Dissenting Statement In the Matter of Oppenheimer & Co., Inc.
Commissioner Luis A. Aguilar and Commissioner Kara M. Stein
Feb. 4, 2015
We respectfully dissent from the Commission’s Order (“Order”) waiving Oppenheimer & Co., Inc.’s automatic disqualification from certain provisions of Regulation D. This “bad actor” disqualification was triggered by the firm’s egregious misconduct, which resulted in $20 million in disgorgement and civil penalties, and a concurrent enforcement action by the Financial Crimes Enforcement Network (“FinCEN”). The facts here make all too clear why the bad actor disqualification provisions were enacted.
To fully explain the extent of the error in granting a full waiver, we first discuss Oppenheimer’s misconduct. We then address the Commission’s decision to turn a blind eye to this firm’s repeated violations, and finally, the deficiencies in the Order granting the waiver request, and how that Order departs from the Commission’s long-established standard criteria.
The nature and extent of the violations that triggered this automatic disqualification, as well as the other violations involved, are significant. First, the firm knowingly executed sales of billions of shares of penny stocks on behalf of a customer, even though its personnel recognized that these transactions were likely unregistered, and therefore unlawful. The firm also failed to stop another customer, a Bahamian entity, from engaging in suspicious sales of billions of shares of penny stocks, despite red flags that these transactions were also unregistered. Second, the firm violated anti-money laundering laws, knowing or having reason to suspect that this Bahamian entity was using its account to evade the payment of U.S. taxes. The firm also failed to withhold taxes owed by U.S. citizens. Finally, the firm permitted the Bahamian entity to act as an unregistered broker, knowingly allowing the entity to execute trades for its clients through Oppenheimer accounts.
FinCEN also brought charges for the misconduct that triggered the bad actor disqualification. As FinCEN’s order assessing a money penalty notes, Oppenheimer had prior penalties for similar anti-money laundering violations in 2005 and again in 2013. The firm also willfully violated the Bank Secrecy Act by failing to implement an anti-money laundering program and failing to file Suspicious Activity Reports with FinCEN.
These violations are just the most recent chapter in a long and unfortunate history of regulatory failures, some more significant than others, but cumulatively indicative of a wholly failed compliance culture. In fact, since 2005, there have been at least 30 separate regulatory actions against Oppenheimer for numerous violations of securities laws and rules.
It is difficult to conceive of a better justification for the bad actor disqualification under Rule 506, or a better reason to act with great care and caution in analyzing whether "good cause" may exist to waive this automatic disqualification. In fact, it is questionable whether a waiver is appropriate at all in these particular circumstances.
Nonetheless, a majority of the Commission granted a full waiver from the five-year automatic disqualification period, based on Oppenheimer’s representation that it will hire a law firm to review its policies and procedures for compliance with Rule 506. To be clear, the Commission’s Order does not require the hiring of a law firm that is either qualified or independent—i.e., one that has not worked for Oppenheimer in the past, much less on Rule 506 matters. This is unacceptable, and a departure from the Commission’s usual practice. If a bad actor waiver is to be granted in the face of such serious and longstanding compliance deficiencies, the Order must reflect careful and strict measures to satisfy the Commission that the firm's Rule 506 business can be conducted in accordance with applicable laws and regulations. Anything less would needlessly place investors at risk, and also be unfair to all those firms in the market that play by the rules.
The facts demonstrate that Oppenheimer has a failed compliance culture, from top to bottom. Although one can hope that the firm will turn things around, the Commission cannot be blind to the fact that prior enforcement actions have also required the firm to retain consultants and to prepare reports on its remediation efforts. The fact that these past efforts have failed to alter an entrenched culture of non-compliance makes the decision to grant a full waiver in this matter even more disconcerting.
Automatic disqualifications from certain privileges of the securities laws are a powerful tool, and they are also intended to protect investors from recidivists. In some cases, we may be able to achieve these goals by requiring meaningful conditions to be attached to the granting of a waiver, tailored to the specific facts at hand. The key, ultimately, is accountability.
Regrettably, the conditions in this bad actor waiver lack teeth because at least three critical components are missing. First and foremost, there is no legally enforceable requirement that the law firm hired to review Oppenheimer’s policies and procedures for ensuring compliance with Rule 506 will be qualified and independent. The Commission has a tried and true approach to consultants that has been used for decades, one designed to prevent conflicts of interest in the compliance review process arising from the desire of the consultant to please an existing client, or to obtain new business. The Commission set a dangerous precedent by ignoring this sound approach in drafting the Order in this case. We sought to have this rectified, but our concerns fell on deaf ears. As constituted, the Order allows Oppenheimer to select as its consultant a law firm already in its employ, one that has every incentive to be accommodating by ignoring or dismissing inadequacies in the firm’s practices. Such a consultant may be even more dangerous than none at all, since it conveys a false sense of security to the Commission and investors. We were offered no compelling reason for disregarding the Commission’s existing standard for compliance consultants—least of all in the case of a frequent recidivist such as this. In fact, although the language incorporated into the Order provides that the law firm must “not be unacceptable” to the staff, we understand that the staff will not utilize our traditional criteria in determining acceptability. Because our votes to approve the waiver were not needed, we were unable to insert this important protection. Perhaps this dissent will help encourage a better result in the selection process. In any event, staff discretion is not an adequate substitute for including the standard requirements in a legally enforceable order.
