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FINRA Baseball Caps, Rice Krispies Treats, Hiring Spree, and ZOOM OTRs
May 1, 2020
35-year-old mother of two and pregnant nurse Sylvia Licin took care of coronavirus patients in Brooklyn until she got the virus herself. After Licin went on a ventilator, her heart stopped and her brain lost four minutes of oxygen before she was revived. She now needs specialized rehab at a center for brain injury. Each of us can rarely change the world but we can often change at least one person's life for the better. Please, if you can, donate to Sylvia Licin at her GoFundMe page:
https://www.gofundme.com/f/help-a-front-line-nurse-and-baby-get-proper-care
https://www.gofundme.com/f/help-a-front-line-nurse-and-baby-get-proper-care
Three weeks ago, I noted in "Personal note from Bill Singer -- Not the time for FINRA to ZOOM through witnesses' rights" (Securities Industry Commentator / April 7, 2020)
http://www.rrbdlaw.com/5153/securities-industry-commentator/#zoom, that I had been receiving complaints about "demands" from FINRA that witnesses participate in ZOOM/teleconferenced on-the-record interviews ("OTRs"). Witnesses and their lawyers related to me their concerns about their inability to meet in person in order to prepare for the OTR, the lack of privacy at home while they were self quarantining, the lack of a court reporter, the lack of bandwith, and the expected diminution in the quality of any ensuing transcript given the multiple remote parties and the multiple platforms involved in the OTR. It may well be that the concerns noted above were merely prompted by misunderstandings or that, by now, FINRA has taken steps to better address the issues. Regardless, my role in our industry is to raise such problems when they are brought to my attention. And I did. Unfortunately, there has been no response from FINRA. That's not merely disappointing. That's shameful and insensitive.
http://www.rrbdlaw.com/5153/securities-industry-commentator/#zoom, that I had been receiving complaints about "demands" from FINRA that witnesses participate in ZOOM/teleconferenced on-the-record interviews ("OTRs"). Witnesses and their lawyers related to me their concerns about their inability to meet in person in order to prepare for the OTR, the lack of privacy at home while they were self quarantining, the lack of a court reporter, the lack of bandwith, and the expected diminution in the quality of any ensuing transcript given the multiple remote parties and the multiple platforms involved in the OTR. It may well be that the concerns noted above were merely prompted by misunderstandings or that, by now, FINRA has taken steps to better address the issues. Regardless, my role in our industry is to raise such problems when they are brought to my attention. And I did. Unfortunately, there has been no response from FINRA. That's not merely disappointing. That's shameful and insensitive.
Lost in FINRA's apparent misguided policy to pressure folks into waiving the traditional format of an in-person OTR conducted at a nearby FINRA office, is that the United States Constitution regulates only the Government, not private parties. As such, if an aggrieved witness seeks to assert that his or her Due Process rights were violated when FINRA threatened to impose regulatory sanctions solely based upon a refusal to participate in a ZOOM OTR, that party would have to demonstrate that FINRA's demand for the teleconferenced OTR constituted a form of so-called "state action."
In the Matter of Department of Enforcement, Complainant, v. Robert R. Tweed, Respondent (FINRA National Adjudicatory Council Decision, Complaint No. 2015046631101 / December 11, 2019)
https://www.finra.org/sites/default/files/fda_documents/2015046631101
%20Robert%20R.%20Tweed%20CRD%202339324%20
\%20NAC%20Decision%20va.pdf, FINRA's NAC clearly states on Page 11 of its Decision that [Ed: highlighting added]:
Tweed argues that the Hearing Panel erred in finding that the statute of limitations does not apply because, according to Tweed, "FINRA disciplinary decisions are appealable to the Securities and Exchange Commission and the United States Courts of Appeal[s], which make them governmental or, at the very least, quasi-governmental actions subject to "the statute of limitations. The SEC previously has considered and rejected this argument, finding that FINRA is not a governmental entity and therefore not bound by any statutory limitations period. See, e.g., William J Murphy, Exchange Act Release No. 69923, 2013 SEC LEXIS 1933, at *92-93 (July 2, 2013) ("But [Section] 2462 does not apply to FINRA disciplinary proceedings because FINRA is not a government entity. Indeed, we have repeatedly held that 'the disciplinary authority of private self-regulatory organizations ('SROs') such as [FINRA] is not subject to any statute of limitation."), aff'd sub nom. Birkelbach v. SEC, 751 F.3d 472 (7th Cir. 2014).
