FINRA Hardship Waiver Hard To Find

May 4, 2018

After you read today's regulatory case, you may be puzzled. Even after you have digested the facts, you may be unsure whether FINRA is right or its member firm is right -- or maybe they're both wrong. The BrokeAndBroker.com Blog publisher Bill Singer Esq has read and re-read the underlying documents in a festering dispute involving a FINRA member firm that asked for a hardship waiver of several thousand dollars in arbitration fees. The assessed fees are customary and not particularly excessive. On the other hand, FINRA says it has a "hardship exemption," which might have been appropriately granted when first requested by the member firm. Regardless, we are also asked to confront that old saying that "what's then is then and what's now is now." As we look back from today's vantage point at the mounting legal paperwork and the increasingly larger dollars clicking off on the taxi meter of fees, costs, and expenses running for such appeals, it all seems absurd. Ahhhh . . . perhaps that's something we can all agree on?

2017 FINRA Public Customer Arbitration

We start off with a somewhat innocuous FINRA public customer arbitration filed in September 2015 in which Claimants sought $1 million in compensatory damages plus punitive damages, interest, costs, and attorneys' fee; and at the close of the hearing had raised their requested compensatory damages to $5,603,264. Paul Beattie, Maureen Beattie, Brianna Beattie, Brooke Beattie, and KEnneth McEwen, Claimants, v. Dakota Securities International, Inc. and Christopher Russell McNamee, Respondents (FINRA Arbitration Decision, 15-02495 / May 4, 2017) https://www.finra.org/sites/default/files/aao_documents/15-02495.pdf

On October 21, 2016, Claimants notified FINRA Dispute Resolution that they had reached a settlement with Respondent Dakota Securities. The hearing proceeded solely against Respondent McNamee, who did not file a submission agreement and did not appear at the hearing.

SIDE BAR: Make a note that the hearing proceeded solely against Respondent McNamee and that Respondent Dakota Securities International, Inc. had settled prior to participating in any evidentiary hearing.

The FINRA Arbitration Panel found Respondent McNamee liable and ordered him to pay to Claimants $170,000 in compensatory damages, and assessed against him $650 in adjournment fees and $1,300 in March 2017 hearing fees.

The Panel assessed against $11,650 in fees against Respondent Dakota Securities as follows:

$5,075 Member Process Fee;
$2,475 Member Surcharge;
$3,900 pre-hearing session fees February and March 2016, and;
$200 discovery-related motion fee.

FINRA OHO Expedited Proceeding

That $11,650 in fees assessed against Dakota Securities became a full-blown regulatory issue. How's that? Read on.

As set forth in the "Background" section of FINRA Regulatory Operations, Complainant, v. Dakota Securities International, Inc., Respondent (OHO Expedited Decision, Exp. Proc. No. DFC170004; STAR No. 20170560282 / February 6, 2018).
http://www.finra.org/sites/default/files/OHO_Dakota_DFC170004_020618.pdf:

Dakota Securities International, Inc. agreed to submit to arbitration in FINRA Arbitration No. 15-02495 (hereinafter "the Arbitration"), and FINRA Dispute Resolution ("Dispute Resolution") thereafter assessed a variety of arbitration fees totaling $11,650. Over the course of 20 months, Dispute Resolution billed Dakota Securities. Dakota Securities requested a hardship waiver of the arbitration fees. Dispute Resolution denied the request, and the firm failed to pay the fees.

On October 16, 2017, FINRA notified Dakota Securities of its intent, effective November 6, 2017, to suspend the firm's membership based on its failure to pay arbitration fees. Dakota Securities requested a hearing, which occurred on November 28, 2017. Dakota Securities argued that it requested a hardship waiver in late 2015, when the firm had minimal excess net capital and little or no revenues.

Dakota Securities contended that FINRA did not respond to the request, improperly added additional fees, and waited 18 months to deny the request. Dakota Securities argued that FINRA acted improperly by failing to timely consider its hardship waiver request. It argued that, in assessing its claimed inability to pay, I should confine my consideration of the firm's finances to the period from late 2015 through the first quarter of 2016, when it purportedly filed its initial hardship waiver request to which it did not receive a response.