Second, there is no requirement for even the most cursory involvement in this compliance review process at the top levels of the firm. The firm’s senior management need not review the report prepared by the law firm, much less vouch for its accuracy. For a compliance review to have any hope of dislodging entrenched practices and a dysfunctional corporate culture, the firm’s senior executives need to establish the correct tone at the top, and be accountable for compliance.
And third, there is no requirement for the firm to return to the Commission at any point to demonstrate that it has complied with the federal securities laws and that continuing the waiver from disqualification is, in fact, warranted. Given the firm’s recidivism, we should not blindly rely on what is essentially just another unconvincing promise to do better.
The Commission’s mandate to protect investors demands that it verify that Oppenheimer has finally carried through on its promises of reform. The simple expedient of a time-limited waiver could provide a strong motivation toward achieving compliance, and help avoid future violations that could harm investors and our markets. Prior efforts to ensure compliance at this firm have failed—repeatedly. It is time for a new approach, one that at least has a chance of successfully focusing the firm’s attention on compliance.
The Commission is this firm's primary regulator, and with this action a majority of the Commission is telling the public that this firm should not be labeled a "bad actor." Given the long record of broken promises, the Commission must demand more accountability from this firm and its leadership. The public deserves no less. The requirements we sought for a qualified, independent consultant, involvement by senior management, and/or a time-limited waiver represent relatively minor changes, but they could have provided significant additional assurances that investors will not be harmed yet again. They would also have sent a clear message that there are meaningful consequences for firms that repeatedly and deliberately flout applicable laws and rules.
For all of these reasons, we cannot support the firm’s request for a waiver from automatic disqualification as a bad actor under Rule 506 of Regulation D.
 See 17 CFR 230.506(d)(1)(iv)(B) and (v)(B).
 See In the Matter of Oppenheimer & Co., Inc., Securities Act Release No. 9711 (Jan. 27, 2015), available at http://www.sec.gov/litigation/admin/2015/33-9711.pdf (the “SEC Charging Order”); see also In the Matter of Oppenheimer & Co., Inc., FinCEN No. 2015-01 (Jan. 27, 2015), available at http://www.fincen.gov/news_room/ea/files/Oppenheimer_Assessment_20150126.pdf (the “FinCEN Charging Order”).
 In fact, these transactions were illegal and unregistered, resulting in charges against Oppenheimer for violations of Section 5 of the Securities Act of 1933. See SEC Charging Order, pp. 16-19.
 See FinCEN Charging Order, p. 2 (referring to civil penalties of $2.8 million in 2005 and $1.425 million in fines in 2013 for anti-money laundering failures).
 Id., p. 7.
 See, e.g., FINRA Docket No. 2011025957001(Jan. 6, 2015) (censure and fine of $250,000 for violations of NASD Rules 3010, 2110, and FINRA Rule 2010); In the Matter of Oppenheimer & Co., Inc., Securities Exchange Act Release No. 73509 (Nov 3, 2014) (censure and fine of $61,200 for violation s of Section 15B(c)(1) of the Exchange Act and MSRB Rule G-15(f); undertaking to review policies and procedures, make necessary changes to effect compliance, and conduct training as to policies and procedures), available at http://www.sec.gov/litigation/admin/2014/34-73509.pdf; FINRA Docket No. 20130377924-01 (Oct. 29, 2014) (censure and fine of $10,000 for violations of FINRA Rule 6730(c)(8) and 4511(a); SEC Rule 17a-3); FINRA Docket No. 2011026125001 (Feb. 12, 2014) (censure and fine of $45,000 for violations of FINRA Rules 6380A, 7450, 6182, and 2010; NASD Rules 3110 and 3010; SEC Rules 10b-10, 17a-3, and 605); FINRA Docket No. 20090181025-01 (Dec. 6, 2013) (censure and fine of $675,000 for violations of fair pricing rules and failed supervision; restitution of $246,974; undertaking to provide three reports regarding supervisory procedures with respect to the pricing of municipal securities transactions); FINRA Order No. 2009018668801 (Aug. 5, 2013) (censure and fine of $1,425,000 for violations of registration provisions of Section 5 of the Securities Act, inadequate supervisory systems and procedures, and anti-money laundering violations; retain independent compliance consultant); FINRA Docket No. 2009018261301 (July 15, 2013) (censure and fine of $17,500 for violations of Regulation SHO); FINRA Docket No. 20090187015-01 (Apr. 2, 2013) (censure and fine of $22,500 for violations of best execution rules, recordkeeping, and