I have always operated with the understanding that, per FINRA rules, one cannot supervise him- or herself. Hardly an outrageous proposition. Today, however, that fundamental, bedrock understanding was so shaken, it has left me wondering whether anything is what it seems (especially when coupled with Loyola’s win this weekend over Illinois, which, really, can only have occurred in some bizarro alternative universe).
It all stems from an AWC submitted by The Logan Group Securities, a modest little matter resolving a modest rule violation. But, there is more here than a quick read reveals.
According to the AWC, Logan Group is a sole proprietorship, and Mr. Logan, the firm’s owner, is its sole registered person.
Let’s stop right there. Doesn’t that HAVE to mean that Mr. Logan – by necessity – supervises himself? Metaphysically speaking, I just don’t see a way around that. I mean, he can only be supervised by another registered person. And, if there is no such person, who does that leave to supervise Mr. Logan? [Insert “brain exploding” sound effect here.]
Ok, moving forward. So Mr. Logan does everything at his firm, it seems. He’s the salesman. He’s the CEO. He’s the CCO. He’s the supervisor. Heck, he probably brews the coffee and hangs the office decorations around Christmas time. He is responsible for the WSPs, that is, creating and maintaining them, and then following them. Given that, unlike an RR at an ordinary firm, when confronted with an apparent sales practice issue, he cannot defend himself by arguing that he lacks culpability because he did everything the WSPs required (suggesting to FINRA that the problem isn’t with the RR, but, rather, the BD, for having inadequate procedures), since to do so would simply mean he was pointing the finger at himself.
So, according the AWC, Mr. Logan sold a bunch of variable annuities. FINRA seems to have had some concerns with the share classes that Mr. Logan recommended to his customers for a period of about one year, from October 2017 to September 2018. Sometimes he used B shares, typically with a seven-year surrender period, other times he used L shares, with a shorter surrender period of three to four years but with higher annual fees. Oddly, even though the AWC includes a finding that there was a violation of Rule 2330, which is the suitability rule for variable annuities, FINRA never flat out finds that the recommendations were unsuitable.
Instead, what FINRA concludes is that the supervisory procedures that Mr. Logan created to deal with the “recommendation and sale of different variable annuity share classes, specifically L shares sales,” were inadequate.
Let’s stop again. So the issue isn’t that Mr. Logan made unsuitable recommendations to his annuity customers. Rather, it is that the supervisory procedures he created to supervise his own sales of annuities were not reasonable because they didn’t work well enough to pick up any potential issues created by his choice of share class.
Wait, what? The procedures that Mr. Logan created were not robust enough to allow him, as supervisor, to detect that the recommendations he himself made, as registered rep, were potentially problematic? You can see how this AWC and its Möbius strip of an analysis has left me confounded.
There were some additional supervisory violations – the firm failed to fulfill a promise it made to FINRA to document its review of variable annuity options with customers; it failed to update its WSPs to reflect a new form it was using to highlight the features of the annuities it was selling; and it failed to collect the investment objective and risk tolerance information for three L-share contract customers – but none was particularly outrageous. The whole case basically boiled down to the fact that Mr. Logan didn’t do a good enough job of supervising (and documenting that supervision of) Mr. Logan’s own sales of annuities.
Which, I suppose, brings me to this question: why, for heaven’s sake, did FINRA charge this as a supervisory claim against a one-man firm, rather than charging that one man with the underlying violations themselves? If FINRA didn’t like the share class that Mr. Logan utilized, why not simply charge him with making unsuitable recommendations? I have devoted blog after blog to complaining about the fact that FINRA is quick to name individuals at small firms as respondents in supervisory cases, while it is loath to do the same with big firms. Yet, here is the smallest possible firm, and rather than doing what it always does, FINRA, instead, elects not to name an individual, but, rather, only the firm.
As long as I do this, I will never understand what makes FINRA tick.
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March 25, 2021 at 01:50AM
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If You Supervise Yourself - Which You Cannot Do - Make Sure You Do It Right - JD Supra
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