Goldman Sanction: FINRA Sends Message On Timely U-4 Amendment

Monday, January 3, 2011 - 01:00

On November 9, 2010, the Financial Industry Regulatory Authority (FINRA) announced yet another sanction of Goldman Sachs & Co. (Goldman) arising out of the Abacus transaction. The basis for the sanction, the firm's failure to timely report that Goldman registered representative, Fabrice Tourre, had received a Wells notice in the course of the SEC's investigation of the Abacus deal, is not surprising. But the magnitude of the sanction - $650,000 for a single U-4 reporting violation - has raised some eyebrows.

Ordinarily, unless willful and systemic, U-4 reporting violations, while by no means trivial in the eyes of the regulators, result in little more than a modest fine and even less attention. Clearly, with the Goldman sanction, FINRA intended to send a very different message - that at least in certain circumstances, even a single failure to report, if indicative of inadequate policies and procedures, can be extremely serious.

The Goldman sanction was by Letter of Acceptance, Waiver and Consent (AWC), and when compared to Goldman's earlier $550 million settlement of the SEC investigation, the sanction is the equivalent of a "parking ticket" for Goldman. Also, when measured against the substantial SEC fine levied against Goldman for the Abacus deal itself - or the £17.5 million sanction against GSI, the firm's international affiliate, by the Financial Services Authority (FSA), Britain's independent, non-governmental version of our SEC, for failing to disclose the Tourre notice - the FINRA sanction seems far less draconian. Indeed, it has been reported that Goldman was satisfied simply to get the entire episode behind itself.

Nevertheless, and certainly from FINRA's viewpoint, the regulatory outcome stands as a strong statement about a member's public disclosure obligations and the role of the Central Registration Depository (CRD) in keeping the industry, the various state securities regulators, and the investing public informed.

According to the AWC, though Tourre's counsel received the written Wells notice in September 2009, and immediately notified Goldman's legal department about it, Goldman did not amend Tourre's U-4 until over seven months later, in May 2010, and only after the SEC had filed a complaint in the matter against Goldman and Tourre. Furthermore, although Goldman's legal department knew of the notice, no one at Goldman advised Global Compliance Employee Services, the firmwide group at Goldman responsible for U-4 amendments, about it.

Question 14G of Form U-4 specifically asks: "Have you been notified, in writing, that you are now the subject of any(2) investigation that could result in a 'yes' answer to any part of 14 A, B, C, D, or E [regarding an actual finding of a violation]."

Putting aside for the moment that neither the SEC nor FINRA recognizes or identifies "subjects" of civil administrative or judicial proceedings and will not do so even if requested, as the Goldman AWC points out, where a written Wells notice has been given, one has the obligation to answer Question 14 G in the affirmative and to make the additional reporting required by it. Though neither the form itself nor the instructions for completing it explicitly say so, guidance in the nature of "Interpretive Questions and Answers" for Question 14 G of Form U-4 do, and have done so, since at least 1998. About its obligation to report, Goldman should have been clear.

That, alone, however does not explain the severity of the Goldman sanction. Rather, there is a flavor to the Goldman AWC that suggests FINRA believed, and perhaps was prepared to prove, that the failure to report Tourre's Wells notice was no mere oversight.

First, it was not the only time Goldman had failed to report a Wells notice. The AWC stated that on at least one other occasion between November 2009 and May 2010, an employee at Goldman had received a Wells notice, the Goldman legal department knew of it, and the event still went unreported.

Second, given the larger issues surrounding the entire Abacus episode and the high profile the matter had assumed within the highest levels of management at Goldman, the Tourre Wells could hardly have gone unnoticed. Typically, when the SEC issues a Wells notice to an individual involved in an investigation that also more broadly targets the firm, a separate Wells notice will be issued to the firm around the same time, and as it turned out that was, indeed, the case here. Goldman had received a similar Wells notice several months earlier, in July 2009.

Furthermore, as a result of the firm's public company reporting obligation to its shareholders, such notices typically engender serious discussion among senior management. One would therefore assume that the SEC's interest in the Abacus transaction had received considerable attention at the firm even before the Tourre Wells notice was reported to Goldman's legal department. Yet Goldman did not disclose the SEC investigation or its own Wells notice until after the filing of the SEC Complaint on April 16, 2010. And even then, it still took Goldman another three weeks, until May 3, 2010, to finally amend Tourre's Form U-4.

Though the AWC never explicitly says so, perhaps the size of the sanction reflects a belief on the part of FINRA that the delay in reporting the Tourre Wells was intended to buy time with the public and in the negotiations with the SEC. If that was the case, FINRA was having none of it and decided to make that point loud and clear.

If there is a practice pointer in the Goldman AWC, and presumably with a monetary sanction of this size FINRA intended there to be one, it is in two additional findings set forth in the AWC.

As the AWC notes, Goldman did not have in place an effective procedure to ensure that Goldman's Global Compliance Employee Services, the registration group with responsibility for amending Tourre's U-4, was promptly informed of the Wells notice. Furthermore, Goldman's written supervisory procedures did not even mention regulatory investigations, or the Wells notices which may accompany them, as an event requiring disclosure. According to the AWC, FINRA read that gap in Goldman's procedures to suggest that Goldman was under the misapprehension that the "triggering event requiring a Form U-4 amendment [occurred], if at all, at a stage significantly later than when a representative receives a Wells notice." The Goldman sanction surely removes any further doubt on that score.

While the Goldman sanction brings some clarity to the U-4 amendment process, it leaves a number of other questions unanswered. At least for now, the Goldman AWC seems to underscore the receipt of a Wells notice as one bright line "triggering event" for reporting a regulatory "investigation."

More troubling, however, is the vagueness of Question 14 G, itself. These days, it may not be at all clear when one is involved in an "investigation," as opposed to an informal inquiry or an examination which is moving parallel to, or supporting, a process that will culminate in a Wells notice. And its reference to "the subject" of regulatory investigation, when no such term is acknowledged by the regulators, which "could result" in the adverse outcomes requiring a "yes" answer to "any part of questions 14 A, B, C, D or E of Form U-4," as almost any investigation can, taken together with the substantial size of the monetary sanction in Goldman, leaves one to wonder: what then is the earliest stage at which firms must report, and, perhaps more importantly, can one afford to be wrong about it? It's certainly something to think about, and perhaps worth discussing with counsel if at all in doubt.

With almost 30 years of experience in securities litigation and regulatory enforcement, David C. Franceski Jr. represents nationally known broker dealers, investment companies and other financial institutions. He counsels clients with respect to insider trading, regulatory inquiries, formal investigations and enforcement actions, and regularly appears before governmental agencies and self-regulatory organizations with responsibility for securities industry oversight. His industry experience also includes Securities Act, Securities Exchange Act, ERISA and Investment Company Act litigation on behalf of a number of the nation's leading investment banks and mutual fund complexes. A long-standing member of the Securities Industry and Financial Markets Association (SIFMA), Mr. Franceski is the current chair of Stradley Ronon's Securities Litigation Practice Group.

Please email the author at dfranceski@stradley.com with questions about this article.