trade reporting rules; restitution of $1,290.58); FINRA Docket No. 20100215969-01 (Jan. 2, 2013) (censure and fine of $20,000 for violations of SEC Rule 10b-10, FINRA Rule 6380A, and OATS violations); FINRA Docket No. 20090184287-01 (Mar. 29, 2012) (censure and fine of $18,000 for trade reporting violations); State of New Hampshire Bureau of Securities Regulation Consent Order No. I-2010-0000017 (Feb. 1, 2012) (fine of $125,000; costs of $30,000 for registration violations and failed supervision related to unregistered securities, penny stocks, unsuitable transactions, and mismarking order entry tickets; undertaking to offer rescission to certain clients; retain independent consultant); FINRA Docket No. 2009018400501 (May 10, 2011) (censure and fine of $100,000 for violations of MSRB Rules G-8, G-17, G-27 and G-32); FINRA Docket No. 2008013630001 (Oct. 12, 2010) (censure and fine of $57,500 for violations of SEC Rule 10b-10; OATS violations and failed supervision; undertaking to revise supervisory procedures relating to best execution, trade reporting, and sales transactions); Consent Order, Commonwealth of Massachusetts, Office of the Secretary of the Commonwealth, Securities Division, Docket No. 2008-0080 (Feb. 26, 2010) (settlement related to auction rate securities, agreement to offer to repurchase up to $3.65 million from investors); Assurance of Discontinuance, Attorney General of the State of New York Investor Protection Bureau, No. 10-023 (Feb. 24, 2010) (settlement with New York State Attorney General to repay an estimated $38 million to investors arising from misrepresentations related to auction rate securities); In the Matter of Oppenheimer & Co., Inc., Securities Exchange Act Release No. 59438 (Feb. 24, 2009) (censure and fine of $850,000 for failure to supervise in connection with the retention and review of e-mails for over four years; undertaking to review policies and procedures, submit a report to the Commission and certify that policies and procedures have been adopted that are reasonably expected to prevent and detect future violations); FINRA Docket No. 20060057396-01 (Sept. 24, 2008) (censure and fine of $12,500 for OATS reporting violations; SEC Rule 605 violations and customer confirmation violations); FINRA Docket No. 20070118783 (July 16, 2008) (censure and fine of $100,000 for violations of NASD Rules 3010(a) and (b), 2110); FINRA Docket No. 20050017145-01 (Apr. 10, 2008) (censure and fine of $25,000 for violations of Regulation SHO); FINRA Docket No. 2007009509501 (Dec. 21, 2007) (censure and fine of $250,000; payment to mutual funds of $4,250,000 for market timing violations and violations of NASD Rules 2110, 3010(a) and (b), 3110; Exchange Act Rules 17a-3, 17a-4); FINRA Order No. 2005000316701 (Oct. 30, 2007) (censure and fines totaling $1,000,000 for violations of NASD Rules 8210, 2110, 3010(a) and 2110; retain independent consultant); FINRA Docket No. 20060059062-01 (Oct. 16, 2007) (censure and fine of $15,000; restitution of $6,852.51 for violations of NASD Conduct Rules 2110 and 2320); Oppenheimer Fined In Trading Scandal, Wall Street Journal (July 9, 2007) (fine imposed against Oppenheimer & Co., Inc. by Massachusetts Secretary of State of “$1 million for the ‘theft, churning and unauthorized trading’ of one of its agents” and return of $135,000 to investor), available at http://www.wsj.com/news/articles/SB118399483158460937?mod=_newsreel_3; NASD Docket No. 20050017907-01 (Nov. 3, 2006) (censure and fine of $27,500 for violations of SEC Rules 200(g),10b-10, 17a-3, 17a-4, 15c2-11; NASD Marketplace Rule 6740, and Conduct Rule 3010); NASD Order No. CE4050002 (Sept. 26, 2006) (fine of $800,000 for failure to respond to regulatory requests and violating MSRB rules; retain outside consultant); NASD Docket No. 20050002356-01 (June 30, 2006) (censure and fine of $17,500 for violations of NASD Marketplace Rule 5220(e) and failed supervision; undertaking to revise supervisory procedures); NASD Docket No. E102003017701 (Feb. 3, 2006) (censure and fine of $20,000 for violations of MSRB Rules G-36(b)(i), G-37(e)(i)(B), and G-38(b)(iv) and (d)); NASD Docket No. EAF0400720002 (Jan. 9, 2006) (censure and fine of $250,000 for violations of NASD By-Laws, Article V, Section 2(c), 3(a), and 3(b); and NASD Conduct Rules 2110 and 3010, and failed supervision; required audits and officer certifications); NYSE Exchange Hearing Panel Decision 05-190 (Dec. 29, 2005) (censure and fine of $1,350,000 for violations of numerous exchange rules including, but not limited to, sales practices and failed supervision); and NASD Order No. CMS040156 (May 17, 2005) (censure and fine of $32,500 for violations of NASD Conduct Rules 3370, 3110, 2110, and 3010; SEC Rules 10a-1, 10b-10, 17a-3 and 17a-4; and Marketplace Rule 5220(e)).