Similarly, in Department of Market Regulation, Complainant, v. Alex Lubetsky, Respondent (Decision, FINRA Office of Hearing Officers, Expedited Proc. No. FBI140011, STAR No. 20110297130-02 / March 12 2015)
https://www.finra.org/sites/default/files/OHO_9550Expedited_Lubetsky_FPI140011_0.pdf, FINRA suspended Respondent Lubetsky with the threat of a follow-on Bar for his refusal to provide testimony at an OTR. In Lubetsky, FINRA's OHO asserts that it is not a governmental actor and, as such, there are no Due Process rights or other Constitutional protections [Ed: footnotes omitted and highlighting added]:
[In] June 2014, in connection with its investigation and pursuant to Rule 8210, Market Regulation issued a written request for Lubetsky to appear for an OTR.7 The Rule 8210 request scheduled Lubetsky's testimony for July 8, 2014. Attached to the request was an Addendum informing Lubetsky that: (1) he was "obligated, under FINRA rules, to answer all questions asked by FINRA staff;" (2) FINRA "is not a governmental agency, and thus, does not recognize the Fifth Amendment privilege against self-incrimination in any of its proceedings, including an OTR;" (3) should he "refuse to answer any questions based on an assertion of the privilege, [he] may be subject to a FINRA disciplinary action and the imposition of sanctions, including a bar from the securities industry, suspension, censure, and/or fine;" and (4) "FINRA is subject to oversight by the SEC and routinely provides the SEC with access to its files.". . .In response, Market Regulation told Lubetsky that his Fifth Amendment claim was meritless; that FINRA was not a governmental agency and did not recognize the Fifth Amendment; and that if he refused to answer questions by asserting this privilege, he may be subject to disciplinary action, including a bar. Additionally, Market Regulation denied that it was coordinating its investigation with the SEC, and represented that its inquiry was independent of, and separate from, any existing governmental inquiry relating to his conduct. Market Regulation then asked Lubetsky a few additional questions, including where he worked before joining Lek, but Lubetsky declined to answer these questions, relying on the Fifth Amendment. Market Regulation again reminded Lubetsky that his refusal to answer questions could lead to disciplinary action, including a bar. Lubetsky reaffirmed his decision not to answer any more questions, and Market Regulation terminated the OTR.
Pointedly, in briefs that FINRA regularly submits to the SEC, the self-regulator admits that it is not a governmental actor and Due Process protections do not apply; e.g., "FINRA's Brief In Opposition to Application for Review In the Matter of the Application of The Association of Robert J. Escobio with Southern Trust Securities, Inc." (Brief submitted to SEC, November 24, 2017) [Ed: emphasis added]
https://www.sec.gov/litigation/apdocuments/3-18143-event-10.pdf:
https://www.sec.gov/litigation/apdocuments/3-18143-event-10.pdf:
Footnote 15: Further, the Commission's precedent discussed herein belies Escobio's argument that adjudicating the Application while his appeal of the Judgment was pending denies him of due process or is otherwise unfair. See infra Part III.A. I. In any event, FINRA is not a state actor such that constitutional due process rights apply in FINRA proceedings. See D.L. Cromwell Jnvs., .lnc. v. NASD Regulation, Inc., 279 F.3d 155, 162 (2d Cir. 2002) (stating that it is a well-settled principle that FINRA is not a governmental actor); Charles C. Fawcett, Exchange Act Release No. 56770, 2007 SEC LEXIS 2598, at *13-14 (Nov. 8, 2007) (same); see also Robert J. Prager, 58 S.E.C. 634, 662-63 (2005) (holding that in determining the fairness of FINRA's proceedings, the Commission looks to whether the proceedings were conducted in accordance with FINRA's rules and whether FINRA implemented its procedures fairly).
Without the protection of Due Process, no one subject to an OTR demand should take FINRA's insistence lightly. The consequences of testimony provided during an OTR can lay the foundation for the imposition of significant fines and crippling suspensions/Bars -- all of which are added on top of considerable legal fees incurred in such regulatory investigations and hearings. All the more reason to hit the Pause button before logging on to an outdated home computer, competing with your self-quarantined family for bandwith, and participating in a six-hour OTR while you are in a one-bedroom apartment within ear-shot of your spouse and children. Sure, when I put it that way it seems unfair for FINRA to pressure a witness into agreeing to a teleconferenced OTR. Sure, when I put it that way, you would like to raise the protection of Due Process -- to insist that you are, at a minimum, entitled to fairplay.
