Bill Singer Slams Garbage Regulation on Wall Street
January 25, 2023
Three Respondents Cited In 539 Plan FINRA Settlement
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, Securities America, Inc., Royal Alliance Associates, Inc., and SagePoint Financial, Inc., submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Securities America, Inc., Royal Alliance Associates, Inc., and SagePoint Financial, Inc., are all subsidiaries of Advisor Group, Inc.
In the Matter of Securities America, Inc., Royal Alliance Associates, Inc., and SagePoint Financial, Inc., Respondent (FINRA AWC 2021069460901)
https://www.finra.org/sites/default/files/fda_documents/2021069460901
%20Securities%20America%2C%20Inc.%20CRD%2010205
%20Royal%20Alliance%20Associates%2C%20Inc.%20CRD%2023131
%20SagePoint%20Financial%2C%20Inc.%20CRD%20133763%20AWC%20lp.pdf
Three Large FINRA Firms and Some Regulatory History
As set out in the "Background" portion of the 2023 FINRA AWC [Ed: footnote omitted]:
Respondents are subsidiaries of Advisor Group, Inc.
Securities America has been a FINRA member firm since November 1981, and is headquartered in La Vista, Nebraska. Securities America has approximately 3,700 registered representatives and 2,100 branch offices.
Royal Alliance has been a FINRA member firm since July 1989, and is headquartered in Jersey City, New Jersey. Royal Alliance has approximately 3,600 registered representatives and 1,300 branch offices.
SagePoint has been a FINRA member firm since May 2005, and is headquartered in Phoenix, Arizona. SagePoint has approximately 1,900 registered representatives and 800 branch offices.
In December 2021, Royal Alliance and SagePoint entered into AWC No. 2019062531501, in which FINRA found that the firms failed to establish and maintain a supervisory system reasonably designed to supervise 529 plan share-class recommendations in that, among other 2 things, the firms’ shared written supervisory procedures did not reasonably address share-class suitability factors specific to 529 plan investments. Royal Alliance and SagePoint were censured and ordered to pay restitution to customers.
In July 2016, Securities America entered into AWC No. 2015047269801 and in December 2017, Royal Alliance entered into AWC No. 2016049977701 and SagePoint into AWC No. 2017054229301, in which FINRA found that each firm failed to establish and maintain a supervisory system and procedures reasonably designed to ensure that certain retirement plan and charitable organization customers who purchased mutual fund shares received the benefit of applicable sales charge waivers. Each firm was censured and ordered to pay restitution to customers; and Royal Alliance and SagePoint were fined.
FINRA Sanctions: Censure, Undertaking, Restitution . . . No Fines
In accordance with the terms of the 2023 AWC, FINRA imposed upon each Respondent a Censure, an undertaking to certify remediation, and the following restitution:
- Securities America, Inc.: $122,845.59;
- Royal Alliance Associates, Inc.: $234,831.92; and
- SagePoint Financial, Inc.: $156,903.93
Five Years of Failed Supervision
As alleged in part in the "Overview" section of the 2023 AWC:
From September 2015 to September 2020, Securities America, Royal Alliance, and SagePoint failed to establish and maintain a supervisory system reasonably designed to ensure that all eligible customers received applicable sales charge waivers or special share classes in connection with rolling over 529 plans from one state plan to another. Some customers who were eligible for these waivers or special share classes did not receive them. Therefore, Respondents violated MSRB Rule G-27.
As more fully described below, FINRA credits Respondents for their extraordinary cooperation. Accordingly, this AWC includes an undertaking to pay restitution totaling approximately $515,000 plus interest, and censures, but no fines.
Not "Ordinary" But "Extraordinary" Cooperation!
The AWC asserts that:
CREDIT FOR EXTRAORDINARY COOPERATION
In resolving this matter without monetary fines, FINRA recognizes Respondents’ extraordinary cooperation for: (1) initiating an internal investigation of Royal Alliance, SagePoint, and other Advisor Group affiliates not then under FINRA review, to identify whether eligible customers were provided with sales charge waivers and/or Class AR shares for 529 plan rollover transactions; (2) initiating, after discovery of the issue, an extensive review of Respondents’ systems relating to 529 plan sales charge waivers and Class AR shares; (3) engaging an outside consultant to identify affected customers; (4) promptly establishing a plan to provide remediation by identifying the affected customers, calculating overcharges to those customers, working with plan sponsors to convert shares, where applicable, and agreeing to pay restitution to affected customers; and (5) providing substantial assistance to FINRA in its investigation.
