UPDATE: FINRA Says Brokerage Fee An Undisclosed Commission

August 12, 2020

This is an update of "FINRA Says Brokerage Fee An Undisclosed Commission" (BrokeAndBroker.com Blog / May 15, 2014)
http://www.brokeandbroker.com/2411/finra-fee-commission-aml/

The cost of doing business on Wall Street explains why the total number of FINRA member firms has plummeted in recent years. If you ask the former and present members of FINRA's small-firm community to cite the costs that typically press heavily upon them, they frequently complain about regulatory fees; excessive fines; the costs of non-production staff (typically back-office compliance and processing); and the lack of leverage in negotiating reasonable clearing fees. At first, some brokerage firms resort to cost-cutting, but there's only so many folks you can lay off before you just can't keep up with the paperwork. When the competitive landscape prevents smaller firms from passing rising costs on to their customers, it's often a death sentence. For better or worse, for the sake of progress or the lack of intelligent market regulation, we have fewer FINRA member firms, more power concentrated in larger firms, and an increasing lack of quality customer service. Consider the quandary posed to one smaller FINRA member firm when dealing with some of these day-to-day issues.

Blackbook's Black Mark

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, Blackbook Capital LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Blackbook Capital LLC, Respondent (AWC 2011025700901, May 5, 2014).

Since 2003, Blackbook has been a FINRA member firm with three offices employing about 35 registered representatives engaging in a general retail and investment banking business. The AWC asserts that the firm had no prior formal disciplinary history with any federal, state, or self-regulatory organization.

$60.50

The AWC alleges that between April 8, 2010 and June 10, 2011, Blackbook issued certain customer trade confirmations that indicated a "miscellaneous" and/or "additional fee" in the amount of $60.50. Allegedly, this charge was added to some 4,515 separate transactions in addition to or in place of a designated commission.

NASD Conduct Rule 2430: Charges for Services Performed

Charges, if any, for services performed, including miscellaneous services such as collection of moneys due for principal, dividends, or interest; exchange or transfer of securities; appraisals, safe-keeping or custody of securities, and other services, shall be reasonable and not unfairly discriminatory between customers.

Securities Exchange Act Rule 10b-10: Confirmation of Transactions

Preliminary Note.

This section requires broker-dealers to disclose specified information in writing to customers at or before completion of a transaction. The requirements under this section that particular information be disclosed is not determinative of a broker-dealer's obligation under the general antifraud provisions of the federal securities laws to disclose additional information to a customer at the time of the customer's investment decision.

Disclosure requirement. It shall be unlawful for any broker or dealer to effect for or with an account of a customer any transaction in, or to induce the purchase or sale by such customer of, any security (other than U.S. Savings Bonds or municipal securities) unless such broker or dealer, at or before completion of such transaction, gives or sends to such customer written notification disclosing:

The date and time of the transaction (or the fact that the time of the transaction will be furnished upon written request to such customer) and the identity, price, and number of shares or units (or principal amount) of such security purchased or sold by such customer; and

Whether the broker or dealer is acting as agent for such customer, as agent for some other person, as agent for both such customer and some other person, or as principal for its own account; and if the broker or dealer is acting as principal, whether it is a market maker in the security (other than by reason of acting as a block positioner) . . .

In analyzing whether Blackbook's charge was reasonable and fairly disclosed to its customers, FINRA apparently determined that:

[A] substantial portion of the $60.50 charge was not attributable to any specific cost or expense incurred by the Firm or service performed by the Firm in executing each transaction or determined by any formula applicable to all customers. A substantial portion of the charge represented a source of additional transaction based remuneration or revenue to the Firm, and was effectively a minimum commission charge. . .

Accordingly, FINRA concluded that Blackbook mischaracterized and understated the amount of the total commissions charged in violation of NASD Conduct Rules 2430, FINRA Rule 2010, and Rule 10b-10 of the Exchange Act.

