9 FINRA developments for wealth managers to watch

August 10, 2022 5:16 PM

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The unanimous award of $1.4 million against Citi for being a 'boys club,' concerns about the impartiality of the arbitrator selection process and alarm bells ringing over the continuing deficiencies in alternative mutual funds are among the latest developments in the FINRA world.

Read our roundup for more on these and other FINRA stories that the wealth management community is watching.

A Citibank Branch Ahead Of Earnings Figures

David Paul Morris/Bloomberg

Citi must pay $1.4M to financial advisor who called it a ‘boys club’

Former Citigroup financial advisor Erin Ann Daly was awarded more than $1.4 million in damages from Citigroup Global Markets and other Citi entities in a FINRA arbitration award following a 10-year fight against gender-based discrimination.

A New York panel ruled in Daly's favor that the firm violated the Civil Rights Act against discrimination in employment. The decision stated that Daly was "illegally discharged."

"This exclusion from her business functionality resulted in loss of opportunity and is a result of Citi's 'boys' club' policies and practices which underlie a culture of gender discrimination," the lawsuit stated.

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Citi must pay $1.4M to financial advisor who called it a 'boys club'

Government Accountability Office As Report Says Most Federal Agencies Don't Follow Security Procedures

Ting Shen/Bloomberg

SEC makes stealth FINRA oversight changes

"Performance measures," "deficiencies" and "corrective actions" were the primary focus of the SEC's recent efforts to tighten its scrutiny of FINRA following recommendations from the Government Accountability Office last December.

But while the GAO's previous Dodd-Frank mandated triennial reviews of the SEC's oversight of FINRA were made fully public, the SEC has now ordered the GAO to remove certain details from the public version of the report published by the GAO in December 2021. The ostensible reason is that the report contains "confidential supervisory information," said the SEC.

However, concerns exist about powers being used "to prevent the public from accessing information that the public or the industry should have a right to review," said Michael Canning, former director of policy and government affairs for the North American Securities Administrators Association.

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SEC makes stealth FINRA oversight changes

Wells Fargo Says Client Borrowing Likely To Accelerate In 2022

Victor J. Blue/Bloomberg

Arbitration ‘fraud’ verdict against Wells Fargo tossed

There is nothing to suggest that Wells Fargo and FINRA conspired to manipulate the arbitrator selection process, according to a Georgia appeals court ruling that threw out an earlier decision by a Fulton County Superior Court judge against the firm and the regulator.

Former Wells Fargo client Brian Leggett sued to overturn a 2019 FINRA arbitration award against him, claiming the process was rigged by the firm and FINRA. In January, Judge Belinda Edwards decided in his favor. Wells Fargo appealed the decision and on Aug. 2 a three-judge panel upheld the 2019 award.

"We were always confident in the merits of our appeal and are pleased that the Georgia Court of Appeals completely validated our position," said Wells Fargo spokesperson Shea Leordeanu. "As a result, the original arbitration award in favor of Wells Fargo has been reinstated."

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Arbitration 'fraud' verdict against Wells Fargo tossed

Trading On The Floor Of The NYSE As Stocks Extend Gains

Michael Nagle/Bloomberg

Ex-Voya client wants firm to pay up now that broker has fled country

A Florida-based FINRA arbitration panel is under fire for its decision to deny a former Voya client's claims against the firm while awarding the client compensatory damages against one of the firm's former advisors, who relocated to the Dominican Republic after being barred in 2018.

The ruling ordered ex-Voya advisor James "Jim" Travis Flynn to pay $322,990 to former client Laurita P. Chmielewski for unsuitable and negligent "high-risk, high-fee, illiquid investments." However, the panel denied Chmielewski's claims against Voya itself without providing any explanation.

"The panel's blatant disregard of the controlling law and resultant failure to find Voya vicariously liable is particularly egregious because [she] has no ability to recover damages against respondent Flynn, who has fled the country," said Chmielewski's attorney Daniel Broxup of Mika Meyers.

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Ex-Voya client wants firm to pay up now that broker has fled country

Photo: Michael Chu

FINRA orders National to pay $9M in latest alternative product case

National Securities must pay nearly $9 million in disgorgement of profits, fines and restitution to settle FINRA charges for "misconduct intended to influence artificially the market for securities offered by the firm's corporate affiliates and investment banking clients" dating back to June 2016 to December 2018.