 17 CFR 230.506(d)(2)(ii) (noting that the “bad actor disqualification” shall not apply “[u]pon a showing of good cause and without prejudice to any other action by the Commission, if the Commission determines that it is not necessary under the circumstances that an exemption be denied.”).
 Section 5 violations go to the heart of Rule 506 compliance. See Vladimir Ivanov and Scott Baugess, Capital Raising in the U.S.: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009-2012, p. 3 (July 2013), (“Rule 506 accounts for 99% of amounts sold through Regulation D”). Indeed, even though not initially proposed, the Commission specifically added Section 5 violations to the final version of the bad actor rule as a standalone trigger for disqualification under Rule 506 noting that, "[a]s a policy matter, we do not believe that exemptions from registration based on Rule 506 should be available to persons whose prior conduct has resulted in an order to cease and desist from violations of Section 5's registration requirements.” See Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, SEC Release No. 9414 (“Rule 506 Bad Actor Release”) p. 58-59; 124 (July 10, 2013) (referring to "the benefits associated with screening bad actors out of the Rule 506 market"), available at http://www.sec.gov/rules/final/2013/33-9414.pdf.
 See Letter from Thomas J. Kim, Sidley Austin LLP, to Sebastian Gomez Abero, Securities and Exchange Commission, pp. 8-9 (Dec. 10, 2014), available at http://www.sec.gov/divisions/corpfin/cf-noaction/2015/oppenheimer-121014-506d.pdf .
 See, e.g., In the Matter of Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith, Inc., Securities Act Release No. 9682 (Nov. 25, 2014) (granting a waiver pursuant to Rule 506(d) on the condition, among others, that the respondent retain “a qualified independent consultant (the ‘Consultant’) not unacceptable to the Staff.”), available at http://www.sec.gov/rules/other/2014/33-9682.pdf; In the Matter of E*Trade Clearing LLC and E*Trade Securities LLC, Securities Exchange Act Release No. 58250 (July 30, 2008) (requiring the retention of “a qualified independent compliance consultant (‘Consultant’), not unacceptable to the staff”) available at http://www.sec.gov/litigation/admin/2008/34-58250.pdf; In the Matter of CIBC Mellon Trust Company, Securities Exchange Act Release No. 51297 (Mar. 2, 2005) (requiring the retention of a “qualified independent consultant (the ‘Consultant’), not unacceptable to the staff”), available at http://www.sec.gov/litigation/admin/34-51297.htm.
 It has been argued that waivers should not be used as “enforcement tools” to penalize wrongdoers. This presents a false dichotomy between properly enforcing these automatic bad actor bars, and routinely waiving them. See Rule 506 Bad Actor Release, pp. 112-113 (July 10, 2013) (stating that the bad actor bar is intended to and should reduce recidivist participation in offerings and deter future fraud).
 Additional or different conditions may be warranted in other cases, depending on the facts and circumstances, and how best to achieve accountability in any given case. Moreover, in some cases, the best way to ensure accountability comes from simply allowing the automatic disqualification to take effect as the law contemplates.
 For example, in 2007, FINRA assessed fines against Oppenheimer for, among other things, violations of best execution rules. See FINRA Docket No. 20060059062-01 (Oct. 15, 2007). Then, in 2010, Oppenheimer was required by FINRA to undertake a revision of its written supervisory procedures with respect to best execution. See FINRA Docket No. 2008013630001 (Oct. 11, 2010). Despite this undertaking, in 2013, FINRA found violations by Oppenheimer involving, yet again, best execution. See FINRA Docket No. 20090187015-01 (Apr. 2, 2013). In addition, the SEC Charging Order requires Oppenheimer to hire an Independent Compliance Consultant to review policies and procedures related to compliance with Section 5 broadly (but not Section 506 specifically), the Bank Secrecy Act, the Patriot Act, its anti-money laundering program, and proper recognition of certain liabilities. It is inexplicable why this consultant must be independent, but the consultant that will review Oppenheimer’s Rule 506 compliance does not. See SEC Charging Order, pp. 21-23.