An irreverent Wall Street Blog
FINRA Notice To Members 19-10 Should Have Said What It Meant
April 8, 2019
As I understood the Ten Commandments -- particularly as presented in Technicolor in the 1956 Cecile B. DeMille movie with Charlton Heston as Moses -- the "Thou Shall Nots" were things that you "must" not do. Shall is not "should." The word "shall" does not invite negotiation or debate. Shall is not a suggestion. After all, it was all carved in stone and considered the law from on high.
Say What You Mean, and, Mean What You Say
When drafting rules, promulgating them, and enforcing them, words matter. As the March Hare admonished Alice:
"Then you should say what you mean," the March Hare went on."I do," Alice hastily replied; "at least -- at least I mean what I say -- that's the same thing, you know.""Not the same thing a bit!" said the Hatter. "You might just as well say that 'I see what I eat' is the same thing as 'I eat what I see'!"
Speaking of saying what you mean and meaning what you say, let's consider several FINRA Rules (and note my highlighting of various words):
Rule 2010. Standards of Commercial Honor and Principles of TradeA member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.Rule 2020. Use of Manipulative, Deceptive or Other Fraudulent DevicesNo member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.Rule 2040. Payments to Unregistered Persons(a) GeneralNo member or associated person shall, directly or indirectly, pay any compensation, fees, concessions, discounts, commissions or other allowances to: . . .Rule 2080. Obtaining an Order of Expungement of Customer Dispute Information from the Central Registration Depository (CRD) System(a) Members or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief. . .Rule 2090. Know Your CustomerEvery member shall use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer. . .Rule 2111. Suitability(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer . . .Rule 3280. Private Securities Transactions of an Associated Person(a) ApplicabilityNo person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule. . .
Hmmm . . . is there a difference between "shall" and "must"? Consider this explanation from "What's the only word that means mandatory? Here's what law and policy say about 'shall, will, may and must.'" (Federal Aviation Administration, Plain Language Initiative) https://www.faa.gov/about/initiatives/plain_language/articles/mandatory/:
[U]ntil recently, law schools taught attorneys that "shall" means "must." That's why many attorneys and executives think "shall" means "must." It's not their fault. The Federal Plain Writing Act and the Federal Plain Language Guidelines only appeared in 2010. And the fact is, even though "must" has come to be the only clear, valid way to express "mandatory," most parts of the Code of Federal Regulations (CFRs) that govern federal departments still use the word "shall" for that purpose.With time, laws evolve to reflect new knowledge and standards. During this transition, "must" remains the safe, enlightened choice not only because it imposes clarity on the concept of obligation, but also because it does not contradict any instance of "shall" in the CFRs." Right now, federal departments go through their documents to replace all the "shalls" with "must." It's a big hassle. If you look at page A-2, section q (PDF) of this link, it shows a sample of how a typical federal order describes this shift from "shall" to "must." Don't go through this tedious process. If you mean mandatory, write "must." If you mean prohibited, write "must not."
I'm sure the good folks at FINRA are not happy with the revelation that their rulebook inappropriately conflates the words "shall" and "must." Worse, FINRA persists is retaining certain rules of its predecessor NASD on its books. Nothing like combining the inarticulate with the outdated! When it comes to drafting and promulgating its various rules, FINRA clearly intends that "shall" means "must," and that "must" means that you are absolutely, positively required to do something. Although FINRA is welcome to argue that it's use of "shall" is merely precatory or aspirational, that would produce the absurd result that many of the self-regulatory-organization's most important antifraud and pro-consumer rules are only meant as wishful thinking and not to proscribe misconduct. To prove that point, consider how that would alter FINRA's cornerstone Rule 2010:
FINRA Rule 2010. Standards of Commercial Honor and Principles of TradeA member, in the conduct of its business, should observe high standards of commercial honor and just and equitable principles of trade.