With the SEC filing its first enforcement action in June under the new Regulation Best Interest rule, the resolution of the National case after four years has the wealth management industry on alert as to what the future may hold for enforcement cases.

"I could easily see the investment banking issue becoming a major focal point for the SEC's initial enforcement actions," said Michael Edmiston, an attorney with Jonathan W. Evans & Associates and current president of the Public Investors Advocate Bar Association. "That's an easy prove to show it wasn't in the best interest of the customer."

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FINRA orders National to pay $9M in latest alternative product case

Norway's Wealth Fund Buys Bank Of America Office In London For $944 Million

Chris Ratcliffe/Bloomberg

Merrill Lynch’s mutual fund restitution tops $119M after latest FINRA case

In its third FINRA case in eight years, Merrill Lynch has agreed to pay $15.2 million in restitution and interest, but avoided a regulatory fine by giving "substantial assistance to FINRA in its investigation" of charges that the firm's clients paid unnecessarily high fees on their mutual funds.

Due to an error in Merrill's automated system, from January 2015 to January 2021 clients were invested in Class C shares when cheaper Class A shares were available, resulting in higher fees.

"We proactively detected this issue, reported it to FINRA and developed a client reimbursement plan," said Merrill spokeswoman Naomi Patton. "We implemented enhancements to address the issue and appreciate FINRA's acknowledgement of our extraordinary cooperation."

Although Merrill avoided a fine on this occasion, the firm has now paid more than $119 million to settle the three FINRA cases.

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Merrill Lynch's mutual fund restitution tops $119M after latest FINRA case

FINRA raises another alarm about alternative mutual funds

Alternative mutual funds remain high on FINRA's list of concerns, despite client losses of more than $1 billion in the infamous "Volmageddon" equity plunge in February 2018 and a spate of five supervisory cases of the product between March 2021 and 2022.

"While these funds may be appropriate for some investors," said FINRA in an April 19 regulatory alert, "FINRA has consistently emphasized the importance of member firms' sales practice obligations for these and other products, especially when such products may carry additional risks for customers."

Although a FINRA examination priorities letter in 2015 and an SEC investor alert in 2017 aired early concerns about alternative mutual funds, FINRA continues to see "deficiencies in its examinations and communications reviews of such products" that wealth managers should note.

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FINRA raises another alarm about alternative mutual funds

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FINRA revives expungement proposal that died after pushback

FINRA has presented a new proposal to reform the process for expunging client complaints from an advisor's record almost a year after the regulator put the previous proposals on hold following criticism from leading industry bodies, including the Public Investors Advocate Bar Association.

According to PIABA Foundation President Lisa Bragança and board member Jason Doss, client claims can currently be removed on a questionable or even invalid basis under FINRA's rules. "We are trying to fix this process," said Bragança. "[FINRA] do seem to have heard some of the things that we're talking about."

However, Doss has concerns. "If they intend to submit the same proposal that they did before, they're going to have the same result," he said.

Meanwhile, FINRA remains positive. "FINRA is committed to shaping the expungement process so that it operates as intended — as a remedy that is appropriate only in limited circumstances in accordance with the narrow standards in FINRA rules," said the FINRA proposal.

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FINRA revives expungement proposal that died after pushback

FINRA accuses terminated brokerage of juicing bond sales with lies

A new FINRA enforcement action against Fusion Analytics Securities for "material misrepresentations and omissions" to clients that netted the brokerage firm $146,000 in commissions has increased the pressure on the firm, its CEO and its RIA affiliate.

Fusion CEO Michael J. Conte accepted a bar in October after he refused to testify before the regulator about its "investigation into potential misrepresentations made in the participation in and supervision of the sale of multiple private offerings of bonds." In a separate case, the SEC filed charges against Conte and the firm's RIA affiliate in August for "fraud in connection with the sale of promissory notes."

In response to the SEC's allegations, Conte and the company denied they made false or material misrepresentations, failed to act in good faith or exercise reasonable diligence. However, a recent mediation session between the parties indicates that a settlement may be forthcoming.

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FINRA accuses terminated brokerage of juicing bond sales with lies