March 4, 2021
2021 Examination Priorities (SEC Division of Examinations)
In recent weeks, the press has been awash with stories about payment for order flow. You've seen it pop up in all its sordid glory via revelations about so-called Zero Commission trading -- to which I respond: TANSTAAFL (there ain't no such thing as a free lunch). With all the faux sincerity of Captain Renault, Wall Street's regulators are now blowing the whistle on crap that they either knew or should have known was going on for years. In a recent FINRA AWC, that rank hypocrisy is on display for all to see. In keeping with how bad press prompts better regulation, FINRA is now in a tizzy about what we in the trade call "Best Execution."
I know that I'm dating myself but do you remember the excitement when the phone company delivered the new edition of the white and the yellow pages? Oh my!! You looked up your name and, wow, you were listed. You looked up your business and breathed a sigh of relief when you saw that the name was spelled right unlike last year. Well, phone books are now relics of an age long past. On the other hand, wow!!!! -- the SEC Division of Examinations has just published its "2021 Examination Priorities." Among the targets for 2021 are the following:
- Retail Investors, Including Seniors and Individuals Saving for Retirement
- Standards of Conduct
- Fraud, Sales Practices, and Conflicts
- Retail-Targeted Investments
- Information Security and Operational Resiliency
- Financial Technology (FINTECH) and Innovation, Including Digital Asset
- Anti-Money Laundering
- The London Inter-Bank Offered Rate (LIBOR) Transition
- Additional Focus Areas Involving RIAS and Investment Companies
- RIA Compliance Programs
- Registered Funds, Including Mutual Funds and ETFs
- RIAs to Private Funds
- Additional Focus Areas Involving Broker-Dealers and Municipal Advisors
- Broker-Dealer Financial Responsibility
- Broker-Dealer Trading Practices
- Municipal Advisors
- Market Infrastructure
- Clearing Agencies
- National Securities Exchanges
- Regulation Systems Compliance and Integrity (SCI)
- Transfer Agents Focus on FINRA and MSRB
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, Richard Scott Shelley submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Richard Scott Shelley was first registered in 1996, and by 2002, he was registered with Packerland Brokerage Services, Inc. The AWC asserts that Shelley "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Shelley violated FINRA Rules 3280 and 2010, and the self regulator imposed upon him a $5,000 fine and a one-month suspension from associating with any FINRA member in all capacities. In part, the AWC alleges that [Ed: "FIP" is an acronym for "Future Income Payments"]:
In July 2016, Respondent sold an investor $29,500 in an FIP security. FIP represented
itself as a structured cash flow investment that purchased pensions at a discount from
pensioners and then sold a portion of those pensions as a "pension stream" to investors.
HP generally promised investors a seven to eight-percent rate of return on their
investment. Respondent received a total of $1,475 in commissions in connection with this
At all times during the stated period, Respondent's employer member firm prohibited its
registered representatives from participating in the sale of private securities transactions
without prior approval from the firm. Respondent did not provide written notice to his
employer member firm prior to participating in the FIP sale. In December 2016,
Respondent also falsely attested on an Annual Compliance Questionnaire that he did not
participate in a private securities transaction.
In April 2018, FIP ceased business, owing nearly $300 million in unpaid investor
payments. In a March 12, 2019 indictment, the United States charged FIP and its owner,
Scott A. Kohn, with conspiracy to engage in mail and wire fraud related to FIP's
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, ITG, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that ITG, Inc. was first registered with FINRA in 1992 and in March 2019, the firm was acquired by Virtu ITG LLC; thereafter, the AWC asserts that:
[A]s part of its consolidation with Virtu Americas
LLC, ITG filed a Uniform Request for Broker-Dealer Withdrawal (Form BDW)
terminating its registration and moved its Market Participant Identifiers, staff, and
business to Virtu Americas LLC in June 2020. ITG's registration was terminated as of
The AWC alleges that ITG "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Reed violated FINRA Rule 33310(a), (b) and (c) and Rule 2010; and the self regulator imposed upon ITG a Censure; $450,000 fine, and an undertaking that the member (now Virtu Americas LLC) will certify the establishment and implementation of policies, procedures, and internal controls reasonably designed to address and remediate the cited issues. Under the heading "Overview" the AWC alleges that [Ed: Footnote omitted]:
From January 2014 through April 2018, ITG failed to establish and implement AML
policies and procedures reasonably designed to detect and cause the reporting of suspicious low-priced securities trading, in violation of FINRA Rules 3310(a) and
During the same period, ITG failed to establish and implement a system reasonably
designed to comply with Bank Secrecy Act regulations requiring firms to have due
diligence procedures for correspondent accounts of foreign financial institutions
(FFIs). ITG failed to conduct due diligence on numerous FFI accounts, including the
correspondent account of one of its foreign affiliates. ITG therefore violated FINRA
Rules 3310(b) and 2010.
In addition, from 2014 through 2016, ITG failed to ensure reasonable or timely annual
independent testing of its AML program, in violation of FINRA Rules 3310(c) and
Panelists explore the evolving regulatory structure surrounding senior investor protections and the challenges facing financial services professionals when developing an effective, efficient and integrated protection framework.
Whatever you do, don't lie to FINRA. I can't even begin to recount the number of times that I have given that admonition to a client. You wouldn't think that such a directive would be open to a lot of interpretation but, alas, folks have a tendency to stretch things to their limits. In a recent FINRA regulatory settlement, we come upon someone who submitted altered and fabricated documents to the self-regulatory-organization during an examination. The surprising thing about the matter is not that the Respondent got caught but the nature of FINRA's sanctions of the misconduct.
BrokeAndBroker.com Blog publisher, Bill Singer, is no fan of Wall Street's version of self regulation, as spearheaded by the Financial Industry Regulatory Authority ("FINRA"). At best, FINRA comes off as a glorified trade group on steroids; at worst, as a lap dog for its larger member firms. Pointedly, the industry's small fry -- the mom-and-pop brokerages and their hundreds of thousands of associated persons -- never quite seem to get the mercy, the benefit of the doubt, or the concessions that seem afforded to the industry's big fish. In today's featured FINRA regulatory settlement, it could be that FINRA has pulled its punches because of Covid. It could be that what's a "relevant" prior disciplinary history is open to broad interpretation. Maybe FINRA got it right and Bill is being overly sensitive. So . . . why don't you take a smell and see if you would eat this sushi?
FINRA placed Kimberly Springsteen-Abbott squarely in its regulatory crosshairs. After a hearing, FINRA's OHO imposed a Bar, a $208,953.75 disgorgement, and a $100,000 fine. On appeal, FINRA's NAC affirmed. The SEC tossed the case back into FINRA's lap with an order to say what you mean and mean what you say. On remand, the NAC whittled away at the sanctions; and, thereafter, the SEC did more whittling. By the time the federal circuit court received the appeal, the once mighty oak of a case was more like a toothpick.