Frankly, FINRA just doesn't seem concerned about fairness. Given the stories that I've heard, FINRA is content to twist arms during a pandemic in an effort to force participation in teleconferenced OTRs, and, as I've heard more recently, in NAC hearings. Which is NOT to suggest -- not even remotely -- that a witness or respondent might not want to voluntarily opt for the videoconference. In such cases, go for it. I have no objections to a non-coerced teleconference involving an OTR or a hearing. On the other hand, FINRA needs to learn that a "no" means a "no" when it comes to asking if a witness will agree to a teleconferenced OTR or hearing. As I noted in my April 7th Securities Industry Commentator article:
In these dire times, FINRA must ensure that Staff is not unfairly pressuring pro se witnesses or threatening witnesses represented by counsel for refusing to participate in a teleconferenced OTR during the COVID-19 pandemic. With many industry professionals working from home and unable to go to their branches or offices, this is not the time for FINRA to strong-arm smaller firms and individual men and women into waiving their meager rights when answering Staff questions during an OTR. In my various communications with associated persons and industry counsel on this issue, I am urging them to communicate with FINRA senior staff and Board members in the event that investigative Staff unreasonably refuses to reschedule an OTR during the COVID-19 pandemic. . . .
Unfortunately, FINRA's senior management and Board of Governors have not responded in a compassionate manner and have not published a comprehensive position on "forcing" teleconferenced OTRs or hearings. Despite having posted helpful links (and I note that in all sincerity) at https://www.finra.org/rules-guidance/key-topics/covid-19, FINRA has not shown much empathy for the plight of the hundreds of thousands of men and women who are largely out of work or sheltering in place. This is not the time to demand participation in multi-hour OTRs via Zoom or other teleconferencing. I am disappointed with the lack of zealous advocacy from elected FINRA Board Governors and from other traditional industry advocates. The industry's small firms and its associated persons are struggling,
It's not that FINRA doesn't know that there's a pandemic spreading across the industry. It does. As noted in part on FINRA's COVID-19 Guidance webpage:
Impact on FINRA Events & ConferencesThe health and well-being of our employees and stakeholders is a top priority for FINRA. Therefore, FINRA is canceling or postponing several of our upcoming events.
Isn't that thoughtful! Out of concern for its employees' "health and well-being," FINRA is cancelling or postponing a whole host of typically nonsensical events that often amount to little more than an excuse for a junket. Then there's this other advisory on the COVID-19 Guidance webpage:
COVID Fraud Task ForceFINRA formed a COVID Fraud Task Force in March 2020 to establish a coordinated response across the organization to potential COVID-related fraud in the broker-dealer industry and in U.S. markets. The task force - a collaborative effort headed by Executive Vice President Greg Ruppert - manages a centralized repository of intelligence gathered from and accessed across the organization to help ensure efficiency and maximum coordination.
Again, isn't that thoughtful! FINRA formed a task force headed by an EVP to coordinate the regulator's anti-fraud response. Bravo! On the other hand, where is the task force headed by an EVP to coordinate the regulator's regulatory response to the plight of hundreds of thousands of associated persons who are currently subject to investigation? Finally, consider this disclosure:
Arbitration & OHO HearingsFINRA is postponing all in-person arbitration and mediation proceedings. In addition, the OHO has postponed hearings of Disciplinary Proceedings.
Again, isn't that thoughtful! FINRA is postponing arbitrations and mediations. Oh, and after you've participated in an OTR, FINRA is postponing any subsequent hearings before its Office of Hearing Officers. Why, then, isn't FINRA postponing the all-critical OTRs and NAC hearings -- subject to a party's right to agree to participate in a teleconferenced alternative? Where is the guidance from FINRA to the industry's hundreds of thousands of employees about their rights when confronted with a demand to participate in a teleconferenced OTR or hearing?
Will it take a tragedy to get FINRA to recognize its moral obligations?