AML

In addition to the allegations about the non-compliant commissions, the AWC alleged that in 28 instances between August 10, 2010 and August 9, 2011, Blackbook failed to expeditiously search its records to determine whether the firm had or presently maintained accounts for or engaged in transactions with any individual, entity, or organization named on the Financial Crimes Enforcement Center's ("FinCEN's") Section 314(a) bi-weekly lists of persons/entities of interest to law enforcement. FINRA deemed such non-compliance to constitute a violation of FINRA Rules 3310(b) and 2010.

FINRA Anti-Money Laundering Rule 3310: Anti-Money Laundering Compliance Program

Each member shall develop and implement a written anti-money laundering program reasonably designed to achieve and monitor the member's compliance with the requirements of the Bank Secrecy Act (31 U.S.C. 5311, et seq.), and the implementing regulations promulgated thereunder by the Department of the Treasury. Each member's anti-money laundering program must be approved, in writing, by a member of senior management. The anti-money laundering programs required by this Rule shall, at a minimum,
(a) Establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under 31 U.S.C. 5318(g) and the implementing regulations thereunder;
(b) Establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act and the implementing regulations thereunder;
(c) Provide for annual (on a calendar-year basis) independent testing for compliance to be conducted by member personnel or by a qualified outside party, unless the member does not execute transactions for customers or otherwise hold customer accounts or act as an introducing broker with respect to customer accounts (e.g., engages solely in proprietary trading or conducts business only with other broker-dealers), in which case such "independent testing" is required every two years (on a calendar-year basis);
(d) Designate and identify to FINRA (by name, title, mailing address, e-mail address, telephone number, and facsimile number) an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program (such individual or individuals must be an associated person of the member) and provide prompt notification to FINRA regarding any change in such designation(s); and
(e) Provide ongoing training for appropriate personnel.

Supplementary Material:

.01 Independent Testing Requirements
(a) All members should undertake more frequent testing than required if circumstances warrant.
(b) Independent testing, pursuant to Rule 3310(c), must be conducted by a designated person with a working knowledge of applicable requirements under the Bank Secrecy Act and its implementing regulations.
(c) Independent testing may not be conducted by:
(1) a person who performs the functions being tested,
(2) the designated anti-money laundering compliance person, or
(3) a person who reports to a person described in either subparagraphs (1) or (2) above.
.02 Review of Anti-Money Laundering Compliance Person Information
Each member must identify, review, and, if necessary, update the information regarding its anti-money laundering compliance person designated pursuant to Rule 3310(d) in the manner prescribed by NASD Rule 1160.

Also, the AWC alleged that Blackbook violated FINRA Rule 3310(c) and Rule 2010 because the firm's 2010 AML test was performed by the firm's bookkeeper, who the AWC characterized as

[N]ot qualified to perform the test as he did not have a working knowledge of the applicable requirements under the Bank Secrecy Act and its implementing regulations. The AMI. test was not independent because RV reported directly to the Firm's AMI, compliance officer and took instruction from the compliance officer in how to perform the AMI, test and which documents to review. The test was not adequate as RV failed to actually test the adequacy of the Firm's AML compliance systems and instead relied on what he was told by the AMI compliance officer.

Email

Finally, the AWC alleged that from July 2009 through August 25, 2011, Blackbook failed to preserve hundreds of business-related email, principally internal emails, in a rewritable, non-erasable format when personnel used personal email addresses outside of the Firm's email domain to send or receive business-related emails. Pointedly, the AWC cited the practice of the firm's Compliance Officer, who retained copies of those emails on his personal email account platform - and FINRA criticized that practice because the emails could have been erased or altered on that platform. The AWC alleged that such practices violated Section 17(a) of the Exchange Act and SEC Rule 17a-4(b)(4) and (D), NASD Conduct 3110 and FINRA Rule 2010.

