FINRA Wrestles With No Debt False Statement Versus Untrue One
December 28, 2017
Wall Street's communications with the public have come under scrutiny in recent years and with good cause. You look back to the lead-up to the Great Recession and there were a lot of lies being told to unwary investors. Whether those investors should have been unwary is another question for another day but, for now, let's just say that there were a lot of folks pushing a lot of toxic crap on folks who were seen as easy prey. Not a pretty picture. All of which explains why there is an enhanced focus on how investment products are marketed online, on air, and during seminars -- not that it's a particularly effective line of defense but, you know, the Maginot Line looked like it would work, right? In a recent FINRA regulatory settlement, we see the best and worst of Wall Street regulation. On sound ground is the self-regulator's unhappiness with one guy's use of his personal email to engage in business communications. On less sound ground is the self-regulator's unhappiness with that same guy's statement to a client about whether an issuer had or didn't have any debt.
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, Craig Sutherland submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Craig Sutherland, Respondent (AWC 2016049804101, December 26, 2017).
Sutherland was first registered in 1993 and by 1994 he was registered with FINRA member firm Money Concepts Capital Corp. The AWC asserts that he has no disciplinary history.
Business Related EmailF
As is typical within the FINRA member firm community, Money Concepts provided its associated persons with a firm-sponsored email address for use in business-related communications. The AWC asserts that the firm's written supervisory procedures ("WSP"):
- mandated that all business-related-email-communications be conducted through the sponsored email address,
- prohibited the use of personal email accounts for business-related communications, and
- communicated this prohibition to its representatives each year in its annual compliance questionnaire.
The AWC alleges that between September 2013 and April 2015, Sutherland used his personal email address for communications to a customer related to his securities business. The AWC asserts that Money Concepts did not have access to Sutherland's personal email account; and, accordingly, the firm was unable to preserve, maintain, and timely review these communications.
FINRA Rule 2210
In pertinent part, FINRA Rule 2210: Communications with the Public states:
(d) Content Standards
(1) General Standards
. . .
(B) No member may make any false, exaggerated, unwarranted, promissory or misleading statement or claim in any communication. No member may publish, circulate or distribute any communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading. . .
The AWC alleges that during December 2014, Sutherland sent emails containing inaccurate, exaggerated, unwarranted or promissory representations pertaining to a single security to three individuals. As set forth by way of example in the AWC:
[I]n one of the emails, Sutherland claimed that the issuer had "no debt." Although Sutherland obtained that information from public releases provided by the issuer, that information was not accurate and was misleading.
Sanctions
In accordance with the terms of the AWC, FINRA imposed upon Sutherland a $5,000 fine and a 15-business-day suspension from association with any FINRA member in any capacity.
Bill Singer's Comment
Sutherland's improper use of his personal email account for business-related communications, I get. It's his alleged false statement about the "no debt" that I don't get.
To start off with, let's consider Sutherland's purported violation of FINRA Rule 2010(d)(1)(B) -- wow, do I like writing that out because it's so many numbers and letters and makes me seem so sophisticated about regulation. The only thing better would be a citation including a Roman numeral and one of those cute little "i" strings: Just imagine how smart you would seem if you could cite a rule along the lines of Rule 56789(m)(IV)(F)(iii). Getting back to Sutherland's violation of FINRA Rule 2010(d)(1)(B), let's read the first sentence in the subparagraph:
(B) No member may make any false, exaggerated, unwarranted, promissory or misleading statement or claim in any communication. . .
According to FINRA Rule 2010(d)(1)(B) it's a violation to simply "make" a "false, exaggerated, unwarranted, promissory or misleading statement or claim in any communication." There's nothing in that first sentence about knowing what you're saying is false. It's what we lawyers call a strict liability provision. In contrast, let's read the second sentence of subparagraph (B):
No member may publish, circulate or distribute any communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading. . .
By way of recap, as set forth in the subparagraph's first sentence, if I "make" a false statement, the Rule says that I am strictly liable. On the other hand, as set forth in the subparagraph's second sentence, if I "publish, circulate or distribute" an untrue statement, then it's only a violation if I know or have reason to know it's untrue? As such, there's a big difference between making a statement (strict liability) and publishing, circulating, or distributing a statement (a violation only if you knew or should have known of the falsehood). To add a further interpretative twist, why does the first sentence refer to a "false" statement but the second sentence refers to an "untrue statement?" Again, this isn't supposed to be pulp fiction -- this is a rule that will be cited in charges against a respondent. The hallmarks of any competent regulatory scheme is consistency and precision of language. It is critical to say what you mean and mean what you say so that folks are on notice of what is prohibited, particularly when their infractions could result in a fine, suspension, or bar.
According to the AWC, Sutherland claimed in one and only one email that an issuer had "no debt." As it turns out, that issuer apparently had some debt. Accordingly, if Sutherland knew that the issuer had debt before he said that it didn't, then he was likely lying. On the other hand, if Sutherland didn't know that the issuer had debt before he said that it didn't, then he may have been mistaken -- whether that mistaken belief is defensible would likely depend upon whether Sutherland "should have known" that his representations were not based upon reliable information. In addressing this threshold issue, the AWC says that "Sutherland obtained that information from public releases provided by the issuer." If Sutherland concluded that the issuer had no debt based upon the issuer's public release, then why was he charged with having violated a rule premised on his knowing that his statement of "no debt" was untrue? There is not even a suggestion in the AWC that the issuer had intentionally lied in its press release or that Sutherland was on notice that the "no debt" representations was untrue.