Here is a post from Michael about a recent settlement involving the submission of false expense reports. The issue isn’t the misconduct, but, rather, the rather tepid sanctions imposed. Do I sense the pendulum starting to swing back? – Alan

It is no secret that FINRA’s Department of Enforcement is attempting to maintain a lower profile these days, due to the pro-business, anti-regulation sentiment emanating from the White House. This year, the number of disciplinary actions brought, and the amount of fines levied, by FINRA have declined substantially. The number of press releases that FINRA has issued promoting its disciplinary actions this year likewise has declined substantially (25 in 2016 vs. 12 in 2017 so far). This strategy appears to be working, as I am unaware of any late night tweets about FINRA being sent from 1600 Pennsylvania Avenue.

I just read a recent AWC that may (or may not) be the product of this new politically-motivated, but nonetheless welcome, strategy. But first a little context: It has been standard operating procedure that if a rep submits personal expenses as business expenses to his firm for reimbursement, then FINRA will seek to bar that rep, irrespective of the dollar amount involved. Period. No room for negotiation. Indeed, some call this stealing. The argument for the bar being that if the rep tried to pull a fast one on his firm, then he may try to do something similar with his customers’ funds, and therefore, is unfit to be in the securities industry.

FINRA chose to depart from its standard operating procedure for Sandy Galuppo, a former Merrill Lynch rep who allegedly had $1.4 billion in client assets.[1] According to BrokerCheck, Merrill terminated Mr. Galuppo for “conduct including improper submission of personal expenses for reimbursement, resulting in management’s loss of confidence.” According to his AWC with FINRA, Mr. Galuppo “submitted dozens of business expense reimbursement requests that he knew or was reckless in not knowing were not compliant with the Firm’s reimbursement policies.” The AWC further found that “[Mr.] Galuppo’s expense reimbursement requests sometimes described meals with his team members as meals with clients, or personal meals as business meals. In other instances [Mr.] Galuppo also provided his subordinates inaccurate information about the reported attendees at meals,” including a $430 alleged client meal that only he and another Merrill employee enjoyed. Conspicuously absent from the AWC is any mention of the dollar amount of personal expenses for which Mr. Galuppo improperly sought reimbursement. Instead of imposing the standard sanction for this misconduct (i.e., a bar), FINRA allowed Mr. Galuppo to serve a one-year suspension, and to pay a $10,000 fine if he joins another firm. This is a very surprising result not only because of FINRA’s prior and consistent treatment of such misconduct, but also because of the number of instances in which Mr. Galuppo submitted false expense reports.

Hopefully, this newfound leniency is not a one-off result, and it carries over to other matters that do not result in customer harm or impact the integrity of the markets – the two tenets of FINRA’s mission statement. In any event, Mr. Galuppo fared quite well under the circumstances. I certainly will be watching to see if others who submit false expense reports for reimbursement, but who do not have a $1.4 billion book of business or work at a large firm, are afforded the same favorable treatment as Mr. Galuppo.