Sanctions

In accordance with the terms of the AWC, FINRA imposed upon Blackbook a Censure, $50,000 fine, and an undertaking to implement corrective measures addressing the commission issues cited.

Bill Singer's Comment

FINRA AWCs permit the attachment of a Corrective Action Statement to demonstrate the steps taken by a respondent to prevent future misconduct subject to the understanding that such an attachment may not deny the charges or make any statement that is inconsistent with the AWC. Further the Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.

I am no fan of Corrective Action Statements and rarely, if ever, advocate their use. Given that the premise of an AWC is a settlement made without admitting or denying the findings, I don't understand why anyone would prepare a statement that tends to typically make admissions, promises to correct situations that have not necessarily been acknowledged, and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statement, then you may want to pause before signing the AWC and ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal afterwards.

If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it. There's no need whatsoever to engage in a post-game, public analysis. Some think that this after-the-fact statement gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. Keep in mind that a Corrective Action Statement may actually set you and your firm up for heavier sanctions down the road if you acknowledge wrongdoing and propose a set of remedial actions. If during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in the statement, or, it is alleged that you failed to implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission. Notwithstanding my opinion, Blackbook apparently determined that it was advisable to submit a Corrective Action Statement and hopefully that step will prove favorable to the firm:

STATEMENT OF CORRECTIVE ACTION
Examination No. 20110257009
THIS CORRECTIVE ACTION STATEMENT IS SUBMITTED BY THE RESPONDENT. IT DOES NOT CONSTITUTE FACTUAL OR LEGAL FINDINGS BY FINRA, NOR DOES IT REFLECT THE VIEWS OF FINRA

This submissions in respectfully transmitted for purposes of identifyihg the various remedial measures undertaken by Blackbook (the "Firm") in furtherance of its ongoing objective to maintain supervisory systems reasonably designed to achieve compliance with respect to the applicable securities laws and regulations and rules of FINRA.

1:FINCEN Reports

FINCEN Reports are now transmitted by email on a bi-weekly basis from fincen.gov to Blackbook's President Franklin Ogele's firm issued email address and have been contemporaneously reviewed by him since November 15, 2011.

Mr. Ogele's reviews are evidenced by way of the FINCEN system's generation of search self-verification memoranda containing the details of such access including the corresponding date and time.

2: Email Preservation

Any and all business-related email communications - whether involving the Firm's customers, internal correspondence or otherwise -- are being archived by Global Relay and have been captured as such since September 2011.

Global Relay is notably the market leader in compliance archiving and message management.

3: AML Test

The Firm has been utilizing the services of reputable third parties with no prior nexus to it (i.e. Quadrant Compliance LLC and VMB Consulting Services, Inc.) for purposes of conducting its annual Independent AML tests for the years 2011, 2012 and 2013.

4: Miscellaneous Fee Charges

Contemporaneous with Blackbook having been freed of Penson's rather onerous five thousand dollar ($5.000) per month minimum charges in favor of Stern Agee's more reasonable one thousand dollar ($1,000) per month minimum fee structure, the Firm's prior $60.50 minimum ticket charge was initially reduced to $45.00 in May of 2012 and then promptly reduced yet again to $29.99 in July 2012.

Moreover, upon approval of the Letter of Acceptance, Waiver and Consent, the Firm will timely implement its undertaking set forth in §B (1), (2) and (3) with respect to any remaining transaction based charge or fee that may be imposed for services performed or costs incurred by the Firm that is not specifically included as part of reported commissions or markup/markdowns.

5: Conclusion

We respectfully submit that the above referenced remedial measures undertaken by Blackbook Capital stand testament to the firm's ongoing objective of maintaining supervisory systems reasonably designed to achieve compliance with respect to the applicable securities laws and regulations and rules of FINRA.

Thank you for your continued consideration in this matter . . .

