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Regulatory Sanctions

FINRA Closes 4-Year Old Best Execution Case Against Oppenheimer

October 19, 2017

by Howard Haykin


So, FINRA conducted a sweep of a broker-dealer's proprietary muni bond trades with its customers and detected some ‘low-hanging fruit’ violations – 6 trades over a 3-month period in which the B/D may not have provided Best Execution. It only took 4 years for FINRA to resolve or settle this case with the B/D. So now, everyone must be pleased to see this case closed – but not me. Because the case is a reminder that FINRA can always come up with rule violations during an investigation or sweep. The only question for member firms is, to what extent should a broker-dealer fight FINRA's charges and its attendant sanctions. [A host of CCO’s can attest to putting up a good fight – right, Gene?]


Oppenheimer & Co agreed to pay over $30K in fines and restitution to settle FINRA charges that the firm failed to provide best execution to customers in proprietary transactions involving municipal securities.


BACKGROUND.    New York, NY-based Oppenheimer has been a member firm since 1945. The firm settled similar charges in 2013 for violations that took place in 2008.


FINRA FINDINGS.    In a sweep examination for the 3-month period, 7/1/13 through 9/30/13, FINRA identified 6 transactions in which Oppenheimer purchased municipal securities for its own account from a customer and/or sold municipal securities for its own account to a customer at an aggregate price (including any mark-up or mark-down) that was not fair and reasonable.


FINRA says it took into consideration all relevant factors, including: (i) the best judgment of the broker, dealer or municipal securities dealer as to the fair market value of the securities at the time of the transaction and of any securities exchanged or traded in connection with the transaction; (ii) the expense involved in effecting the transaction; (iii) the fact that the broker, dealer, or municipal securities dealer is entitled to a profit; and, (iv) the total dollar amount of the transaction.


The conduct described in this paragraph constitutes separate and distinct violations of MSRB Rules G-17 (Conduct of Municipal Securities and Municipal Advisory Activities) and G-30 (Prices and Commissions).


FINANCIALISH TAKE AWAYS.    FINRA probably sees little value in disclosing specific relevant factors used in determining the sanction - like, how many proprietary muni bond trades were tested from the Relevant Period – and thus, what percentage of those trades that were found to be violative in nature. Of course, I'll forever recall a statement by Mike Wolk in the 1990's when he ran Market Regulation for FINRA (he's now a law partner with Sidley Austin). When asked about de minimus standards, Mike responded that one trade that negatively impacts a customer is “one too many.”


Yes, well, we all have to champion our causes, and I’ve always expressed the belief that FINRA jeopardizes its cooperative or collaborative relationship with its member firms when it chooses not to bend with materiality. APPLY ZERO TOLERANCE FOR DETECTING ERRORS DURING EXAMINATIONS, BUT EASE OFF WHEN CONSIDERING SANCTIONS - USE MATERIALITY, AND REMEMBER THAT THERE'S STILL A PLACE IN REGULATION FOR "LETTERS OF CAUTION."


As applied in this case, were the 6 violative transactions enough to warrant a $30K fine? It all depends ...


This case was reported in FINRA Disciplinary Actions for August 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2013038869101.