February 19, 2008
In FINRA's just-released February 2008 Monthly Disciplinary Actions, we have the following nugget, which I have reproduced below verbatim:
Legend Merchant Group, Inc. (CRD #5155, New York, New York) submitted a Letter of Acceptance,Waiver and Consent in which the firm was censured, fined $22,500 and required to file an application with FINRA, consistent with NASD Rule 1017 for approval of the material changes referenced in the AWC concerning changes to its Membership
Agreement, and the firm must comply fully and timely with related FINRA requests for
additional information and documents.Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it effected material and ongoing changes in its business operations by adding a branch office and expanding the number of associated persons with direct customer contact without FINRA's prior approval. The findings stated that the firm failed to timely report statistical and summary information regarding customer complaints, and failed to report the most egregious problem as alleged in customer complaints as FINRA required. (FINRA Case #20060036818-01)
I have long counseled member firms about the dangers of undertaking material changes to the terms and limits of their Membership Agreement. Those who frequent my RRBDLAW.com website know that such commentary features prominently in my monthly Cases of Note analysis. So, "no" -- I have no problem with the Rule 1017 aspect of the Legend case.
So what's bugging me?
FINRA's all too frequent cavalier approach to explaining its decisions drives me nuts. On one level, FINRA decisions (such as the monthly case reports) are supposed to be educational. They should serve to highlight developing problems for an industry. Such head's up guidance is truly helpful for overburdened compliance departments trying to stay ahead of the ever-lengthening curve.
On another level, FINRA communications should interpret existing rules and regulations so as to clarify their scope and intent. This is often a challenge for any regulator -- because regulators have a tendency to wrongly expand their reach through excessively elastic rule interpretations that over-step the bounds. Worse, when presented with an uncontested Complaint and a settled case (such as with Legend's AWC), FINRA has little constraint in terms of putting the best spin on its own preferred interpretation of the facts and violations.
The Legend case highlights what happens when FINRA doesn't appreciate the burden upon it to maintain a meticulous analysis of the facts and its own rules. I call your attention to this finding:
The findings stated that the firm failed to timely report statistical and summary information regarding customer complaints, and failed to report the most egregious problem as alleged in customer complaints as FINRA required.
Read NASD Conduct Rule 3070: Reporting Requirements, and show me any language therein where a member firm is required to figure out just what the hell is "the most egregious problem" contained in any customer complaint. Then show me where the member is obligated to specifically notify FINRA of such a determination. Fact is, there is no such rule or obligation. Member firms are clearly obligated to report customer complaints as defined with great care by Rule 3070. However, just as clearly, no rule requires members or their compliance departments to scrutinize customer complaints in a foolish effort to figure out what's the most egregious complaint.
Regulation is far too serious a business to be undertaken with such carelessness by a regulator. Compliance is far too serious an obligation of member firms for their staff to be burdened with the vagaries of such capricious rule interpretations by regulators.