Also READ:

FINRA Expulsion/Cancellation: 2016

On Page 39 of Disciplinary and Other FINRA Actions (August 2016):

Firms Expelled for Failure to Pay Fines and/or Costs Pursuant to FINRA Rule 8320
Blackbook Capital, LLC (CRD #123234)
Hillside, New Jersey
(June 29, 2016)
FINRA Case #2011025700901

On Page 36 of Disciplinary and Other FINRA Actions (September 2016):

Firms Cancelled for Failure to Pay Outstanding Annual Assessment Fee Pursuant to FINRA Rule 9553
BlackBook Capital, LLC (CRD #123234)
Hillside, New Jersey
(July 22, 2016)

SDNY Complaint 2019

On December 23, 2019, Plaintiffs Blackbook and Ogele filed a Complaint and on January 16, 2020, an Amended Complaint in the United States District Court for the District of New Jersey ("DNJ") asserting eight counts against Defendant FINRA et al for the regulatory action whereby the regulator enforced its rules; state tort claims, and constitutional challenges. Blackbook Capital, Inc., and Franklin Ogele, Plaintiffs, v. The Financial Industry Regulatory Authority, Inc., et al., Defendants (Opinion, United States District Court for the District of New Jersey ("DNJ"), 19-CV-21772 / August 10 2020)

http://brokeandbroker.com/PDF/BlackbookOpDNJ200810.pdf

Initially, DNJ considered FINRA's motion to dismiss the Amended Complaint pursuant to Federal Rules of Civil Procedure ("FRCP") 12(b)(1) and 12(b)(6); and Blackbook and Ogele's Motion for Leave to File an Amended Complaint.

SIDE BAR: FRCP Rule 12: Defenses and Objections: When and How Presented; Motion for Judgment on the Pleadings; Consolidating Motions; Waiving Defenses; Pretrial Hearing
. . .
(b) How to Present Defenses. Every defense to a claim for relief in any pleading must be asserted in the responsive pleading if one is required. But a party may assert the following defenses by motion:

(1) lack of subject-matter jurisdiction;

(2) lack of personal jurisdiction;

(3) improper venue;

(4) insufficient process;

(5) insufficient service of process;

(6) failure to state a claim upon which relief can be granted; and

(7) failure to join a party under Rule 19.

A motion asserting any of these defenses must be made before pleading if a responsive pleading is allowed. If a pleading sets out a claim for relief that does not require a responsive pleading, an opposing party may assert at trial any defense to that claim. No defense or objection is waived by joining it with one or more other defenses or objections in a responsive pleading or in a motion.

In considering the parties various contentions, DNJ noted that:

FINRA contends that the Court lacks subject matter jurisdiction because "Congress set forth the exclusive means for review of final actions in FINRA disciplinary proceedings, which includes a system of appeal first to the SEC and then to the United States Courts of Appeals." Def. Br. at 15. FINRA continues that this Court lacks jurisdiction because Blackbook waived its right to administrative remedies, including its right to appeal, through the AWC. Id. at 16.

at Page 5 of the DNJ Opinion

The Court found that in entering into the AWC settlement with FINRA, Blackbook had waived its right to seek administrative review of the settlement and penalties. Accordingly, DNJ held that it:

lacks jurisdiction to entertain Plaintiffs' claims as they relate to the AWC and FINRA's purported discriminatory enforcement of rules, which ultimately led to the disciplinary proceeding and AWC. If Plaintiffs wanted to challenge FINRA's application of its regulatory rules, the proper channel would have been to use the comprehensive administrative review process set forth in the Securities Exchange Act of 1934. See Mohlman v. Fin. Indus. Regulatory Auth., Inc., No. 19-154, 2020 WL 905269, at *5 (S.D. Ohio Feb. 25, 2020) (explaining that plaintiff that voluntarily entered into an AWC "cannot not ask this Court to reconsider the decision he made . . . several years ago)".