FINRA NTM 19-10 Should Have Been A Contender
On April 5, 2019, FINRA published Regulatory Notice 19-10, which is titled: "Customer Communications / FINRA Provides Guidance on Customer Communications Related to Departing Registered Representatives" ("FINRA NTM 19-10")
http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-19-10.pdf , which in pertinent parts states:
Background and DiscussionFINRA has consistently sought to ensure that customers can make a timely and informed choice about where to maintain their assets when their registered representative (i.e., a person registered with the member who has direct contact with customers in the conduct of the member's securities sales) leaves a member firm. Accordingly, FINRA expects that:1. in the event of a registered representative's departure, the member firm should promptly and clearly communicate to affected customers how their accounts will continue to be serviced; and2. the firm should provide customers with timely and complete answers, if known, when the customer asks questions about a departing registered representative.Registered Representative DeparturesRegistered representatives move with some frequency between member firms and across financial firms under various regulatory jurisdictions, such as investment advisory firms and insurance companies. In addition, registered representatives may leave the financial industry entirely. A registered representative's departure may prompt customer questions about the departing representative and the status of their accounts following the departure. FINRA recognizes that member firms' different business models give rise to different approaches to managing the customer relationship, and that the expectations regarding a member firm's handling of a departing registered representative will vary accordingly. For instance, the departure of a registered representative who works closely with customers in a one-on-one relationship will likely be handled differently than the departure of a registered representative in a customer advisory center model or a group service model. While member firms have flexibility in reassigning customer accounts and communicating with customers about the reassignments, they should provide timely and complete answers, if known, to all customer questions resulting from a departing representative, so that customers may make informed decisions about their accounts.Communications with CustomersCustomers should not experience an interruption in service as a result of a registered representative's departure. FINRA understands that decisions about the reassignment of customer accounts, if applicable, are typically made promptly following the departure of a registered representative. In the event of a registered representative's departure, FINRA expects that the member firm will have policies and procedures reasonably designed to assure that the customers serviced by that registered representative are aware of how the customers' account will be serviced at the member firm, including how and to whom the customer may direct questions and trade instructions following the representative's departure and, if and when assigned, the representative to whom the customer is now assigned at the member firm. In addition, a member firm should communicate clearly, and without obfuscation, when asked questions by customers about the departing registered representative. Consistent with privacy and other legal requirements, these communications may include, when asked by a customer:1. clarifying that the customer has the choice to retain his or her assets at the current firm and be serviced by the newly assigned registered representative or a different registered representative or transfer the assets to another firm; and2. provided that the registered representative has consented to disclosure of his or her contact information to customers, providing reasonable contact information, such as phone number, email address or mailing address, of the departing representative.FINRA would not expect a member firm to seek to obtain the departing registered representative's contact information if not known by those responsible for reassigning and continuing to service the account (e.g., the branch supervisor responsible for reassigning the customer account or newly assigned registered representative) at the time of a customer's question. As with all communications with customers, information provided by the member firm about the departing registered representative must be fair, balanced and not misleading.
So . . . you might be wondering, and, as such, you might ask: What's wrong with FINRA NTM 19-10? To which I would answer: virtually everything. Remember those biblical, civics, and FINRA statutory interpretation lessons that I raised above? Well, now would be a good time to recall them. Allow me to slowly dissect FINRA NTM 19-10.
FINRA NTM 19-10 Quote:
FINRA has consistently sought to ensure that customers can make a timely and informed choice about where to maintain their assets when their registered representative (i.e., a person registered with the member who has direct contact with customers in the conduct of the member's securities sales) leaves a member firm.
Absolute, unadulterated bull-shit. There is no such history. There is not such effort. FINRA's actions are motivated and directed by its member firms. So-called Wall Street "stakeholders" representing public customers and industry associated persons are disenfranchised from any voting role at FINRA. Consequently, what FINRA has consistently sought to ensure is that customers make choices that cater to the needs and desires of FINRA's member firms. If FINRA can pretend and persuade that its actions are designed to ensure informed, fair, consumer choice, well, you know, that's all the better -- but that's not the impetus or the goal. All of which explains FINRA's tepid and inadequate response to revelations of unauthorized account openings by its major member firms and those firm's disgraceful retaliatory attacks against whistleblowers. Please note that an "NTM" is a Notice to Members, who are FINRA's member firms. That's not a notice to the Public. That's not a notice to Customers. That's not a notice to the industry's hundreds of thousands of associated person.
If FINRA were truly an impartial Wall Street regulator, then its drafting and promulgating of NTM 19-10 should have been preceded and accompanied by the convening of a representative panel of registered representatives and a separate representative panel of customers/customer-advocates; and the regulator should have solicited input and recommendations from both panels. How sincere was FINRA's motivation in drafting NTM 19-10? Did the self-regulatory-organization approach informed customer choice from an impartial perspective? Not if past is prologue. As reported in "Finra to Breakaway Brokers, Firms: Fight It Out" (Barron's, Jan. 5, 2018) https://www.barrons.com/articles/finra-to-breakaway-brokers-firms-fight-it-out-1515185626:
Finra is apparently going to let brokerages and breakaway brokers fight it out over the issue of who owns the client.A spokeswoman for the regulator tells FinancialAdvisorIQ that it takes no position on the debate, and adds that Finra isn't involved in the broker protocol. Finra has arbitration rules to handle disputes, but no who-owns-the-customer rule.
