Finra Enforcement Proceedings and the Case of Stanley Clayton Niekras

FINRA Enforcement Proceedings and the Case of Stanley Clayton Niekras

November 7, 2017

FINRA Enforcement Proceedings

For any FINRA member charged with violations of FINRA rules, federal securities laws, and/or their provisions, FINRA can conduct an enforcement hearing. FINRA conducts their hearings with a panel of impartial adjudicators who preside over these cases (Guide)^[1]. In order to maintain the independence and the impartiality of these adjudicators, attorneys and respondents are prohibited from communicating with them in any fashion. Once someone is named as a respondent, they have a number of options. One potential option for them is to offer to settle. Rule 9270 states that these settlement offers must not be made frivolously, and in essence, the punishment must fit the crime - that is, an individual cannot propose a sanction or settlement that is not consistent with the gravity of the offence (Guide). Likewise, FINRA is also able to offer settlements, however FINRA’s settlements have often been described as heavy-handed and extreme (Financial Advisor)^[2].

        Once a complaint is lodged, rules 9133 and 9134 allow a respondent 25 calendar days from when they were served the complaint to file an answer. FINRA requires that an answer must either admit, deny, or request more evidence for each allegation made against the respondent. If a hearing is requested by either party, then a panel of three independent adjudicators is assembled (Guide). During a hearing, each party presents their case under oath by using relevant evidence, documents, and testimonies to build their case. These arguments and the evidence are crucial for the panel to come to a decision; after hearing all relevant information, the panel will sometimes request the parties provide “proposed findings of fact” and “conclusions of law” (Guide). Ultimately, this helps the panel reach a decision, which is reached based on a majority vote of the three-member panel. The decision is disseminated to repositories that FINRA members can access and is sent out to any firms with which the defendant may have had contact.  After the decision, the respondent is free to appeal the decision to the NAC, to the SEC and to federal court if further appeals are made (Decisions)^[3].

Department of Enforcement v. Stanley Clayton Niekras

An example that illustrates both the hearing process and an even rarer situation where FINRA lost an enforcement proceeding can be found in the case of Department of Enforcement v. Stanley Clayton Niekras. This case alleged that Mr. Niekras, a general securities representative, used misrepresentations and violated FINRA rule 2010 to an elderly couple and their adult children (Niekras)^[4]. FINRA rule 2010 requires any member to “observe high standards of commercial honor and just and equitable principles of trade,” (Guide)^[5].

As the elderly family was advancing in age, Niekras worked with them to try and make sure their children received some of their fortune. Niekras offered the adult children an annuity to invest in, which he would have made about $75K commission on, saying it was the best investment vehicle for them to accomplish the goals their parents had in mind.. The adult children declined, and Niekras then attempted to bill them for prior services he had rendered their parents, despite knowing no prior agreement was in place for any arrangement like this. This was the basis of FINRA Enforcement’s charges against Niekras. Enforcement alleges that the billing documents Niekras drew up in addition to oral statement Niekras made to the family regarding fee payment constituted material misrepresentations (Niekras).

        The family had requested that FINRA not contact the elderly parents out of respect for their advanced age and declining health. The record does note however that the parents did not suffer from any mental or physical ailments. On the final day of the hearing, Niekras went to the elderly parents’ home and spoke with the father. He noted that the father was “sharp as a tack” and essentially that their children had requested they not testify with no basis to do so (Niekras).

        In concluding the case, the Enforcement panel noted that their sole job was to determine whether Niekras had made material misrepresentations, with materiality defined as information that a reasonable investor would have considered in making an investment decision, as noted in class discussions. Enforcement could not find that Niekras’ alleged misrepresentations were actually statements of fact, but rather statements of opinion. In preparing the bills for the family, Enforcement held that he was taking the opinion that he should be compensated for his years of service and not actually serving them a bill to be paid. He essentially was expressing his belief he deserved to be paid if the adult children did not buy the annuity which he would have received commission on (Niekras). It is also somewhat interesting that Enforcement would attempt to prove a case about material misrepresentations without even attempting to verify if the parties that the alleged misrepresentations were made to could testify. Regardless, a footnote disclosure notes that FINRA found the conduct inappropriate on a number of levels, however the case was not based on that, and was decided as it should have been on the merits around the claim of alleged material misrepresentations (Niekras).

Appealing FINRA’s Decision to the NCA

After FINRA uses their Sanction Guidelines to determine the appropriate sanctions if violations have occurred, a firm or individual has the right to appeal a hearing panel decision to the National Adjudicatory Council (NAC), or the NAC may on its own initiate a review of a decision. The NAC has the authority to affirm, modify, reverse, increase, or reduce any sanction or impose any other fitting sanction. During the time frame when a decision is on appeal, the sanction is not actively enforced against the firm or individual. Approximately 86% of respondent’s appeals of NAC decisions to the SEC were dismissed without briefing or resulting in affirmed sanctions (Rubin)^[6]. One case that took place in 2006 while FINRA was known as NASD (National Association of Securities Dealer) was the case of American Funds Distributors, Inc. (AFD) where they choose to litigate rather than settle^[7]. In FINRA’s enforcement action, they stated that American Funds Distributer’s, “use of directed brokerage payments, a practice where AFD directed trades through brokerages' trading desks as a reward for selling funds to retail clients where AFD was the principal underwriter and distributor of those funds.” At this time, FINRA also alleged that 20 other firms were engaged in using directed brokerage payment activities but they all decided to settle resulting in $50 million in fees for FINRA. AFD argued to the hearing panel that although the practice in question was prohibited in a later amendment, the version of the rule in effect did not prohibit its conduct during the time frame they were alleged of misconduct. When AFD then appealed to the NAC, the NAC affirmed the Hearing Panel decision for a $5 million fine and stated that the conduct was intentional and not merely negligent.