Regulatory Operations contended that the firm had not established that it filed a hardship waiver request in late 2015 and, in any event, it must demonstrate a current inability to pay the fees in order to avoid suspension.

Pages 2 -3 of the OHO Expedited Decision

In considering the Dakota Securities's financial picture, the OHO Expedited Decision states, in part, that [Ed: footnotes omitted]:

Gary Cuccia ("Cuccia"), Dakota Securities' current chief operating officer, financial and operations principal ("FINOP"), and chief compliance officer testified that he recently joined the firm and reviewed its historical financial information. Cuccia testified that he filed a Financial and Operational Combined Uniform Single ("FOCUS") Report for Dakota Securities on October 31, 2017, in which the firm reported excess net capital of $44,000. He testified that, as of October 2017, the firm had the ability to pay the outstanding fees. He also testified that, in late 2015 when Dakota Securities filed its original hardship waiver request, the firm did not have sufficient funds to pay the fees.

Dakota Securities' unaudited balance sheet as of September 30, 2017, reported total assets of $150,109 and total liabilities of $60,838.51 For September 2017, financial documentation that the firm submitted in connection with this matter showed gross profits of $11,237, net income of $4,220, cash of $78,310, and net capital of $87,394.52 Account statements for Dakota Securities' two checking accounts demonstrated that, as of September 30, 2017, the firm's total cash balance was $78,310.53 Dakota Securities submitted in this matter a profit and loss statement for the period of January 2017 through October 2017, which reported total income of $326,508, gross profit of $120,311, total expenses of $76,514, and net income of $43,797.54 Part IIA of Dakota Securities' September 30, 2017 FOCUS Report showed excess net capital of $87,39455 and net income of $18,809.

Dakota Securities represented that it has not made any efforts since September 15, 2015, to obtain financing to pay the arbitration fees, and the firm does not hold any lines of credit or have outstanding loans.

Pages 6 - 7 of the OHO Expedited Decision

The OHO Expedited Decision found that the fees at issue were properly assessed by FINRA and that the self-regulatory organization was within its rights to move to suspend the firm for non-payment. As set forth in pertinent part in the OHO Expedited Decision [Ed: footnotes omitted]:

Dakota Securities has not demonstrated a bona fide inability to pay. The firm argued that, although it admittedly has a current ability to pay the fees, it did not have the ability when it originally applied for a hardship waiver in late 2015. Dakota Securities urged me to consider its financial situation at the time of its initial request. The guiding case law, however, directs me to consider the firm's "available assets or income," which in this case suggests a current ability to pay the arbitration fees. The record suggests that FINRA may have been slow in following up on its outstanding invoices, but this does not compel me to ignore the firm's current available assets. In fact, Dakota Securities benefitted from FINRA's inaction in that it has been allowed to maintain its membership and avoid FINRA's collection efforts for nearly two years.

As to Dakota Securities' current ability to pay, the record supports a finding that the firm has sufficient means to make a "meaningful payment" toward satisfaction of the outstanding amount. Dakota Securities' annual audited report for the year ending December 31, 2016, reported total assets of $105,491, total revenues of $204,292, net income of $19,905, and cash of $40,282.Dakota Securities' current FINOP, Cuccia, testified that the firm's October 31, 2017 FOCUS report showed excess net capital of $44,000. Its September 30, 2017 FOCUS report showed excess net capital of $87,394 and net income of $18,809. Account statements for Dakota Securities' two checking accounts demonstrated that, as of September 30, 2017, the firm's total cash balance was $78,310. The firm's profit and loss statement for January through October 2017 reported total income of $326,508 and a gross profit of $120,311, while its total expenses were $76,514. These figures do not demonstrate an inability to pay.

An inability to pay defense may also be rejected where a respondent could borrow the funds or make meaningful payment towards the full amount even if it is unable to pay the full amount due. Dakota Securities represented it has not made any efforts since September 15, 2015, to obtain financing or some other form of credit to pay the arbitration fees. The firm also rejected the 12-month payment plan that FINRA's Finance Department offered in June 2017.

