Back to the Future, but SEC and FINRA Enforcement Issues from the Present (October 2020)
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NSCPCurrents NOVEMBER 2020 Back to the Future, But SEC and FINRA Enforcement Issues from the Present (October 2020) By Brian Rubin About the Authors: Brian Rubin is a Partner at Eversheds Sutherland. He can be reached at [email protected]. 1 NOVEMBER 2020 NSCP CURRENTS 1 NOVEMBER 2020 NSCP CURRENTS his year marks the 35th anniversary of the premier of the first Back to the Future movie, and November 5th was the 65th anniversary of Marty McFly going back in time in the TDeLorean to escape the terrorists who shot Doc Brown. Back to the Future Part II followed in November 1989, where our stars traveled from 1985 to 2015, a world of flying cars andJaws 19 (or not). And then came Back to the Future Part III in May 1990, involving a trip to the Wild West in 1885. The movies are known for many things, including the following: • Cool things and happenings: • The hoverboard • Self-tying sneakers • The skateboard chase • Quotes: • “Why don’t you make like a tree and get outta here?” (Cf. “Why don’t you make like a tree and leave?”) (Get it?) • “Roads? Where we’re going, we don’t need roads.” • “Nobody calls me chicken.” • “Eastwood. Clint Eastwood.” (Cf. “Bond. James Bond.”) • “Who’s Vice President, Jerry Lewis?” • When Marty claimed to be from 1985, 1955, Doc asked him, “So tell me, future boy, who’s president of the United States in 1985?” Marty responded, “Ronald Reagan,” causing Doc to say, “The actor? Then who’s Vice President, Jerry Lewis? I suppose Jane Wyman is the First Lady. And Jack Benny is Secretary of the Treasury!”1 • “Great Scott!” • Songs: • Johnny B. Goode • The Power of Love Less well known is that if you watch the movies closely enough (multiple times over many years), you’ll learn that they really deal with compliance issues, applicable to the securities industry, not unlike other popular movies and television shows.2 For example, while the movies don’t deal with insider trading (the purchase or sale of securities based on material non-public information), they do deal with something similar: betting on sporting events in the past, knowing the outcome because of an almanac from the future. For those who don’t remember, Marty got the great idea of bringing a copy of “50 Years of Sports Statistics” to the past so he could place a few bets. Doc (correctly) reprimanded him: Doc: Marty! I didn’t invent the time machine for financial gain. The intent here is to gain a clear perception of humanity: where we’ve been, where we’re going, the pitfalls and the possibilities, the perils and the promise . perhaps even an answer to that universal question: Why? Marty: Oh, hey, I’m all for that, Doc, but what’s wrong with making a few bucks on the side?3 Even though Doc was not a compliance officer (as far as we know), he convinced Marty to do the right thing and throw the almanac in the trash. Later, however, Doc and Marty pieced together the following set of facts: Doc: You see, while we were in the future, Biff got the sports book, stole the time machine, went back in time and gave the book to himself at some point in the past. Look . It says, 1. https://sfy.ru/transcript/back_to_the_future_ts. 2. See, e.g., Not Dead Yet: Just Flesh Wounds, Suspensions, and Fines (SEC, CFTC and FINRA Enforcement Actions in September 2020), Currents (October 2020); “The Show, er, um, Article About Nothing (other than SEC, CFTC, FINRA, and State Securities Enforcement Actions in August 2020),” Currents (September 2020); “Just When You Thought It Was Safe to Go Back in the Office (Or at Least Think About It): SEC and FINRA Examinations and Enforcement Actions in July 2020, Currents (August 2020); “Curb Your Enforcementism: SEC and FINRA Enforcement Cases in June 2020,” Currents (July 2020). 3. http://www.dailyscript.com/scripts/bttf2_3.pdf (edited). 2 NOVEMBER 2020 NSCP CURRENTS right here, that Biff made his first million betting on a horse race in 1958. He wasn’t just lucky: he knew because he had all the race results in the Almanac! That’s how he made his entire fortune! Marty: That [so and so] [or expletive deleted, if you prefer] stole my idea! Doc, he must have overheard me when I told you . This whole thing’s my fault. If I hadn’t bought that book, none of this would have happened. Doc: Well, that’s all in the past. Marty: You mean in the future. Doc: Whatever, it demonstrates precisely how time travel can be misused and why the time machine must be destroyed . after we straighten all of this out4. So, dear readers, is Doc liable because he knew of the red flags (the almanac and the time machine), but he didn’t take sufficient steps to prevent each from being used for nefarious purposes? For example, why didn’t he burn the almanac or hide the keys to