A recently posted FINRA webpage demonstrates the extent of FINRA's inability to comprehend the human catastrophe caused by the pandemic's impact on its Small Firm Member and associated person communities. Published a mere two weeks ago, the tone deaf "#InThisTogether: Delivering "FINRA in a Box" (FINRA.com / April 17, 2020) https://www.finra.org/media-center/blog/in-this-together-delivering-finra-in-a-box. literally starts off with these four paragraphs:
FINRA has been on a hiring spree, working to fill scores of open positions. But given that almost all employees are working remotely as a result of the coronavirus outbreak, how are these new hires getting the equipment to start work from home?The solution: "FINRA in a Box."That's what staff call the package FINRA sends to new hires, containing a laptop, onboarding instructions, introductory material, a little branded merch-and even a few pieces of candy to sweeten their first day.In normal times, the first day for a new employee includes a visit from Desktop Support to set up the staffer's desktop, including access to any specialized systems or information they will need for their job. For example, an examiner in Member Supervision and an analyst in Market Regulation require different sets of tools and data. But with virtually everyone working remotely, that visit is not possible. . . .
Are you kidding me? FINRA is on a goddamn "hiring spree?" Now? In these plague times??
With so many Small Member Firms headed for insolvency and thousands of industry employees likely in line for termination, who the hell on the Board of Governors authorized the organization to fill "scores of open positions?" And lemme see if I got this -- these scores of employees are starting work at home. At home? So how critical is it to fill these jobs, right now, if you can't even onboard the new hires at their work-sites? And before you answer that -- why would any of your excuses and explanations be okay to justify your at-home employment onboarding but not be okay when raised by a potential witness seeking to delay the conduct of an OTR or hearing? Are you sending free laptops to witnesses asked to appear at ZOOM OTRs? Are you sending Desktop Support to those same witnesses' homes? Yeah, dealing with double standards is tough. Finally, you're twisting the arms of reps to prod them into a forced ZOOM OTR but you're sending FINRA baseball caps and Rice Krispies treats to newly-hired FINRA Staff? https://twitter.com/i/status/1255884567078150144
Doesn't FINRA's Board of Governors have better things to do with FINRA's dwindling financial resources? Just a thought -- did it ever occur to you that you might want to send those boxes of goodies to the thousands of industry employees who have lost or will soon lose their jobs? Did you think of freezing hiring and rebating the savings to smaller firms and unemployed associated persons?
Where the hell is FINRA's Board of Governors?
Where the hell is FINRA's C-Suiters?
Where the hell is FINRA's Senior Management?
As a former Series 7 and 63 registered representative; in-house brokerage, mutual fund, and investment company lawyer; American Stock Exchange lawyer and NASD attorney; as one of the founders of the NASD and then the FINRA Dissident Movement; as one of the four original petition candidates who in 1998 first contested NASD's nominated Board candidates; and as a long-time advocate for industry reform, I remain disappointed with FINRA's persistent failure to embrace disparate views and to constructively reach out to dissidents. Notwithstanding, when the folks at FINRA do good, I applaud them. When they do bad, I criticize them. I have been a persistent reform voice in the wilderness and place a premium on my integrity. I will not be a hypocrite and simply complain about everything and anything FINRA does. There are many, many good (even wonderful) folks who toil daily in the thankless job of regulation. I know. I used to be one of them.
When it comes to FINRA's heavy-handed OTR conduct, I allow for the fact that, by now, the policy has been revised or is in the process of revision. Also, I allow for the fact that I am merely giving voice to complaints presented to me, and that some of those grievances may be predicated upon a misunderstanding or confusion. Regardless, I am speaking for those who are afraid to challenge FINRA. I'm not questioning whether FINRA hears me; I'm questioning whether FINRA listens.
Since the 1990s, when I entered the private practice of law and founded the NASD (and then FINRA) Dissident Movement, I've tried to engage NASD and then FINRA in a constructive manner. Sometimes I speak to folks in confidence. Sometimes I've met with folks under a cone of silence. I honor my promises to keep things off the record, and so they will stay. If this OTR issue is where things go, yet again, ballistic, so be it. I'm not ready to make nice. I'm not ready to back down. If FINRA isn't going to tone down the pressure for teleconferenced OTRs and hearings, I'm just as happy to climb back in the ring. I come from a long line of boxers -- even had a Light Heavyweight World Champion in my family. I took my first karate class in 1968. I never quite minded the taste of my own blood in my mouth. My reputation is that I answer the bell for the 13th Round of a 12 Round fight. It is my hope, however, that the members of FINRA's Board of Governors and senior management get off their asses and make this right.