Finally, even if I were to focus solely on Dakota Securities' financial status as of late 2015 and early 2016, based on the record before me, the firm has not established a bona fide inability to pay. The record includes incomplete financial information for 2015. Zipper testified that Dakota Securities was losing money in 2015 and early 2016 and had minimal excess net capital, but the firm did not offer into evidence audited financial statements, complete sets of 2015 bank account records, or the testimony of the firm's 2015 FINOP or other principal equipped to explain the firm's 2015 finances in detail. Zipper testified repeatedly, and Cuccia agreed, that the firm had inadequate funds in late 2015, but the documentary evidence to support this claim is not sufficient.

Pages 9 - 10 of the OHO Expedited Decision

FINRA Sanctions

Pursuant to the OHO Expedited Decision, FINRA suspended Dakota Securities until the firm pays the $11,650 in arbitration fees, and said suspension was to become effective 14-calendar-days after the issuance of the decision. Additionally, the OHO Panel ordered the firm to pay $750 in a hearing fee and $1,712.09 in transcript costs.

SEC Appeal

On February 23, 2018, the Securities and Exchange Commission received a communication from Dakota Securities in the form of a "Motion to Appeal Decision of Regulatory Operations of FINRA in Expedited Proceeding No. DFC170004 STAR No. 20170560282" http://brokeandbroker.com/PDF/DakotaSECApp.pdf In pertinent part, Dakota's Motion to Appeal states:

Dakota Securities International believes that Regulatory Operations of FINRA erred when ruling that Dakota Securities International did not show an inability to pay the fees assessed it by FINRA and as such must pay the $11,500 fee assessed.

In late 2015 Dakota Securities International demonstrated an inability to pay the $11,500 arbitration fee when first assessed. Secondly Dakota Securities International alleges that the inability to pay offered by the FINRA collection division is a pretense, and will prove by testimony given by FINRA's person in charge of granting or denying a firm's appeal based on its ability to pay. The testimony will show that the FINRA office of collection has never approved afee waiver based on a firm's ability to pay. The testimony will show in the transcript provided by Dakota Securities International that FINRA collection department believes and said as much that there they cannot see any reason FINRA would grant a fee waiver regardless of its ability to pay, regardless of its financial condition. FINRA's department of collections stated if a firm is in a difficult condition, the owner of a broker -dealer can go out and borrow the funds necessary to pay their fees. When asked by the mediator, Ms. CarIa Carloni how many fee waivers were granted in by the collections department in the last ten years FINRAs response was none. Ms. Carloni then asked if Mr. Zipper was informed of this fact when he was told he could apply for a waiver. The response was no. Ms. Carloni then asked the collections officer is there anywhere Mr. Zipper could have found out that there have been no waivers granted in the last 10 years regardless of the circumstances or financial condition of the firms. The answer was also no. Dakota Securities believes it has demonstrated the FINRA fee waiver policy is apolicy in name only, and is in fact a pretense.

FINRA filed a "Motion to Dismiss the Application for Review and to Stay the Briefing Schedule" http://brokeandbroker.com/PDF/DakotaSECApp.pdf As set forth in the "Introduction" to FINRA's Motion to Dismiss:

Dakota Securities International, Inc. ("Dakota") has appealed from a February 6, 2018 decision in a FINRA expedited proceeding (the "Expedited Decision") suspending Dakota for its failure to pay fees assessed in connection with a customer-initiated arbitration. Specifically, the Expedited Decision ordered that, effective 14 calendar days after issuance, FINRA would suspend Dakota's membership until the outstanding fees were paid. Prior to the suspension starting, however, Dakota paid the arbitration fees and the suspension was never imposed. FINRA took no other adverse actions against Dakota.

The Commission should dismiss Dakota's application for review primarily because it lacks jurisdiction over this appeal. Because the suspension was never effective, Dakota is not subject to a final disciplinary decision by FINRA and, accordingly, the Commission does not have jurisdiction over this appeal under Section 19( d) of the Securities Exchange Act of 1934 (the "Exchange Act").

