An irreverent Wall Street Blog
How Long Has This Been Going On? A Case of Delayed FINRA Regulation
September 26, 2017How long is too long? That's a very fair question to ask of any Wall Street regulator when it comes to the amount of time that elapses between when they are on notice of misconduct and until such time as they either settle their case or file charges. In a recent FINRA regulatory settlement, we are left with troubling questions about why Wall Street's self-regulator apparently sat on its butt for some four years after a member firm had fired a registered rep for several instances of regulatory and compliance violations.
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, Sharon
Melinda Kwan submitted a Letter of Acceptance, Waiver and Consent
("AWC"), which FINRA accepted. In the Matter of Sharon
Melinda Kwan, Respondent (AWC 2013038528501,
September 19, 2017).
The AWC asserts that Kwan was
first registered in 1995, and that by April 2009, she was associated with FINRA
member firm National Planning
Corporation.
Getting Real
(Estate)
The AWC asserts that during the
relevant period between April 2009 and April 2013, Kwan had participated in
real estate activities with two firm customers (who were also personal friends)
involving two residential properties. The AWC asserts that Kwan did not
disclose her real estate activities to NPC until April 2013; and, further, that
she provided inaccurate annual firm compliance attestations regarding her
outside business activities ("OBA") between 2009 and 2012.
FINRA deemed Kwan's involvement with
the cited real estate activities to constitute OBA violations of NASD Rule 3030 and
FINRA Rule 2010 between April 2009 and December 14, 2010; and FINRA Rules 3270
and 2010 for her involvement between December 15, 2010 and April
2013.
Joint
Accounts
The AWC asserts
that during the relevant period between April 2009 and April 2013, Kwan opened
and maintained two joint bank accounts with a firm customer in June 2009 in
furtherance of their real estate activities. The AWC further alleges that
between June 2009 and February 2013, Kwan's customer deposited almost $1.4 million
into the two accounts.
During the period
when Kwan had opened and maintained the accounts, the AWC asserts that NPC's
written supervisory procedures prohibited "customer funds from being
deposited into any account owned by or under the control of a registered
person." In contravention of her firm's policies, Kwan allegedly failed to
disclose the joint accounts and NPC did not approve them. Moreover, the AWC
asserts that between 2009 and 2012, Kwan provided "inaccurate annual firm
compliance attestations regarding her joint bank accounts. . ."
FINRA deemed Kwan's opening and
maintaining the cited joint bank accounts without the requisite disclosure or
approval, and her inaccurate attestations to constitute violations of FINRA
Rule 2010.
Discharge
Online FINRA
BrokerCheck records as of September 26, 2017, disclose under
the heading "Employment Separation After Allegations" that NPC
"discharged" Kwan on September 25, 2013, based upon allegations
that:
REPRESENTATIVE DID NOT DISCLOSE TO THE FIRM A BANK ACCOUNT WHICH SHE SHARED WITH A CLIENT.
Sanctions
In accordance with the terms of
the AWC, FINRA imposed upon Kwan a $15,000 fine and a four-month suspension
from associating with any FINRA member in any
capacity.
Bill Singer's
Comment
Lost in the
presentation of facts and sanctions in this case is the passage of time. The underlying
events cited by FINRA took place between 2009 and 2012. That's between five to eight years ago. Okay, fine, FINRA is entitled to say that it was only first put on notice of Kwan's conduct in 2013. We'll give the self-regulator that much. Even so, NPC fired
Kwan on September 25, 2013. We just celebrated the fourth anniversary of her
termination. If you read NPC's BrokerCheck termination disclosure, it's clear that the employer
fired its employee failing for failing to disclose a bank account shared with a client. So, you tell me, what the hell took
nearly four years for FINRA to investigate and settle?
What value is there in imposing a lousy $15,000
fine and a four-month suspension four years
after a registered rep was fired for misconduct that took
place five to eight years prior? No . . . I am NOT
suggesting that Kwan didn't violate any rules, be those regulatory or
in-house compliance ones. No . . . I am NOT arguing that she avoid any fine or
suspension for her apparent misconduct. I am simply asking . . . making the point, as it were . . .
that FINRA is failing as a regulator when it fails to timely police the industry and timely protect the investing
public.
In cases where a rep takes extensive steps to hide misconduct or where
a member firm's disclosures are obtuse, I fully understand that a regulator may
be prevented from detecting misconduct and imposing sanctions. But in FINRA's
regulatory settlement with Kwan, all the facts at issue were publicly disclosed
no later than September 25, 2013, in NPC's regulatory filings. Consequently,
the imposition of a $15,000 fine years after the violations were known comes
off as nothing more than a revenue-enhancing scheme. As to the four-month
suspension, I mean, really, what's the point of that after so much time has
elapsed? Look at it this way, 12 four-month periods have already come and gone since NPC fired Kwan in September 2013.
The smoke alarms
went off. The security guard simply figured that the alarm was ringing because
the battery was dying. He didn't do anything until he saw the flames. At that
point, he ran like hell and stood outside watching the building burn down.
What's the point of having alarms if no one timely responds to them? Is FINRA pursuing effective regulation or is it
all nothing more than a scheme to generate fines and give the mere appearance
of oversight? How does that lyric
go?
Well, your friends with their fancy
persuasion
Don't admit that it's part of a
scheme
But I can't help but have my
suspicion
'Cause I ain't quite as dumb as I
seem