FINRA Disclosure

asensio.com was started in 1996 as the website for Asensio & Company, Inc. (ACO), a brokerage firm registered with the U.S. Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority, Inc. (FINRA).  Initially, the website was simply a venue to release ACO’s short-selling research to the public.  ACO was an innovator in its use of “Strong Sell” recommendations, was one of the first brokerage firms to release research via the internet, and became the first and only FINRA member to exclusively focus on short-selling research and trading.

Beginning in 2001, the operations of asensio.com were separated from brokerage operations.  The Asensio brokerage firm came under increased FINRA scrutiny beginning in 1999.  This occurred at the same time that the Asensio short-selling operation was becoming increasingly successful and at the same time that asensio.com became publicly involved in advocating against failures by the American Stock Exchange (AMEX) to control and prevent stock fraud.  The AMEX was owned by FINRA at the time.

For background – FINRA, formerly known as the National Association of Securities Dealers, Inc. (NASD), is a private corporation that has regulatory power as a “self-regulatory organization” under the Securities Exchange Act of 1934.  Since the 1983 amendments to the Exchange Act, all broker-dealers have had to obtain “membership” in FINRA, i.e. become regulated by FINRA, in addition to being subject to regulation by the SEC.

FINRA imposed a sanction on Manuel P. Asensio in January 2005.  The sanction arises from a the first enforcement action concerning a new FINRA rule and requests for information about asensio.com’s reports on PolyMedica in 2003. The enforcement action was predicated upon a dispute concerning FINRA’s jurisdiction over asensio.com.  The objective of the separation in 2001 had been the elimination of FINRA’s jurisdiction over asensio.com.  No agency or department of the U.S. government has ever reviewed the merits of the FINRA’s jurisdiction claim or the FINRA sanction, or given an opinion that FINRA’s treatment of Mr. Asensio was justified.  FINRA’s decision does not directly impact the operation of asensio.com, but we have compiled this section to provide detailed information about the FINRA matter, since Mr. Asensio’s status with FINRA has impinged upon journalists’ and others’ perceptions of asensio.com’s research.

The dispute between Mr. Asensio and FINRA started with PolyMedica Corporation – a company that was raided by 85 FBI agents, forced to settle criminal charges for defrauding Medicare by paying $35 million to the U.S. government, and later went bankrupt.  In February 2003, USA Today ran a front-page story about Mr. Asensio’s investigation of PolyMedica; the article quotes Lanny Davis, a high-ranking official in the Clinton White House turned lobbyist, advocating against short-sellers.

Days before the USA Today article, FINRA began an investigation of Mr. Asensio and his brokerage firm related to asensio.com reports on PolyMedica.  FINRA’s investigation primarily concerned whether asensio.com reports should be treated as broker-issued research reports, especially whether asensio.com reports should have the price graph and conflict of interest disclosures required for broker research reports.  FINRA’s requests for information did not address the substance of the asensio.com reports on PolyMedica.  Mr. Asensio objected to FINRA’s demands on the grounds that FINRA did not have jurisdiction over the asensio.com website, which had been separated from the FINRA-regulated broker-dealer.

The correspondence and on-the-record testimony provided by Mr. Asensio to FINRA, in response to the requests for information, contended that reports on asensio.com, as an independent publisher, should not be subject to FINRA’s broker-dealer regulation.  FINRA responded by initiating a disciplinary proceeding against Mr. Asensio.  Rather than accepting a settlement offer from FINRA, Mr. Asensio chose to continue litigating the case, and FINRA decided to impose a sanction on Mr. Asensio, which bars him from associating with any FINRA-member broker-dealer, for a failure to respond to a FINRA request for information.  An unqualified bar sanction is FINRA’s most severe sanction.  While the FINRA rules concerning technical aspects of research reports – the rules at issue in FINRA’s investigation of the asensio.com reports – were minor in nature, FINRA’s sanction was based on a purported failure to respond to a request for information.  FINRA’s sanction guidelines provide that a bar sanction should be imposed for a failure to respond to a request for information, and any single request for information going unanswered can give rise to a bar sanction.  In short, nothing in FINRA’s investigation should have resulted in a severe sanction, but FINRA chose to impose a severe sanction because of the conduct shown in response to its requests for information.

FINRA is not required to obtain government approval before imposing a bar sanction, and anyone impacted by a FINRA sanction has only a very limited opportunity to have the government intervene.    To date, no government agency or court has reviewed or affirmed the merits of the sanction imposed on Mr. Asensio.

Mr. Asensio has taken numerous actions in the attempt to remedy his FINRA status.  These include:

  1. In 2007, a membership continuance (MC-400) application filed with FINRA;
  2. In 2009, a procedure to obtain guidance from SEC staff, through the assistance of members of Congress, pertaining to remedies available to address a FINRA sanction;
  3. In 2010, a petition for rulemaking filed with the SEC by the Alliance for Economic Stability to address issues in FINRA’s rules related to Mr. Asensio’s case;
  4. In 2010, an SEC appeal proceeding – initiated by the SEC based on Mr. Asensio’s letters – for review of the FINRA sanction and MC-400 decision; the SEC dismissed the appeal without a merits-based review on the grounds of timeliness;
  5. In 2010, an appeal of the SEC decision to the U.S. Court of Appeals for the Eleventh Circuit; the Court declined to accept the case for review;
  6. In 2010, the filing of a joint New Membership Application (NMA) and MC-400 with FINRA;
  7. In 2011, an application for SEC review of an SEC staff decision that approved a rule-change proposed by FINRA, which would automatically preclude the filing of a joint NMA and MC-400; FINRA’s rule change was automatically stayed, and to date, the Commission has not taken up the matter for review;
  8. In 2011, an appeal of the FINRA staff decision on the NMA and MC-400 to FINRA’s NAC;
  9. In 2012, an appeal to the SEC of FINRA’s decision on the NMA and MC-400; the SEC did not find grounds to set aside FINRA’s decision.

 

The following documents provide useful background information about the dispute between FINRA and Mr. Asensio and about Mr. Asensio’s attempts to seek relief:

  1. A summary of filings submitted to the SEC in support of the 2010 appeal proceeding;
  2. A presentation dealing with conflicts of interest in regulatory oversight of activist short-selling;
  3. An attorney’s letter submitted to FINRA regarding the jurisdictional dispute that was central to the disciplinary proceeding;
  4. An attorney’s letter submitted to FINRA about FINRA’s attempts to limit review of the sanction;
  5. A legal opinion dealing with all the major issues in the FINRA-related proceedings;
  6. An attorney’s letter explaining FINRA’s legal and regulatory deficiencies;
  7. A petition for rulemaking filed with the SEC by the Alliance for Economic Stability to address conflicts of interest at FINRA and related rule deficiencies; and
  8. Documents related to FINRA’s attempt to obtain SEC approval for a rule change in response to Asensio’s joint NMA and MC-400 filings: Comment letters, the initial Order pursuant to delegated authority, the Asensio petition for Commission review, and a statement from the Secretary of the SEC regarding the petition’s effect.  (The SEC staff’s initial approval of the rule in February 2010 was automatically stayed after Asensio filed a petition for Commission review; to date, the Commission has taken no action to reinstitute the rule change.)