Even if the Commission finds that it has jurisdiction, the appeal should be dismissed because it is moot. Because the suspension was never imposed, even a favorable decision by the Commission will not provide Dakota with any relief. Dakota, therefore, has no cognizable interest in the outcome of this appeal and the Commission should dismiss it.

On April 30, 2018, the SEC received a communication from Dakota Securities in the form of a "Motion Opposing FINRA's Motion to Dismiss"
http://brokeandbroker.com/PDF/DakotaSECOppFINRAMotDis.pdf In pertinent part, the transmittal letter for the Motion in Opposition states:

Dakota Securities believes FINRA does not understand the appeal Dakota Securities is making to the SEC in this matter. Dakota Securities is not trying to have the suspension of the firm, that never happened, stayed or overturned but rather we are asking the Commission to review the FINRA fees that were assessed to our firm for $11,650 dollars for an arbitration case from 2015 that we believe are in error. FINRA had a hearing in November of 2017 and ruled on that hearing in a letter dated February 6, 2018 in which FINRA Hearing Officer Carla Carloni ruled that Dakota Securities did in fact have to pay the $11,650 broker dealer fees for that arbitration case. Dakota is asking the Commission to review this matter and overturn FINRA's decision as being improper.

In Dakota's Motion in Opposition, the firm references, in part, the following:

I want to now go over the evidence that shows the FINRA collection department, which is responsible for granting hardship waivers for companies showing an ability to pay, is a waiver in name only and never granted. On page 184 of the transcript, Q. "what does dispute resolution consider when evaluating a waiver request made by an active FINRA member firm." A." As a general matter, we will not grant a hardship waiver request filed by FINRA active member firms. The theory being that active member firms should have sufficient capital to bear FINRA fines." Ms. Carloni, the hearing officer then asked Mr. Carley long have you worked in this position. Mr. Carey answered 10 years. Ms. Carloni then asks how many waivers have you granted in those ten years. Answer zero, none. Ms. Carloni then asks, Mr. Carey was Mr. Zipper informed by FINRA dispute that hardship waivers are never granted? The answer, No. Ms. Carloni then asked Mr. Carey, is this policy not granting hardship waivers for active member firms written anywhere for Mr. Zipper to read? The answer, No.

The final Item I would like to demonstrate the hardship waiver is in name only. Please refer to page 187 in the transcript. Question" Okay. And if the firm had come to dispute resolution showing that it had only about $7,000 in excess net capital (which Dakota did demonstrate) would dispute resolution grant such a waiver request?" P. 188. A." No, because we don't grant waiver requests to active FINRA firms." That there is the answer to the question. FINRA Dispute Resolution doesn't grant waiver requests to active FINRA firms. The four hours of testimony in this case talking about Dakota's financials and ability to pay was made moot when in the last 20 minutes of the transcript Mr. Carey from FINRA says it doesn't matter what the financials are we are not granting any_ waivers period and haven't done so in the 10 years I have been here. This hardship request for the ability to pay for a member firm doesn't exist and was admitted in testimony under oath that the member firm is never informed of this both verbally or in any written rule. Our firm spent numerous hours and thousands of dollars sending and resending financial documents requested by FINRA Resolution and FINRA knowingly knew the effort would never result in a waiver being granted. If this isn't a sham or ruse what is it. I am asking the Commission to reverse this decision and have FINRA return the fees assessed and paid fees now paid and the costs incurred due to their negligence in their handling of this matter.

Page 3 - 4 of Dakota Motion in Opposition

SEC Order Extending Briefing Schedule

The SEC granted FINRA's request to extend the briefing scheule until the SEC rules on its Motion to Dismiss. in In the Matter of the Application of Dakota Securities Internationa, Inc. for Review of Discipinary Action Taken by FINRA (Order Extending Briefing Schedule, '34 Act Rel. No. 83139; Admin. Proc. File No. 3-18382 / May 1, 2018) https://www.sec.gov/litigation/opinions/2018/34-83139.pdf

