In a recent review of a disciplinary action charging a chief compliance officer (CCO) with committing “should have known” liability, the DC Circuit Court of Appeals, in a per curium opinion, ignored the FINRA rule that the CCO allegedly violated. The decision raises questions about how FINRA will charge firms and compliance officers for “should have known” violations.
The Holy Grail. Knights who say “Ni.” The list goes on and on. (Wink wink, nudge nudge, say no more.) Monty Python, the comedy group, is known for a lot of things. However, what most people don’t know is that if you watch their movies, TV shows and Broadway musical very carefully, you’ll actually learn a lot about compliance and securities enforcement.
To understand what Monty Python can teach us about the SEC, CFTC and FINRA enforcement actions brought in September 2020, read more here.
A recent 2-1 decision by the Financial Industry Regulatory Authority Office of Hearing Officers stretched Rule 8210 beyond its wording and intent, barring a registered representative in the process.
The case, Department of Enforcement v. Wilfredo Felix, et al., involved several issues, including Felix’s failure to produce his Wage and Income Transcript (IRS transcript), which he could have obtained by submitting an IRS Form.
An IRS transcript is an IRS-created document that shows “most line items” from tax returns, including adjusted gross income. During the investigation, FINRA staff asked Felix to produce his IRS transcripts (a very rare request), which he did not have in his possession, or to sign an IRS Form instructing the IRS to send them to him.
He refused, stating that FINRA’s request went beyond the scope of Rule 8210.
Everyone knows that Seinfeld, which premiered 31 summers ago, was one of the most popular television sitcoms ever. It was on the airwaves (remember those?) for nine years, nominated for 68 Emmy Awards, winning ten times, including twice for Outstanding Writing in a Comedy Series, winning twice. It was self-identified as a “show about nothing.” Indeed, co-creator Larry David “admonished the writing staff that there would be ‘no hugging, no learning’ in the scripts, and there wasn’t. Ever.” However, despite this warning, those who watched the show know that it was, in fact, a show about a lot, including the following:
- A “puffy” shirt;
- A low talker, a close talker, and a high talker;
- A short-tempered soup restaurant owner who yells, “No soup for you”;
- Waiting for a table at a Chinese restaurant;
- Contests among friends;
- Re-gifting; and
- Of course, yada yada yada.
Those who watched the show carefully also know that despite the “no learning” admonition, Seinfeld provided important lessons about topics related to investing and the securities industry. Indeed, the final episode of the first season was called “The Stock Tip,” and 24% of all televisions in America “tuned in” to watch14 (back when we “changed” channels on a “TV”—not on a “screen” and “streaming” was the route tears took down your face when the TV antenna flew off your roof).
Read more here, to explore themes contained in Seinfeld that help explain securities enforcement actions.
The SEC, just a few days ago, announced an enforcement action against a trust company for failure to exercise substantial investment authority over their collective trust funds. According to the SEC, because of this failure, the trust was not entitled rely on the Section 3(c)(11) under the Investment Company Act and was therefore operating unregistered investment companies. This SEC’s action is curious to say the least; it is first statement by the SEC in recent memory which addresses Section 3(c)(11)’s bank-maintained requirement. The action does not allege client harm and does not serve to advance any stated concern by the SEC regarding bank collective trust funds which are bank-regulated products. By bringing last week’s case, the SEC raises the question of what constitutes “substantial investment authority” for purposes of the “maintained by a bank” requirement, but offers no sense of the SEC’s expectations or where the SEC may be headed more generally with respect to bank collective trust funds.