in the rules.
FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
Frankly, FINRA Rules 1210 and 2010 are about as short as any FINRA Rule gets.
You must be registered with FINRA if you are engaging "in the investment banking or securities business of a member."
You're supposed to be honorable, just, and equitable in your business dealings.
With simplicity, however, often comes complications.
As a veteran industry lawyer, I disparagingly refer to FINRA Rule 2010 as an overly elastic, rubbery, catch-all rule that spells out virtually none of its key terms and is shamelessly stretched to cover a whole host of sins (real or imagined). What bothers me the most about FINRA Rule 2010 is that it never seems to get applied as zealously to FINRA's Large Member Firms as it does to smaller firms and associated persons.
Then there's the supposed short-and-sweet language of FINRA Rule 1210 -- except, if you read just a click past the substantive wording of the body of the rule, you immediately come across 11 enumerated categories of "Supplementary Material."
So . . . we've seen how FINRA tackled TCI with a Censure and fine for the firm's violations of Rule 1210 and Rule 2010; let's see how FINRA goes after some human beings who allegedly violated both Rule 1210 and Rule 2010.
January 2021: FINRA v. McCurty
Conveniently for me, I wrote a whole article about one such regulatory exercise similar to FINRA v. TCI in which FINRA cited a lowly rep for violating both FINRA Rules 1210 and 2010. FINRA Fines And Suspends Rep For Taking Or Not Giving A Crap (BrokeAndBroker.com Blog / January 19, 2021)
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, Myreon S. McCurty submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Myreon S. McCurty, Respondent (FINRA AWC 2019063415501 / January 15, 2021)
The AWC alleges that Myreon S. McCurty was first registered in 2018 with Charles Schwab & Co., Inc. and by October 2019, he was registered with Pershing LLC. The AWC alleges that Myreon S. McCurty "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Myreon S. McCurty violated FINRA Rule 1210 and 2010; and the self regulator imposed upon him a $5,000 fine and an 18-month suspension from association with any FINRA member in any capacity.
What prompted FINRA's double-barreled regulatory sanctions of a fine and suspension? The AWC alleges in part that:
On July 10, 2019, McCurty took the Series 10 qualification examination. Prior to beginning the exam, McCurty attested that he had read and would abide by FINRA's Rules of Conduct. The Rules of Conduct prohibit the use or attempted use of personal items, including personal notes and study materials, during the examination. The Rules of Conduct also state that unscheduled breaks are permitted only for restroom use. During the Series 10 examination, McCurty took an unscheduled break during which he went to the restroom where he possessed unauthorized Series 10 study materials related to the subject matter of the examination.
January 2021: FINRA v. Casella
Yet again, conveniently for me, I wrote a whole article about another regulatory exercise in which FINRA cited a lowly rep for violating Rule 1210 and 2010. FINRA Fines and Suspends Rep for Reviewing Prohibited Study Materials in Testing Center Restroom (Securities Industry Commentator /March 15, 2021)
In the Matter of Grace M. Casella, Respondent (FINRA AWC 2020068626201 / March 24, 2021)
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, Grace M. Casella submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Grace M. Casella was first registered in 2020 with Securian Financial Services, Inc. The AWC alleges that Casella "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Casella violated FINRA Rules 1210 and 2010. Accordingly, the self-regulatory-organization imposed upon Casella a $5,000 fine, and an 18-month suspension from associating with any FINRA member in all capacities.
What prompted FINRA's double-barreled regulatory sanctions of a fine and suspension? The AWC alleges in part that:
On August 28, 2020, while associated with Securian, Casella took the Series 7 exam. Prior to beginning the examination, Casella attested that she had read and would abide by the FINRA Test Center Rules of Conduct (the Test Center Rules). The Test Center Rules prohibited the use or possession of certain items, including study materials, in the examination room or during a restroom break and required all such materials to be stored in a locker. During her examination, Casella took an unscheduled break and went to the restroom, where she reviewed her personal notebook containing study materials. Testing center personnel discovered Casella with her notebook but allowed her to submit her responses without changing any answers.
FINRA's Disparate Treatment of Associated Persons
In 2021, FINRA sanctioned McCurty and Casella each with a $5,000 fine and an 18-month suspension. You think that pretending you're going to take a leak for a few minutes and actually perusing study materials is as serious and protracted a bit of misconduct as failing to register over 400 workers over a 14-month period-- particularly after you promised FINRA you would promptly do so?
You think that FINRA's 2023 Censure and $500,000 fine on TCI hit that firm with the same oomph that the $5,000 fine and 18-month suspension hit McCurty and Casella? Ain't it nice that FINRA has this penchant for consistency and imposed identical fines and suspension on McCurty and Casella? On the other hand, in stark contrast, TCI gets off with a slap on the wrist for violating the exact same Rule 1210 and Rule 2010.
If you're going to suspend a human being for a year and a half for violations of FINRA Rule 1210 and 2010, shouldn't you also shut down a member firm for at least the same stretch of time -- or at least for some time when that firm violates the same Rules 1210 and 2010? And before you're too quick to defend the disparate sanctions, recall that McCurty and Casella did "not have any relevant disciplinary history;" whereas TCI and its affiliates did.
Sadly, infuriatingly, no one at FINRA notices the disparity in its heavy-handed sanctioning of individual reps versus its deft and creative sanctioning of large, very large member firms.
I am NOT arguing for lesser sanctions for the two human beings, but I sure as hell am asking why large FINRA member firms get off so much lighter.
Does this disparity bother no one in FINRA's management?
Does this unfairness bother no one on FINRA's lackluster Board of Governors?