Bill Singer's Comment

I have tried to allow the parties' own words speak for themselves. As I understand the dispute, Dakota Securities is arguing that around the September 2015 date when the arbitration Claimants filed their Statement of Claim, the member firm sought relief from customary FINRA arbitration fees. FINRA takes some issue with when the hardship request was first sought and also argues that the consideration for such a waiver is a member firm's "current" inability to pay. From that perspective, FINRA argues that as of the date when it suspended Dakota Securities, the member firm had failed to demonstrate a current inability to pay. In response, Dakota Securities argues that FINRA's so-called "hardship exemption" is a sham and, as such, the self-regulatory-organization has engaged in bad faith (if not fraud) by pretending to give fair consideration to financial relief for its members. Accordingly, Dakota Securities argues that it should have been granted a hardship waiver based upon its finances when the arbitration was commenced. Further, Dakota Securities asserts that FINRA hides behind an undisclosed policy of never, ever granting a member in good standing a "hardship exemption." Like I said at the inception of today's blog, it's hard to side with the firm or the regulator because they both make sound arguments.

Although I'm not really sure where I come down on the ultimate issue, I know that there is significant -- and I mean significant -- history among various parties involving FINRA and Dakota Securities and the SEC as noted at the end of this article. Some of that background may influence the way you view the arbitration fee dispute. Certainly, there is more context to the matter now on appeal to the SEC than just an isolated FINRA public customer arbitration and fees assessed in that matter.

If it turns out that FINRA has never, ever granted a hardship waiver to a member firm that was still up and running, then that troubles me. It troubles me in the same way that you're told an App is free but when you click to activate it, you learn that there is a free 30-day trial period after which you will be billed annually unless you opt out. If there is a FINRA hardship waiver, I can't imagine that during the Great Recession, for example, that some waivers were not granted. I will await FINRA's response during the SEC appeal to see what the facts of that scenario are and were.

When folks ask me why I view the current iteration of self-regulation as a failure and FINRA's discharge of its self-regulatory duties as often inept and incompetent, I can hardly think of a more glaring example than the nonsense that is parading before us today in all its idiotic vainglory. I mean, seriously?

You want to hazard a guess as to how much money FINRA spent prosecuting a member firm's refusal to pay $11,650 in fees?

Did anyone at FINRA offer some discount to Dakota Securities in an effort to reach a compromise?

For all FINRA's high-minded talk about a so-called 360 degree review of its operations, for all the high-production-value videos and online content that seem little more than masturbatory marketing, the self-regulator hasn't quite figured out how to bring effective management to the business of regulating. You folks need to come down from your 20,000-feet-in-the-sky-cruising-altitude and get some muddy boots on the ground. The issues in Dakota Securities seem reminiscent of prior encounters with Sharemaster, Howard Feigenbaum, and Johnny Burris that come off less about bona fide regulation and more about power politics.

From the perspective of someone who is also an advocate for defrauded public customers and industry whistleblowers, I wish that FINRA battled with the same principle and determination when it came to protecting the public and supervising the industry. In recent times, when given the opportunity to enter the lists as a champion for fair employment practices in the industry, FINRA infamously announced that it would not get involved in the ongoing demise of the Broker Protocol or the disturbing industry trend of forcing employees into unconscionable non-compete and non-solicitation agreements. Oh yes, FINRA will strap on the armor and charge at the likes of Dakota Securities over a measly $11,650. Let's see where the regulator's enthusiasm is with the next whistleblower arguing workplace retaliation or the next woman arguing sexual harassment at the branch office.

For additional content and context on the ongoing dispute among Dakota, FINRA, and the SEC see:

SEC Zaps Zipper's Second Stay Request (BrokeAndBroker.com Blog February 7, 2018)
FINRA Dispute Hangs Out As SEC Unzips Zipper Appeal (BrokeAndBroker.com Blog January 16, 2018))
UPDATE: SEC Says No Mulligans For FINRA Settlements (BrokeAndBroker.com Blog November 29, 2017
SEC Says No Mulligans For FINRA Settlements (BrokeAndBroker.com Blog October 3, 2017)

FINRA Hardship Waiver Hard To Find

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