Similarly, as reported in "Finra Refuses to Get Embroiled in 'Who-Owns-the-Customer' Debate" (Financial Advisor IQ, January 5, 2018) http://financialadvisoriq.com/c/1843923/211733:
Finra isn't going to intervene in the "who-owns-the-customer" debate that's resurfaced in the financial advisory industry because of the three high-profile exits of Morgan Stanley, UBS and Citigroup from the Protocol for Broker Recruiting.The broker protocol "is an agreement between the firms, so Finra is not part of it," a Finra spokeswoman tells FA-IQ in reaction to suggestions received by the publication about the regulator's role in defining who owns the customer - the broker-dealer firms or the advisors.The spokeswoman adds that Finra doesn't have a position on this particular debate.FA-IQ's straw poll of advisors shows 91% believe they themselves own the customers, their account information and the right to service their assets. The rest believe the firm owns them.
So much for pre-emptive Wall Street regulation. FINRA is going to let its member firms and their former employees fight it out. FINRA takes no position on the debate. FINRA isn't going to intervene.
When a rep departs a FINRA member firm, be that by resignation or discharge, a battle necessarily ensues as to the respective rights of that employee and the former employer to retain or transfer customers. Frankly, I've never really accepted that there is any debate as to who owns the customer: The customer owns himself or herself; and it is up to the customer whether to stay or go. As to how a FINRA member firm and its former rep should conduct their affairs when communicating with the customer about staying or transferring is another issue. The problem with FINRA NTM 19-10, is that we have what I consider a biased and conflicted regulator -- who is often little more than a lapdog for its Large Member Firms and which often conducts itself as indistinguishable from a glorified trade organization -- arrogating to itself the right to set the rules for how its members and their former reps should seek to communicate with customers about remaining at the firm or transferring with the former rep to his or her new shop. Notably, I received no response whatsoever to "Who Owns The Customer? Open Letter To FINRA Board From Bill Singer Esq" (An Open Letter to the Financial Industry Regulatory Authority Board of Governors / January 8, 2018)
http://www.brokeandbroker.com/3761/who-owns-customer/, which stated in part:
http://www.brokeandbroker.com/3761/who-owns-customer/, which stated in part:
In conclusion, the Broker Protocol is a self-serving agreement negotiated among employers/management and imposed without benefit of bargaining upon employees/labor and foisted upon equally disenfranchised public investors. There is no place for such fiat within self-regulation -- except, you know, the FINRA Board of Governors sat in silence as its large member firms sliced and diced control of public customers among themselves and then forced the convention upon their employees, smaller firms, and customers. Now, as that private agreement dissolves, the Board again gives silent assent. In resolving "who owns the customer," FINRA's role is not that of a combatant but as the protector of the public investor and the industry. As members of the Board of Governors, your role is to act when your intervention is necessary, and this is such a moment in time. For once, assert your independence and protect the public and the industry. No one is asking you take sides. Embrace the task of corporate governance and do your job.
As evidenced by FINRA NTM 19-10, FINRA's Board did not rise to the challenge. That's not an unexpected outcome. It is merely further proof that FINRA's Governors are co-opted by powerful industry interests and unwilling to antagonize such patrons. It is yet another example of the lack of fairness in structuring a so-called Wall Street self-regulatory-organization on a framework that limits the vote to only member firms to the exclusion of such mission-critical stakeholders as public customers and associated persons. Beyond its failed record of consumer advocacy, FINRA refuses to enter the fray on behalf of fairer policies for hundreds of thousands of industry registered representatives. Notably, FINRA did not draft the Broker Protocol and refused to involve itself in that agreement's expansion and decline. Similarly, FINRA has compiled a regulatory record as a quasi-collection-agent for its member firms per unpaid awards on promissory notes/EFLs, but there is no such record reflective of FINRA's regulation when its member firms fail to pay or fail to timely pay fees and/or commissions. Additionally, FINRA has rarely taken on weaponized Forms U5 or invoked its regulatory arsenal when confronted with evidence of workplace discrimination/harassment.
FINRA NTM 19-10 Quote:
2. the firm should provide customers with timely and complete answers, if known, when the customer asks questions about a departing registered representative.
This is as shameful a bit of garbage as FINRA has ever published. A firm "should" provide its public customers with timely and complete answers? Should? Should?? Not "shall" or "must" as is used throughout so many FINRA Rules. Only "should." What a wonderful bit of dissembling. In using "should," FINRA dilutes FINRA NTM 19-10 to a relatively meaningless aspiration for its member firms to be honest with their customers concerning the facts about a departing registered rep. What is enraging about this FINRA statement is that FINRA is the same organization that owns and operates BrokerCheck. https://brokercheck.finra.org/ Let's visit the "Why Use BrokerCheck?" page and see what it says:
BrokerCheck is a free tool to research the background and experience of financial brokers, advisers and firms.. . .BrokerCheck helps you make informed choices about brokers and brokerage firms-and provides easy access to investment adviser information.. . .BrokerCheck tells you instantly whether a person or firm is registered, as required by law, to sell securities (stocks, bonds, mutual funds and more), offer investment advice or both.. . .BrokerCheck gives you a snapshot of a broker's employment history, regulatory actions, and investment-related licensing information, arbitrations and complaints. . .
