FINRA Censures and Fines Firm Over Supervision of Watch and Restricted Lists

May 6, 2019

Oh the games people play. Oh the game regulators play. Oh the games FINRA plays. In today's blog, we consider the plight of a FINRA member firm and its seemingly all-in-one executive known but to FINRA -- well, sort of. But for the self-regulator's silliness in hiding the apparent malefactor's name, the regulatory settlement is a useful exercise in how to better supervise employee trading and to implement watch and restricted lists.

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, Midtown Partners & Co.. LLC, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Midtown Partners & Co., LLC, Respondent (FINRA AWC 2016051196101, May 2, 2019)
http://www.finra.org/sites/default/files/
fda_documents/2016051196101%20Midtown
%20Partners%20%26%20Co.%2C%20LLC
%20CRD%20104223%20AWC%20va.pdf

The AWC asserts that Midtown Partners has been a FINRA member firm since 2000 with one office and eight registered individuals, and the firm is primarily involved in underwriting and does not carry any customer accounts.

Past as Prologue

Under the heading "Relevant Disciplinary History," the AWC lists:

2011 FINRA Offer of Settlement whereby the firm was Censured and fined $30,000 for:

failing to have a reasonable system of supervision. including written supervisory procedures. regarding information barriers. It failed to maintain a watch list and to reasonably maintain a restricted list, and failed to review trading in employee accounts to identify trading in securities on the restricted list;
- and -

2016 FINRA AWC whereby the firm was Censured and fined $5,000 for:

failing analyze any potential business conflicts between the firm and a
representative's outside business activity and to determine whether the outside
activity should he characterized as involving private securities transactions, both
of which were required by the firm's written supervisory procedures.

Trading in Restricted/Watch List Stocks

The AWC alleges that in early December 2013, Midtown's Chief Executive Officer, President. Chief Compliance Officer and Chief Financial Officer began discussing a possible registered direct-offering engagement with an issuer. The AWC references the firm's CEO, President, CCO, and CFO only as "JC."

SIDE BAR: The FINRA AWC declines to name the name of Midtown's CEO, President, CCO, and CFO (all of those titles are united under one and only one executive)? Keep in mind that Midtown is a FINRA member firm with only one office and only eight registered folks. At some point, FINRA's hide-and-seek policy gets both absurd and silly. After all, if you visit FINRA's online BrokerCheck website and do nothing more than type in the name "Midtown Partners, " you are directed to a report as of May 6, 2019, that discloses under the heading "Direct Owners and Executive Officers," three and only three names:
"75% or more' owner Apogee Financial Investments, Inc;
"10% but less than 25%" owner India Globalization Capital, Inc.; and
"Less than 5%" owner "CLARKE, JOHN ROBERT," who is also listed as holding the "Position" of "CEO/CFO/FINOP/PRESIDENT/CCO/AMLCO" as of "01/2009."
Sadly, FINRA's secret AWC code remains impenetrable and I have no idea how anyone will ever be able to figure out the indentity of "JC." If you are able to crack FINRA's multi-faceted and multi-layered code, please contact the BrokerAndBroker.com Blog with your findings . . . he says with dripping sarcasm and a sardonic smile.

On the Watch List

In any event, the AWC alleges that on December 2, 2013, Midtown added to its "Watch List," the direct-offering issuer; and, thereafter, on March 31, 2014, Midtown entered into a selling agreement for an S3 offering. Because of what the AWC characterizes as "an unexpected delay," the offering did not close overnight as anticipated but took two days -- as a result, the issuer was added to the firm's Watch List on the subsequent closing date and not upon the execution of the selling agreement.

On the Restricted List

The issuer remained on the Watch List until May 22, 2014, at which time it was placed on the Midtown's "Restricted List," because of the firm's discussions about a separate investment-banking engagement with the same issuer.

Midtown's WSPs: Watch/Restricted Lists

As explained in part in the AWC:

Pursuant to its written supervisory procedures, Midtown maintained watch and restricted lists governing employee trading in securities of issuers with which Midtown was considering entering into, or had entered into. an investment banking relationship. Securities were to be added to the watch list when Midtown received or became likely to receive material non-public information, or was engaged to provide certain services to the issuer. Those persons who were involved in the assessment of a potential transaction with an issuer on the watch list were precluded from trading securities of that issuer. If Midtown was engaged as a placement agent for an offering, or if the issuer became subject to an information barrier, the stock was added to the restricted list, which precluded any trades by any employees of the firm. Thus, employees who were involved in assessing a potential transaction were prohibited from trading in watch list stocks of the issuer, and all employees were prohibited from trading in restricted list stocks.

JC's Sales

Notwithstanding Midtown's Watch List and Restricted List written supervisory procedures ("WSPs"), on May 21, 2014, while the issuer's stock was on the firm's Watch List, "JC" allegedly sold 20,000 previously-acquired shares of the issuer; and on May 28, 2014, while the issuer's stock was on the firm's Restricted List, "JC" allegedly sold 10,000 shares. The AWC states that the 30,000 shares were sold "in an account outside Midtown" but concedes that statements were sent to Midtown.

FINRA Supervisory Violations

The AWC asserts in pertinent part that:

Although Midtown maintained the required lists, it failed to conduct review s of JC"s trading, which would have led to the detection of trading in stock of an issuer on the firm's watch and restricted list. Part of this failure was attributable to the firm's failure to designate a principal to supervise JC, as discussed further below.

By virtue of the foregoing, Midtown violated NASD Rules 3010(a) and (b), and thereby also violated FINRA Rule 2010.

Additionally, the AWC asserts that from January 2014 through December 2016, Midtown's supervisory system failed to designate anyone to supervise "JC," in apparent violation of NASD Rule 3010(a)(5) and its successor, FINRA Rule 3110(a)(5).

Sanctions

In accordance with the terms of the AWC, FINRA imposed upon Midtown a Censure and $50,000 fine. Additionally, Midtown agreed to certify to FINRA within 60 days that it has "established and implemented policies, procedures, and internal controls reasonably designed to address and remediate the issues identified. . . ."

Bill Singer's Comment

Oh how I wish that we could figure out just who "JC" is, but, alas, FINRA has put in place a sophisticated code that makes it impossible --- impossible, I say! -- to uncover the JC's identity. I note that the AWC is signed by a "John R. Clarke" on behalf of Midtown. Maybe that's a hint as to the hidden identity of "JC"?

It's tough to get beyond the fact that "JC" is the individual who engaged in the trading that caused Midtown to fail to reasonably supervise; however, FINRA won't disclose, even in a lousy footnote, even in a embedded link, the name of this apparent malefactor. No . . . JC's conduct doesn't amount to anything that appears to have endangered a public customer or necessarily resulted in meaningful harm. Be that as it may, given JC's apparent pivotal role at Midtown coupled with his role as the "cause" in the cause-and-effect chain of his member firm's Censure and $50,000 fine, why did FINRA hide his name behind two capital letters. Oh, the games people play . . . and the games FINRA plays.