Securities Industry Commentator by Bill Singer Esq

122 Days And Counting For FINRA's Independent Review Of Its Arbitration Selection Process (BrokeAndBroker.com Blog)

Justice Department Secures Groundbreaking Settlement Agreement with Meta Platforms, Formerly Known as Facebook, to Resolve Allegations of Discriminatory Advertising / Lawsuit is the Department's First Case Challenging Algorithmic Discrimination Under the Fair Housing Act; Meta Agrees to Change its Ad Delivery System (DOJ Release)

SEC Charges Egan-Jones Ratings Co. and CEO with Conflict of Interest Violations (SEC Release)

FINRA Suspends Rep for PST and Personal Email

In the Matter of Brian F. Donnelly, Respondent (FINRA AWC)

United States' Lawsuit

The United States' complaint challenges three key aspects of Meta's ad targeting and delivery system. Specifically, the department alleges that:

• Meta enabled and encouraged advertisers to target their housing ads by relying on race, color, religion, sex, disability, familial status and national origin to decide which Facebook users will be eligible and ineligible to receive housing ads.
• Meta created an ad targeting tool known as "Lookalike Audience" or "Special Ad Audience." The tool uses a machine-learning algorithm to find Facebook users who share similarities with groups of individuals selected by an advertiser using several options provided by Facebook. Facebook has allowed its algorithm to consider FHA-protected characteristics - including race, religion and sex - in finding Facebook users who "look like" the advertiser's source audience and thus are eligible to receive housing ads.
• Meta's ad delivery system uses machine-learning algorithms that rely in part on FHA-protected characteristics - such as race, national origin and sex - to help determine which subset of an advertiser's targeted audience will actually receive a housing ad.

The complaint alleges that Meta has used these three aspects of its advertising system to target and deliver housing-related ads to some Facebook users while excluding other users based on FHA-protected characteristics.

The department's lawsuit alleges both disparate treatment and disparate impact discrimination. The complaint alleges that Meta is liable for disparate treatment because it intentionally classifies users on the basis of FHA-protected characteristics and designs algorithms that rely on users' FHA-protected characteristics. The department further alleges that Meta is liable for disparate impact discrimination because the operation of its algorithms affects Facebook users differently on the basis of their membership in protected classes.

Settlement Agreement

These are the key features of the parties' settlement agreement:

• By Dec. 31, 2022, Meta must stop using an advertising tool for housing ads known as "Special Ad Audience" (previously called "Lookalike Audience"), which relies on an algorithm that, according to the United States, discriminates on the basis of race, sex and other FHA-protected characteristics in identifying which Facebook users will be eligible to receive an ad.
• Meta has until December 2022 to develop a new system for housing ads to address disparities for race, ethnicity and sex between advertisers' targeted audiences and the group of Facebook users to whom Facebook's personalization algorithms actually deliver the ads. If the United States concludes that this new system sufficiently addresses the discriminatory disparities that Meta's algorithms introduce, then Meta will fully implement the new system by Dec. 31, 2022.
• If the United States concludes that Meta's changes to its ad delivery system do not adequately address the discriminatory disparities, the settlement agreement will terminate and the United States will litigate its case against Meta in federal court.
• The parties will select an independent, third-party reviewer to investigate and verify on an ongoing basis whether the new system is meeting the compliance standards agreed to by the parties. Under the agreement, Meta must provide the reviewer with any information necessary to verify compliance with those standards. The court will have ultimate authority to resolve disputes over the information that Meta must disclose.
• Meta will not provide any targeting options for housing advertisers that directly describe or relate to FHA-protected characteristics. Under the agreement, Meta must notify the United States if Meta intends to add any targeting options. The court will have authority to resolve any disputes between the parties about proposed new targeting options.
• Meta must pay to the United States a civil penalty of $115,054, the maximum penalty available under the Fair Housing Act.

[I]n 2019, Egan, who at the time headed Egan-Jones's ratings group, became involved in business and marketing activities concerning a client and was influenced by sales and marketing considerations while participating in determining a credit rating for that client, which created a prohibited conflict of interest. The order finds that by issuing and maintaining a rating for the client under those circumstances, Egan-Jones violated the SEC's NRSRO conflict of interest rules and, further, that Egan caused the company's violations. 

The SEC's order also finds that, in 2018, Egan-Jones violated another conflict of interest provision by continuing to issue and maintain ratings for another client even though that client had contributed ten percent or more of the company's net revenues during the prior fiscal year. Finally, the order finds that Egan-Jones failed to establish, maintain, and enforce policies and procedures reasonably designed to manage such conflicts of interest. 

From February 2020 through March 2021, Donnelly participated in a private securities transaction involving one of his First Allied customers (Customer A). In February 2020, Donnelly introduced Customer A to the president of a company seeking investments in limited partnership units. The limited partnership units were securities. After making the initial introduction, Donnelly provided to Customer A the private placement memorandum for the investment and a presentation about the company. Donnelly also discussed with the company how Customer A should make payment. Thereafter, in June 2020, Customer A invested $250,000 in the company. Even after Customer A made his investment in the company, Donnelly continued to act as an intermediary between Customer A and the company. For example, in March 2021, Donnelly requested and received Customer A's account statement from the company, which he provided to Customer A. He also transmitted an updated private placement memorandum for the investment to Customer A, along with the accompanying acknowledgment. Donnelly did not receive any commissions or other compensation for his activities. 

Donnelly failed to provide prior written notice to First Allied to participate in the company's sale of limited partnership units to Customer A. Donnelly's participation in the transaction was outside the regular course and scope of his employment with First Allied. 

Therefore, Donnelly violated FINRA Rules 3280 and 2010. 

. . .

From February 2020 through March 2021, Donnelly used his personal email account to communicate with Customer A about securities transactions. From October 2020 through April 2021, Donnelly also used text messaging on his personal cell phone to communicate with another First Allied customer (Customer B) about securities transactions, including the liquidation of several securities that Customer B held at First Allied. Donnelly did not forward his emails or text messages to First Allied for review or retention. As a result, Donnelly caused First Allied to fail to maintain those communications, as it was obligated to do under the Exchange Act and FINRA rules. 

Therefore, Donnelly violated FINRA Rules 4511 and 2010. 

• Securities Industry Commentator
• Bill Singer