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Equitable Inadvertence Earns Inequitable FINRA Sanctions
October 25, 2021
FINRA censured and fined Equitable Advisors, LLC after the firm had settled a customer arbitration via an agreement in which the customer agreed to "not oppose, object to, or otherwise interfere with" any expungement motion. Although such a pre-conditioned settlement runs afoul of FINRA's rules, the regulator conceded that the offensive language was not inserted by Equitable and had inadvertently slipped by the firm's oversight. Which begs lots of questions for which there are no answers provided by FINRA.
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, Equitable Advisors, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Equitable Advisors, LLC has been a FINRA member firm since 1974 with about 5,400 registered representatives at 1,051 branches. In the Matter of Equitable Advisors, LLC, Respondent (FINRA AWC 2020067328101)
https://www.finra.org/sites/default/files/fda_documents/2020067328101
%20Equitable%20Advisors%2C%20LLC%20CRD%206627%20AWC%20sl.pdf
Inadvertence
In accordance with the terms of the AWC, FINRA imposed upon Equitable Advisors, LLC a Censure and $20,000 fine. As alleged in part in the AWC [Ed: footnote omitted]:
Bill Singer's CommentOn December 10, 2018, Equitable settled a FINRA arbitration proceeding brought by the customer against it and one of its registered representatives. The settlement agreement improperly provided that the customer would "not oppose, object to, or otherwise interfere with" any motion brought by the representative to expunge information from the CRD System relating to the customer's claims. Although Equitable did not insert the violative language relating to expungement to the agreement, through inadvertence, it failed to detect and remove that provision before signing.Therefore, Equitable violated FINRA Rule 2081 and 2010.
By way of spelling it out, here's what FINRA's Rulebook mandates:
FINRA Rule 2081:Prohibited Conditions Relating to Expungement of Customer DisputeNo member or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer's agreement to consent to, or not to oppose, the member's or associated person's request to expunge such customer dispute information from the CRD system.
Unlike many rules in FINRA's Rulebook, Rule 2081 says what it means and means what it says. Similarly, FINRA Regulatory Notice 14-21: "SEC Approves FINRA Rule 2081 Regarding Prohibited Conditions Relating to Expungement of Customer Dispute Information / Effective Date: July 30, 2014" clarifies that:
Accordingly, new FINRA Rule 2081 prohibits expressly such conduct by providing that no member firm or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer's agreement to consent to, or not to oppose, the member firm's or associated person's request to expunge such customer dispute information from the CRD system. The prohibition applies to both written and oral agreements and to agreements entered into during the course of settlement negotiations, as well as to any agreements entered into separate from such negotiations. The rule also precludes such agreements even if the customer offers not to oppose expungement as part of negotiating a settlement agreement and applies to any settlements involving customer disputes, not only to those related to arbitration claims.
Stripped down to basics, the Equitable AWC involves an arbitration that was settled about three years ago in 2018, and the Settlement Agreement included the non-opposition language cited in the AWC. Except, Equitable did not insert the language; and given that the language references the customer's non-opposition to a potential expungement request, it doesn't seem likely that the customer included the prose. For reasons that truly make no sense to me, the AWC fails to let us in on the Top Secret source of the offensive settlement language. Sure, I could guess, you can guess, but why the hell is a Wall Street regulatory settlement being turned into a guessing game?
I am struck by FINRA's concession in the AWC that the "violative language" was not inserted by Equitable. How it got into the agreement is a mystery, or at least FINRA is intent on creating one. Regardless, the AWC asserts that it was only "through inadvertence" that Equitable had "failed to detect and remove the provision before signing." Note that the AWC did not ascribe the motive to fraud. Did not ascribe the motive to recklessness. The word of choice by the regulator was "inadvertence." Which begs the question: What the hell is the point of imposing a Censure and a $20,000 fine upon Equitable for "inadvertence"? No one in the industry gives a rat's ass about a Censure, so I'm not going to quibble over such a silly sanction. As to the $20,000 fine, given the underlying facts, that sort of transitions from a "sanction" into a "penalty," and FINRA is not authorized to impose penalties.
Assuming that the Customer Settlement Agreements used by Equitable is some boiler-plate document, it's likely that whatever in-house staffer was charged with reviewing the final draft, did so merely by focusing on the non-boiler-plate language, which would have specified the parties' names and the specific events being compromised via settlement. Sure -- it would be wonderful if we all re-read every word in every boiler-plate document that comes across our desk, but, let's not pretend that we do. We don't.
Clearly, the AWC infers that someone had altered the boiler-plate in a manner that did not notify Equitable of the change and, as such, did not present circumstances whereby a reasonable person likely would have detected the changes and removed them. As such, FINRA's sanctions are sanctioning human error, which, as long as we're humans, will likely occur. It is, after all, part of the human condition. Frankly, I'm sure that human error occurs each and everyday at FINRA itself, much to the regulator's chagrin. I wonder how FINRA would feel if the SEC were to Censure and fine it for producing a filing in which language was inadvertently included but no one at FINRA detected it and removed it before submitting to the SEC.