Securities Industry Commentator by Bill Singer, Esq.

November 16, 2017

The PIABA report urges FINRA to rigorously address its "public governors" conflicts of interest limit overlapping and excessive service on other boards, and consider nominating public governors with a demonstrated interest in investor protection issues. Pointedly, the PIABA report highlights concerns about the following governors, as set forth in the PIABA Press Release:

* Eileen Murray to serve as a public governor beginning in 2016, even though she serves as the co-CEO of the world's largest hedge fund, Bridgewater Associates.

* Shelley Lazarus has served as one of FINRA's public governors since 2013. Lazarus serves on the board of The Blackstone Group, "a leading global alternative asset manager" handling $366.6 billion as of December 31, 2016." The Blackstone Group has multiple FINRA member subsidiaries, including Blackstone Advisory Partners L.P.  Lazarus has been an executive at Ogilvy & Mather from 1995 through 2012. She now serves as the Chairman Emeritus of Ogilvy. In 2015, Ogilvy created FINRA's BrokerCheck advertising campaign.

* William H. Heyman, currently the chairman of FINRA and called a "public governor" even though he is the Chief Investment Officer of The Travelers Companies, Inc., previously served in the NASD (the predecessor to FINRA) as an "industry governor".  Curiously, he has served for the last 14 years on the Board of Governors even though FINRA's bylaws expressly limit "public governors" to two three-year terms.

* Carol Anthony Davidson has been a "public governor" since 2013, even though he joined the board of Legg Mason Inc., in 2014. Legg Mason is a global asset management firm and has a FINRA member subsidiary, Legg Mason Investor Services, LLC.  Davidson's 14,906 shares give him a more than $500,000 stake in Legg Mason. Davidson serves on at least five corporate boards and six different FINRA Board Committees.

* Joshua S. Levine serves as a "public governor" while working as a managing director affiliated with Kita Capital Management, LLC.  Levine's LinkedIn profile makes clear that he co-founded Kita Capital Management, LLC and that it provides "capital, operations and advice to technology-driven organizations."  Although his current FINRA profile indicates that he has served as a managing director for Kita Capital Management without interruption since 2005, past FINRA Annual Reports characterized him as "retired." The PIABA report notes that inconsistent disclosures raise questions about the quality of FINRA's disclosures and governance.

Rulemaking Petition to Amend Exchange Act Rule 17a-4(f) (By letter dated November 14, 2017, as submitted to the Securities and Exchange Commission)

By Petition submitted from the Securities Industry and Financial Markets Association ("SIFMA"), the Financial Services Roundtable ("FSR") , the Futures Industry Association ("FIA"), International Swaps and Derivatives Association ("ISDA")  and the Financial Services Institute (together, the "Associations"), the the Securities and Exchange Commission ("SEC") is asked to  amend Rule 17a-4 under the Securities Exchange Act of 1934 ("Exchange Act"). As set forth in part in the Petition (footnotes omitted):

[S]pecifically, the Associations request that the Commission amend Rule 17a-4(f) to no longer require broker-dealers to implement a "non-rewriteable, non-erasable" or "write once, read many" ("WORM") standard, notify their designated examination authority of their intent to use electronic storage, have an electronic records audit system, and employ a third-party downloader. As described in more detail below, these 20-year old technology-specific rules are obsolete and measurably slowing the pace of securities firms' adoption of communication technologies that investors are using and requesting. 

In place of those outdated requirements, the Associations propose a rigorous retention standard that is technology-neutral and consistent with current approaches to managing and protecting data. A modernized rule will allow firms to take advantage of the most current information management technologies and more effectively secure regulatory records. This proposal would not otherwise affect the description or types of records required to be retained under the Exchange Act nor inhibit prompt access to such records by the SEC or other self-regulatory organizations. 

Securities and Exchange Commission's Division of Enforcement's 2017 Annual Report  As noted in Enforcement's 2017 Report:

The Commission brought 754 actions and obtained judgments and orders totaling more than $3.7 billion in disgorgement and penalties. Significantly, it also returned a record $1.07 billion to harmed investors, suspended trading in the securities of 309 companies, and barred or suspended more than 625 individuals.

Personal Note from Blog/Securities Industry Commentator publisher Bill Singer, Esq.: After some 35 years on Wall Street and over two decades as an industry reform advocate, it is astonishing for me to realize that I have virtually nothing to complain about in 2017 concerning SEC Chair Clayton's management and the exemplary conduct of Enforcement Co-Directors Avakian and Peikin. That team is focused on setting achievable goals targeting those who defraud the most vulnerable investors. For the first time in my career, I find myself encouraging SEC management to stay the course. Although I will critique the SEC when and where I find fault with a particular emphasis on the federal regulator's frustrating and infuriating Whistleblower program, I still offer congratulations on a superb record for 2017!

According to federal prosecutors, between 2004 and September 2014, Richard Moseley Sr. owned and operated a group of payday lending businesses (the "Hydra Lenders") that issued and serviced small, short-term, unsecured loans, known as "payday loans," through the Internet to customers across the United States. Moseley fraudulently targeted over 620,000 workers to whom payday loans were extended with illegally high interest rates in violation of state usury laws. As set forth in the DOJ Press Release:

[T]he loan agreements suggested, for example, that the borrower would pay $30 in interest for $100 borrowed.  In truth and in fact, however, MOSELEY structured the repayment schedule of the loans such that, on the borrower's payday, the Hydra Lenders automatically withdrew the entire interest payment due on the loan, but left the principal balance untouched.  As a result, on the borrower's next payday, the Hydra Lenders could again automatically withdraw an amount equaling the entire interest payment due (and already paid) on the loan.  Under MOSELEY's control and oversight, the Hydra Lenders proceeded automatically to withdraw such "finance charges" payday after payday, applying none of the money toward repayment of principal.  Indeed, under the terms of the loan agreement, the Hydra Lenders withdrew finance charges from their customers' accounts unless and until consumers took affirmative action to stop the automatic renewal of the loan. 

Moseley was convicted of one count of:
  • conspiracy to collect unlawful debts in violation of Racketeer Influenced Corrupt Organizations Act ("RICO"); 
  • collecting unlawful debts in violation of RICO;
  • conspiracy to commit wire fraud; 
  • wire fraud;
  • aggravated identity theft; and
  • violating the Truth in Lending Act ("TILA")
In a recent FINRA Acceptance, Waiver & Consent ("AWC") regulatory settlement, a registered person is barred after voluntarily resigning . If you read the published AWC, you come away with the sense that the respondent quit his job amid some nebulous allegations that he had diverted customer funds. On top of that, you find out that the respondent was barred because he refused to cooperate in the regulator's investigation. By the time you've digested this AWC,you pretty much figure that it's not much about anything other than some guy who didn't want to be bothered answering FINRA's annoying questions. Not quite!