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Compliance Concepts

Wide Scale Proxy Voting Fraud Took Down Firm, But Not Senior Management

March 20, 2018

by Howard Haykin


Harking back to days when “KNEW OR SHOULD HAVE KNOWN” was a standard used by regulators to determine culpability - particularly among senior management types. Continue reading ...


It’s a somewhat confounding case. Realty Capital Securities (“RCS”), a broker-dealer, was charged in November 2015 with violating Massachusetts securities laws when certain of its brokers participated in a proxy voting fraud. The brokers, it seems, submitted fake proxy votes in connection with 2015 annual shareholder meetings of certain investment funds sponsored by American Realty Capital (“ARC”), an affiliate of the broker-dealer. 


In early December RCS agreed to pay a $3 million fine and terminate its Massachusetts securities license in order to settle the Massachusetts charges. By January 2016, RCS shuttered its door when it withdrew its broker-dealer registration with the SEC.  [Click on NYTimes, 12/2/15]


Yet, Massachusetts regulator William Galvin wasn’t finished. In June 2016, the securities regulator fined 7 other broker-dealers a total of $238,000 because their brokers worked with RCS brokers in submitting unauthorized proxy votes for the ARC-sponsored nontraded REITs. Those firms were: (i) Voya Financial Advisors; (ii) FMN Capital Corp; (iii) Invest Financial Corp.; (iv) Newbridge Securities; (v) Pariter Securities; (vi) Platinum Wealth Partners; and, (vii) TKG Financial.


WHICH BRINGS US TO THE VEXING QUESTION.    Having presented a proxy voting scam so egregious that a broker-dealer paid a $3 million fine and shut down its operations, how then is it possible that just a handful of lower level registered reps / wholesalers were charged in the ‘crime’?  



  • In recent articles in other publications, we learn that at least 2 other RCS brokers were alleged to have taken part in the proxy fraud.  However, both individuals refused to cooperate with FINRA investigators and were barred from the industry.


Yet, nowhere else could I find any records to indicate that principals or senior management of RCS were ever sanctioned in connection with this case. From FINRA's BrokerCheck records, I was able to identify RCS's CFO, COO and CCO during the Relevant Period. But none had any disciplinary disclosures in their files.


FINANCIALISH TAKE AWAYS.    It once again adds up to frustration with FINRA and other regulators. Are regulators afraid to hold managerial and supervisory types responsible for violative actions at their financial services firms? When did regulators stop referring to the “KNEW OR SHOULD HAVE KNOWN” standard for judging negligence?


More importantly, when will regulators return to the “KNEW OR SHOULD HAVE KNOWN” standard?