So, lemme see here, BrokerCheck is a "free tool" that allows public customers to "research the background and experience" of their brokers. It is a tool that helps those customers "make informed choices" about their stockbrokers. It is a tool tells public customers "instantly whether a person or firm is registered . . ." It is a tool that gives public customers a "snapshot of a broker's employment history . . ." Why doesn't FINRA NTM 19-10 require member firms to provide the public customers of departed registered reps with the direct link to a rep's BrokerCheck page? After all, BrokerCheck does disclose a rep's current places of employment and registration. Why isn't that link printed on each and every confirmation and statement sent by FINRA's member firms to their customers? And, no, I'm not talking about a gateway link to BrokerCheck, which then requires assent to terms of use and a click to an entry page and then a click to a more detailed report. I'm asking why there isn't a published direct-link via one-click that will immediately present any public customer with the current contact information for their current or former stockbroker. Why wouldn't FINRA state that its member firms "shall" disclose such information in response to any query from any customer as to the whereabouts of their former servicing stockbroker? Oh yeah, I can think of a reason: BrokerCheck might disclose where that stockbroker is now working and that would inhibit the former employer's ability to play hide-and-seek in an effort to frustrate the customer's ability to locate and contact the former stockbroker and, omigod, transfer their account to the new firm. By default, FINRA has championed its member firms' insistence that they, and they alone, "own" the customer account.
FINRA NTM 19-10 Quote:
[W]hile member firms have flexibility in reassigning customer accounts and communicating with customers about the reassignments, they should provide timely and complete answers, if known, to all customer questions resulting from a departing representative, so that customers may make informed decisions about their accounts.
Seriously? Wall Street's self-regulatory-organization thinks that when a customer's account is being reassigned, that the member firm "should" provide timely and complete answers? And the acceptable alternative to that course of action is what? A FINRA member firm doesn't have to provide timely and/or complete answers but is given permission to jerk the customer around so as to trash the former rep's ability to communicate with the customer and frustrate the customer's ability to make an informed choice? Moreover, what is this crap about "if known?" FINRA maintains BrokerCheck. FINRA has access to the Central Registration Depository. Overnight, FINRA could create an online database providing public customers with easy, one-click access to their former stockbroker's contact information when such information is available. Yes, I understand that it may take a day or two for CRD to be informed by the new FINRA member firm of the registration of the departed rep from the former firm. And yes, I understand that a given rep may not want to provide any contact information if leaving the industry. All of which are easily addressed in far better fashion than suggesting that FINRA member firms "should" (but not "shall" or "must") provide timely and complete answers to public customers.
FINRA NTM 19-10 Quote:
[I]n addition, a member firm should communicate clearly, and without obfuscation, when asked questions by customers about the departing registered representative. . .
Yet again I ask: Seriously? Wall Street's self-regulatory-organization thinks that the member firm "should" communicate clearly, and without obfuscation? Amazing, isn't it, how you can almost sense FINRA's discomfort with having to publish FINRA NTM 19-10, and you can almost see, if you look long enough and carefully enough, the surreptitious hand of its Large Member Firms drafting and re-drafting this nonsense parading as regulation. When you come to a red light at an intersection, you should come to a full stop -- mind you, you don't have to come to a full stop, you are not being told that you "must" come to a full stop, so, you know, it's all open to interpretation and how you're feeling, and, well, have a nice day.
FINRA NTM 19-10 Quote:
FINRA would not expect a member firm to seek to obtain the departing registered representative's contact information if not known by those responsible for reassigning and continuing to service the account (e.g., the branch supervisor responsible for reassigning the customer account or newly assigned registered representative) at the time of a customer's question. . .
Of for godsakes: Seriously? Wall Street's self-regulatory-organization "would not expect" a firm to make every effort to provide the contact information of a former rep to one of the firm's customers? FINRA can't even muster up a lousy "should" here but, in its place, it opts for whatever the hell "would not expect" is supposed to signal. Again, why didn't FINRA NTM 19-10 state that a member firm "shall" provide a direct link to a former rep's BrokerCheck. Similarly, why didn't FINRA NTM 19-10 also state that in addition to the direct-link to BrokerCheck, a member firm must provide the former rep's CRD number and a direct telephone number and/or email address for a FINRA staff member authorized to provide that rep's last known contact information to an inquiring public customer?
In the end, what a colossal waste of time FINRA NTM 19-10 is, and what an embarrassment. You tell me -- what the hell is the point of publishing a notice to the regulator's member firms when the only point of the document is to suggest what members "should" do and to inform them what FINRA "would not expect"?