the DeLorean? And is Marty liable for aiding and abetting or causing Biff’s impermissible activity because Biff used Marty’s idea? After all, Marty did admit it was his “fault,” didn’t he? Well, luckily for us, these activities did not involve the trading of securities. (And, of course, these characters are fictitious, so who really cares?) Nonetheless, as we’ll see, other aspects of Back to the Future present lessons more applicable to the securities profession. (Warning: after reading this article, it’s possible that regulators will demand that firms build time machines so they can prevent inappropriate behavior from occurring.) Failure to Report One of the rules of time travel is that you can’t alter history (as anyone who has ever engaged in time travel or watched a Back to the Future movie knows). If you do, then magical musical moments like bringing your parents together (metaphorically and otherwise) may not occur, and you may not be born. As Marty said to band leader, Marvin Berry (Chuck’s brother): Marvin, you gotta play. See that’s where they kiss for the first time on the dance floor. And if there’s no music, they can’t dance, and if they can’t dance, they can’t kiss, and if they can’t kiss they can’t fall in love and I’m history.5 Similarly, under the securities law, you cannot go through time to alter history, and you must report certain historical events on Form U4 and U5 amendments and pursuant to Rule 4530. (Pretty good transition, huh?) On October 27, 2020, FINRA entered into a Letter of Acceptance, Waiver and Consent (AWC) settlement with a firm, fining it $125,000 for, among other things, filing deficiencies related to Forms U4 and U5 amendments and Rule 4530(d).6 FINRA found that between May 2015 and November 2018, the firm filed four late Form U4 amendments and eight late Form U5 amendments relating to reportable customer complaints and an unsatisfied judgment. In addition, the firm failed to file five Form U4 amendments relating to reportable customer complaints. The firm also failed to report or reported late statistical and summary information for 19 written customer complaints, reported a year late a settlement of a customer’s claim for sales practice violations and submitted 34 inaccurate or incomplete filings required by FINRA Rule 4530(d). FINRA also found various violations related to the firm’s Written Supervisory Procedures (WSPs). The firm’s failure to enforce its procedures occurred for various reasons. In some instances, firm personnel failed to identify the communication at issue as a complaint or incorrectly determined 4. http://www.dailyscript.com/scripts/bttf2_3.pdf. 5. https://sfy.ru/transcript/back_to_the_future_ts. 6. https://www.finra.org/sites/default/files/fda_documents/2017053208002%20National%20Securities%20Corporation%20CRD%207569%20AWC%20sl.pdf. 2 NOVEMBER 2020 NSCP CURRENTS 3 NOVEMBER 2020 NSCP CURRENTS that a customer complaint was not a reportable event. In other instances, firm personnel failed to timely review and process customer complaints in accordance with firm procedures. On other occasions, the firm’s registration group entered the wrong problem code or failed to identify the subject security in a FINRA Rule 4530 filing. Takeaways: • Regulatory filings are a FINRA priority. Such filings are one tool regulators use to perform their jobs. • Firm’s may have adequate written procedures, but if they don’t enforce them properly, firms may be sanctioned. • Although the AWC does not use the word “training,” it appears that the firm may not have adequately trained its staff on how to identify complaints and when to make regulatory filings. In addition, the firm may not have adequately supervised the employees responsible for this function. Improper Payments of Personal Expenses Sometimes, fees and payments are easy to understand—they are used to pay for goods or services. On the other hand, sometimes things are free. But, on the third hand (in the future, people may have three hands), sometimes things are free, but they still cost money. Lou: Are you gonna order something, kid? Marty: Yeah, gimme a Tab. Lou: Tab? I can’t give you a tab unless you order something. Marty: Right, gimme a Pepsi Free. Lou: You wanna a Pepsi, pal, you’re gonna pay for it.7 In separate settlements, FINRA sanctioned two firms for treating personal expenses as business expenses, causing firms to maintain inaccurate books and records. In one settlement, on October 1, 2020, FINRA entered into an AWC with a firm and an individual who was its Chief Executive Officer (CEO), President, Chief Compliance Officer (CCO), Finance and Operations Principal (FINOP), and sole owner for, among other things, inaccurate classifications of certain business expenses as business expenses, causing inaccurate FOCUS reports and inaccurate books and records.8 The CEO/CCO/Etc.