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HSBC Securities Settlement Raises Questions About FINRA Examinations
July 5, 2017When the self-regulation of Wall Street works, it is a partnership between the regulated and regulator with all parties buying into the core principle that a fairly regulated industry redounds to the ultimate benefit of all participants. Sadly, that's a tough sell. Those who are regulated always chafe under the collar, no matter the industry and no matter the fairness of those who regulate. It's just a given that such tension is inherent in any regulatory dynamic. On the other hand, those who regulate too often view the industries that they police as a den of thieves and the men and women who work there as the enemy. That too is inbred within the regulatory system.
The result of such myopia is that those who are regulated often hide their mistakes in a desire to avoid fines and negative publicity: which has the unfortunate result of transforming a relatively minor problem into a disaster of epic proportions. Similarly, regulatory organizations seem to metastasize into ineffective bureaucracies incapable of the flexibility that best puts out brush fires before they become conflagrations. In the end, this unhealthy breeding ground of mistrust and distrust encourages really bad players to knowingly hide in the shadows where they are often ignored until a firm blows up and investors are fleeced out of their savings. BrokeAndBroker.com Blog publisher Bill Singer came across a somewhat mundane FINRA regulatory settlement with HSBC Securities. Bill applauds FINRA's efforts and is fully on board with its findings and sanctions. On the other hand, Bill also pokes around and shows us some aspects of this settlement that should concern us and prompt more reform at FINRA. Case In PointFor 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, HSBC Securities (USA), Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of HSBC Securities (USA), Inc., Respondent (AWC 2017053137201, June 30, 2017).SIDE BAR: Read about the variations in FINRA AWCs pertaining to the presentation of a respondent's background: "FINRA's Foolish Inconsistency" (BrokeAndBroker.com Blog, June 9, 2017).
WORM Format
Bill Singer's Comment: Truly, I hate this type of regulatory double-dip. I take no issue with charging the member firm for failing to maintain its electronic records as required. That's a fair allegation and one that should be enforced. Also, I have no issue with requiring timely notice of a firm's retention of an outside vendor. Again, I get the rationale and support it. On the other hand, does FINRA really need to don the old belt and suspenders and further charge HSBC Securities with failing to have an audit system to catch its failure to properly maintain records? Such over-charging only undermines the entire system. Just because you can do something doesn't mean you have to.
Vendor Attestation
Here we go again with FINRA's nonsense about disclosable regulatory history -- and more to the point, so-called "relevant" history.
Online FINRA BrokerCheck records as of July 5, 2017, disclose under the heading "Regulatory - Final" 57 records. Is FINRA asserting that someone read through each and every one of the 57 posted regulatory matters and concluded that not a single one was "relevant" prior disciplinary history? I note the following two matters are prominently featured in FINRA press releases:
Online FINRA BrokerCheck records as of July 5, 2017, disclose under the heading "Regulatory - Final" 57 records. Is FINRA asserting that someone read through each and every one of the 57 posted regulatory matters and concluded that not a single one was "relevant" prior disciplinary history? I note the following two matters are prominently featured in FINRA press releases:
Seems to me that if we're talking about inadequate WSPs that such a failure would cover a host of supervisory issues, some of which appear involved in many of the 57 regulatory matters disclosed on BrokerCheck. Similarly, since the AWC points a finger at the retention of electronic records, such a shortcoming would likely be relevant to many issues involving the recording of orders and the retention of trade data. Who exactly is it at FINRA that is mandated to parse through a member firm's regulatory history and decide what is relevant and what is not? Exactly where in FINRA's rules are the guidelines for discerning what is to be deemed "relevant" and by whom ?As Time Goes By
Finally, consider this extract from the AWC:
FACTS AND VIOLATIVE CONDUCT
Over the past decade, the volume of sensitive financial data stored electronically by broker-dealers has risen exponentially. These broker-dealer electronic records must be complete and accurate, not only to assist FINRA and other regulators in their efforts to protect investors through periodic examinations, but also to ensure member firms can carry out their audit functions. Recent years also have seen increasingly aggressive attempts to hack into electronic data repositories, enhancing the need for firms to keep these records in WORM format . . .
Next, let's consider this extract from the AWC:
FINRA is asserting in the HSBC Securities AWC that from about 2007 to the present ("over the past decade") that there has been a rise in the volume of electronically-stored financial data. Moreover, FINRA acknowledges the dangers of increasing incidents of hacking.From May 2003 to the present (the "Relevant Period"), the Firm failed to maintain electronic broker-dealer records in non-erasable and non-rewritable format, known as WORM format, as required by . . .
We start with a FINRA member firm with 57 final regulatory records -- apparently none of which the self-regulatory organization considered "relevant" to its most recent disciplinary settlement with that same member firm. Next, FINRA states that since 2007, it has a heightened concern about the manner in which financial data is electronically stored. Finally, FINRA asserts that HSBC Securities failed to maintain certain WORM records since 2003 -- a date reaching back some 14 years. I make no excuses for HSBC Securities and fully respect FINRA's regulatory concerns and sanctions. That being said, more than a few questions come to mind:
Are we really to believe that HSBC Securities' WSPs became inadequate overnight?Are we to to buy into the fantasy that for 14 years FINRA Staff was unable to uncover any evidence that an outside third-party vendor was retained to provide electronic storage services?Did a FINRA examiner ever ask the member firm to provide an annual list of all third-party vendors used for electronic record storage and compare those names to all 90-day notifications?Did FINRA request an annual, sample production from all third-parties handling electronic records -- sort of like the test page that we get from that $99 Wi-Fi-enabled printer on our desk?Has the regulation of Wall Street come down to nothing more than don't-ask-don't-tell?Why are FINRA members shouldering the huge financial burden of paying the salaries of regulatory staff if the job is nothing more than reading toe-tags at the morgue?