at Page 7 of the DNJ Opinion

As to FINRA's post-AWC conduct whereby it expelled Blackrock, the self-regulatory-organization argued that it was absolutely immune because the cited actions were related to its regulatory functions. Although conceding that the absolute immunity issue has not been addressed by the Third Circuit, DNJ is influenced by other circuits who afforded absolute immunity in the discharge of regulatory responsibilities. According. DNJ found FINRA immune for its expulsion of Blackrock:

Notably, Plaintiffs fail to address whether FINRA is entitled to immunity or explain how the Court could legally provide their requested relief. As a result, the Court follows the weight of persuasive authority and concludes that FINRA is entitled to absolute immunity for its regulatory conduct and that there is no private right of action to assert claims related to FINRA's regulatory conduct. In this instance, Counts One through Six pertain to FINRA's application of its rules, the decision to accept the AWC and its conduct after Blackbook failed to pay the entire fine. Accordingly, Counts One through Six pertain to FINRA's regulatory activity and are dismissed.

at Page 8 of the DNJ Opinion

Finally, DNJ considers Plaintiffs' argument that FINRA's conduct was unconstitutional. In what amounts to short circuiting of that contention, the Court admonishes that:

A constitutional violation can only occur when the alleged wrongful conduct "can properly be ascribed to the government" because the Constitution only "protects against state interference with fundamental rights." Citizens for Health v. Leavitt, 428 F.3d 167, 177 (3d Cir. 2005). While not directly addressed by the Third Circuit, the Third Circuit has determined that NASD, FINRA's predecessor, was a private entity, such that its conduct cannot amount to state action. See Epstein v. Sec. Exch. Comm'n, 416 F. App'x 142, 148 (3d Cir. 2010); see also Epstein v. Fin. Indus. Regulatory Auth., Inc., No. 09-1567, 2009 WL 971419, at *4 (D.N.J. Apr. 9, 2009) (concluding that FINRA, "formerly known as NASD, and its employees . . . are not state actors"). Plaintiffs argue that other circuits have determined that FINRA is a state actor and that the Court should also conclude the same. But Plaintiffs provide no authority demonstrating why the Third Circuit would now conclude otherwise and find that FINRA's conduct amounts to state action. Plfs. MTA Reply at 3. Accordingly, this Court follows the weight of authority within the Third Circuit, and also determines that FINRA is a private entity. Plaintiffs, therefore, cannot bring their constitutional claims against FINRA. Defendant's motion to dismiss is granted on these grounds for Counts Seven and Eight, and Plaintiffs' motion to amend is denied. . . .

at Page 9 of the DNJ Opinion

Accordingly, DNJ granted Defendant's Motion to Dismiss without prejudice; however, "Plaintiff is provided with thirty (30) days to file an amended complaint that cures the deficiencies noted herein." Further, DNJ denied Plaintiff's Motion for Leave to File An Amended Complaint. At first blush the Court seems to have pronounced a tautology allowing an amended complain yet denying one. Apparently aware of the inconsistency, the Opinion offers this reconciliation:

[T]o be clear, although the Court is denying Plaintiffs' motion to file the current proposed amended complaint, it is granting Plaintiffs an opportunity to file another amended complaint that complies with this Opinion. . . .

READ:

Federal Court Transmogrifies FINRA Into State Criminal Prosecutor (BrokeAndBroker.com Blog / December 13, 2019)
http://www.brokeandbroker.com/4957/finra-dicken-state/

FINRA Schrodinger Cat Is Dead, Alive, And A Zombie (BrokeAndBroker.com Blog / November 7, 2017)
http://www.brokeandbroker.com/3658/turbeville-finra-/

Federal Appeals Court Deems FINRA Deputy Of The Federal Government (BrokeAndBroker.com Blog / November 6, 2017)
http://www.brokeandbroker.com/3655/finra-deputy-federal/

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UPDATE: FINRA Says Brokerage Fee An Undisclosed Commission (BrokeAndBroker.com Blog)

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