Bill Singer's Comment
When I talk about "garbage regulation" on Wall Street, this FINRA AWC is typical of what troubles me. The customers of the three Respondent firms wound up overpaying sales charges and fees for several years. Keep in mind that 529 Plans are designed to help save for educational expenses. I didn't make up the charges. FINRA filed them. I didn't write the language from the AWC that I have cited above. FINRA drafted the AWC.
How so very nice of FINRA to not impose a fine on the Respondents. How are we to reconcile that regulatory generosity with the Respondents' prior histories of failed supervision as noted by FINRA in the 2023 AWC? How are we to reconcile that regulatory generosity with FINRA's history of imposing fines on smaller firms and individual associated persons for similar or lesser conduct? I'm sure that we will all sleep better at night knowing how chummy things get in the not so bare-knuckled world of Wall Street regulation.
As best I can tell, on the one hand, FINRA wants us to accept that the Respondents "failed to establish and maintain a supervisory system;" but, on the other hand, FINRA wants to bend over backwards to thank them for belatedly investigating what they should not have had to investigate if they had set up an adequate supervisory system in the first place!
Oddly, there is no reference to Respondent Securities America anywhere in FINRA's "Credit for Extraordinary Cooperation," which raises the question as to why that Respondent was given credit for extraordinary cooperation. I note that the AWC was signed on behalf of Securities America by its Chief Compliance Officer Harold Chaffee. In "FINRA Announces Results of Governor Elections / Firms Elect Wendy Lanton as Small Firm Governor, Re-Elect Jim Nagengast as Large Firm Governor" (FINRA News Release / August 7, 2020) https://www.finra.org/media-center/newsreleases/2020/finra-announces-results-governor-elections, the self-regulatory-organization noted the election of Jim Nagengast, Securities America's Chief Executive Officer:
Nagengast has served on FINRA's Board since 2018, when he was elected by large firms via a special election to fill a Large Firm Governor vacancy. He currently serves on the Board's Finance, Operations and Technology Committee, and its Regulatory Operations Oversight Committee. Nagengast joined Securities America - - an Omaha, Neb.-based independent investment advisory and brokerage firm -- in 1994, and served as Chief Financial Officer, Chief Operating Officer and President before being named CEO in 2010. . . .
Ummm . . . lemme see if I got this:
SIDE BAR: A Few Points Worth Noting:
- As noted in the 2023 FINRA AWC:
Securities America has been a FINRA member firm since November 1981, and is headquartered in La Vista, Nebraska. Securities America has approximately 3,700 registered representatives and 2,100 branch offices.
- As specifically noted about Respondent Securities America in the 2023 FINRA AWC at Page 3:
• Securities America: The firm failed to apply sales charge waivers or purchase Class AR shares in approximately 38% of 529 plan rollover transactions, impacting approximately 250 accounts in which rollover purchases totaled approximately $4 million. This caused customers to unnecessarily pay approximately $120,000 in sales charges and fees.
- Absent from the AWC's "Credit for Extraordinary Cooperation" is ANY specific reference to Respondent Securities America despite reference in part to "(1) initiating an internal investigation of Royal Alliance, SagePoint, and other Advisor Group affiliates not then under FINRA review, . . ."
- FINRA has a Board of Governors. Respondent Securities America's CEO Jim Nagengast sits on the current Board as confirmed at
https://www.finra.org/about/governance/finra-board-governors#Current
You'd sorta think that given the above-bullet-points that, y'know, just tossin' this out there, but, hey, maybe FINRA might want to include some reference in the AWC that the Chief Executive Officer of one of the Respondents sits on FINRA's Board of Governors?
Which raises the question as to whether any Governor on FINRA's lackluster and do-nothing Board even raised a question about why there wasn't such a disclosure in the AWC about Governor Nagengast and his role at Respondent Securities America.
Clearly, I think it a "Better Practice" for all FINRA regulatory settlements to disclose the fact that an employee/agent/officer of a Respondent member firm sat on FINRA's Board or its various committees during the times when cited misconduct occurred at a member firm. Moreover, if and when necessary, FINRA should preclude for appropriate periods of time further service from representatives of such member firms if the cited misconduct rises to a level where such a sanction would be appropriate in the public's and the industry's interest.
All of which makes you wonder why, yet again, the Governors on FINRA's Board seem content to stare at the ceiling, avoid eye contact, or not make any effort to implement more appropriate policies. Then again, there is a "self" in both "self regulation" and "self preservation," so maybe we're witnessing everything that's wrong with allowing an organization such as FINRA to regulate Wall Street.
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