Former FINRA board member Kovack settles enforcement cases

Regulators squeeze hundreds of cases in recent years by ordering companies to explain their conflicts of interest to clients omitted any mention of particularly egregious action in two recent enforcement actions.

FINRA and the SECOND Cases settled late last month against Kovack Financial, whose CEO served on the FINRA board of governors most of the time involved in both cases. Neither regulator has disclosed that their handling of the cases could present a conflict of interest for FINRA or the agency that oversees it.

Fort Lauderdale-based Kovack Financial and its subsidiaries, Kovack Securities and Kovack Advisors, agreed Aug. 23 and 26 to pay a combined $1.1 million in damages and penalties to resolve the separate investigations, which have started around the time CEO Brian J. Kovack started. member of the board of directors of FINRA for six years as a medium-sized company representing.

He completed the second two terms in August 2021, ultimately earning around $90,000 per year from FINRA for an average workload of four hours per week, according to FINRA’s latest available nonprofit disclosure to the IRS. Neither the FINRA supervisory case against Kovack’s company over mutual fund recommendations nor the SEC action involving embedded advisory accounts mentions the CEO’s seat on the board. Kovack’s tenure on the board overlapped with the respective periods in which regulators said the company violated the rules.

At a minimum, FINRA should have followed the same standards as most publicly traded companies in sharing the existence of its investigation and the steps taken by its board of directors to remove Kovack’s CEO from any discussion regarding one. or the other case, according to Bill Singer, a lawyer and former regulator who writes the “Broke and broker“compliance blog.

“It really presents a lab experience with FINRA,” Singer said. “What do you do when you start investigating a company that has someone on the board? Here it looks like they haven’t done anything.”

Singer added that he does not personally accuse Kovack of wrongdoing, but rather raises the same questions Singer asked when other FINRA governors’ offices had cases. In the most infamous example, convicted fraudster Bernie Madoff once acted as Vice Chairman of FINRA’s predecessor, the National Association of Securities Dealers and served as a member of its Board of Directors and Chairman of its New York Region, in addition to several NASDAQ supervisory roles.

SEC officials did not immediately respond to requests for comment.

FINRA spokesman Ray Pellecchia noted that the regulator’s website discloses the member firm affiliations of each member of the board of governors and that the regulator and FINRA staff respect a code of conduct that includes the resolution of conflicts of interest. FINRA board members and staff also receive annual training on the subject.

“The Board of Governors receives no information and has no involvement in ongoing enforcement matters,” Pellecchia said. “If a decision in an enforcement action is appealed to the board, any governor for whom it presents a conflict would be challenged.”

Kovack Financial, which has neither admitted nor denied claims by regulators in settling cases, did not respond to requests for comment.

In a 2018 Press release when launching Kovack’s “re-election campaign” to the Board of Governors, Kovack said he “helped guide FINRA toward greater transparency, efficiency and more open communication on behalf of the firms and advisors I represent “.

“As the leader of an independent brokerage that I helped build from scratch, and as someone who has dedicated most of my professional life to the financial advisory space, I am dedicated to making the heavy lifting on behalf of midsize businesses across America,” he said. “That’s why I’m committed to pursuing my mission to establish a regulatory landscape that will protect and empower businesses, advisors and investors in pursuit of their goals in the years to come.”

Kovack’s business generates more than $100 million in revenue annually with more than 400 financial advisors in production, as Company No. 30 on Financial planningof the IBD Elite ranking of independent wealth managers. In the settlement with FINRA, she agreed to a censure and a $210,000 fine; to resolve the SEC case, he agreed to pay $899,000, including restitution and interest of $199,000 and a civil penalty of $700,000.

FINRA alleges the firm failed between March 2015 and May 2017 to enforce a system to oversee sales of certain mutual fund stocks whose upfront fees make short-term trading unsuitable for some clients. The firm also missed red flags from a banned former Kovack broker identified only by the initials “MK” who recommended $2.1 million of those trades to eight clients, including five seniors, investigators said. FINRA did not release the name of the former broker, but said it banned the representative in 2017 for refusing to cooperate with its investigation. The firm paid compensation to harmed customers who paid “unnecessary sales fees” during its possible investigation of the broker, according to FINRA.

Kovack Securities “relyed primarily on one person to perform daily manual reviews of trading activity in the accounts of all of its registered representatives, which at the time numbered over 300,” according to the letter. FINRA Acceptance, Waiver and Consent.

In the other case, the SEC accused Kovack’s RIA of failing, between 2015 and August 2018, to regularly review its aggregate fee accounts to ensure that they were still suitable for clients and to indicate correctly some of the fees paid by customers. Such “global commission” programs cost clients a single asset-based commission for many investment management services. The company ended its program in 2018. The SEC subsequently warned all businesses on conflicts of interest with embedded expense accounts, such as those with little business activity justifying expenses, outright mis-billing, and transactions that reduce costs for RIAs while increasing costs for customers .

The SEC credited Kovack with “promptly taken corrective action” during the investigation, but blamed the company for botching some basic compliance steps. Between 2012 and 2015, the company failed to conduct its required annual compliance review, and from 2015 to 2017, it failed to even conduct an accounts receivable review, according to the settlement order.

“After the Commission’s Examinations Division began a review of [the RIA] in 2017, [it] performed account reviews for the first time in nearly two years,” the order reads.

The allegations and lack of discussion by either regulator on how to handle enforcement issues involving companies whose executives serve on FINRA’s board of directors “does not pass the test of ‘smell’ for Singer, he said. He acknowledged Kovack’s company’s presumption of innocence, but said FINRA had yet to at least disclose its investigation.

“How come they were investigating a governor in 2018 and nobody knew about it until 2022? That’s going to cause significant issues going forward,” Singer said. “Why does FINRA always seem to be the dog chasing the car?”