I 'm not saying that FINRA is seeing Communists under every bed, but lately, our regulator is sure seeing a lot of Reds — as in red flags. Consider these two recent disciplinary actions.
Waving Red Flags
Registered Principal Robert Anthony Bellia Jr. was charged with failing to investigate why one registered representative under his supervision had an apparently troubling number of “sellouts” in his customers' accounts — a situation that FINRA deemed all the more worrisome because some new customers were also failing to pay for securities that had appreciated in value. Even I call that a red flag; and that's what FINRA called it too. Without admitting or denying the allegations, Bellia settled the case (FINRA OS/2005001502703/March 2009) and was fined $10,000; suspended 10 business days in all capacities; and suspended 90 days in his Principal/Supervisory capacity only. To FINRA's credit, the sanctions imposed upon Bellia strike me as fairly tailored to the violation.
Bellia is a perfect example of a compliance “red flag”:
One rep has numerous sellouts,
those sellouts involve a number of new accounts, and
those new accounts are walking away from profitable trades.
In response to those warning signs, a supervisor's hindsight, foresight, and insight should all be screaming out.
Missing Red Flags
But then there is the case of Hudson Securities, Inc., which FINRA charged with failing to tailor its Anti-Money Laundering (AML) procedures specifically to its wholesale trading business, for copying parts of it its AML document from irrelevant NASD examples that were meant to apply to retail business, and for failing to reference its AML guidelines in its supervisory document and compliance manual. Basically, the firm left employees to devise their own red flags to address the firm's market-making activities and to determine how to apply AML procedures. Without admitting or denying the allegations, Hudson settled the case (FINRA AWC/2007008732901/March 2009) and was censured and fined $10,000.
While I appreciate the concerns raised in the Hudson case, two aspects of the case bother me.
First, Wall Street truly needs to stop accepting the fiction that phonebooks of policies and procedures are tantamount to effective regulation and supervision. I mean, come on now, let's all be honest: No one ever reads those cumbersome written supervisory procedures (WSP), no one knows where they are kept at the branch, and hardly anyone ever encounters a problem and responds by thumbing through the WSP for guidance. These documents are doorstops, not compliance tools. Frankly, I sort of liked the idea that Hudson's employees had “to devise their own red flags” because it requires human beings to think and react. I'll take that any day over dry words on paper.
Second, in this day of billion dollar scams and trillion dollar budgets, maybe a $10,000 fine seems inconsequential — but ask enough independent/regional FINRA firms and I'm sure that you will find out that to them, $10,000 is still a tidy sum. Given that the Hudson case is about poorly written policies and missing cross-references, why not order that the necessary revisions be made to FINRA's satisfaction within 30 days — and if you have to add a fine, why not $1,000?
Wall Street's regulators squirmed before Congress when asked about the red flags they missed in Madoff and Stanford and AIG and every other recent scandal. The well-rehearsed explanation was that we lacked staffing and dollars — and then, it was my predecessor's fault and we're changing our policies to prevent a recurrence. Many of you probably chuckled in response to those lame excuses; after all, you've mouthed them yourself with a straight face to FINRA or the SEC. Ah, but with one, huge difference: no regulator ever seems to get personally fined or suspended — not like Bellia or Hudson.
All of which reminds me of a toast that I heard years ago. I apologize if I mangle the exact words but I'm going on memory here. Let me raise a glass to the good folks at FINRA and the SEC, and wish them the following:
May you have the hindsight to know where you've been, the foresight to know where you are going, and the insight to know when you have gone too far.