For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Mark B. Fricks submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Mark B. Fricks, Respondent (AWC 20100240347, August 13, 2012).
Fricks entered the securities industry in 1987 where he remained until 1992, thereupon returning in 2000 with SunAmerica Securities, Inc. ("SunAmerica") (a predecessor firm to SagePoint Financial Inc. ("SagePoint"), where he was employed from May 3, 2000 through July 12, 2010. In August 4, 2010, the firm filed an amended Uniform Termination Notice for Securities Industry Registration ("Form U-5″) reporting that Fricks was terminated for violating the Finn's policy by selling an unapproved product.
According to the AWC, Fricks had no prior disciplinary history in the securities industry.
The AWC alleges that between April 1, 2010 and June 30, 2010, Fricks sold 20 American Equity InvestmentLife Insurance Co. ("American Equity") equity indexed annuities ("EIAs") to 17 investors (including 15 of his customers) for a total investment of approximately $1,216,160. Fricks received approximately $62,581 in commissions from the sale of these American Equity EIAs. The AWC alleges that Fricks failed to disclose to these EIA sales and his receipt of commissions; and that SagePoint did not approve the sales.
Frick's firm's policies and procedures required its registered representatives to provide prompt written notice disclosing all outside business activities, including the sales of EIAs. Although Fricks was permitted to sell fixed annuities through his approved outside business he was prohibited from selling EIAs unless he had secured prior firm approval; moreover, the firm's annual compliance questionnaires included reminders of this policy and the registered person's obligations.
SIDE BAR: At the time of this case, NASD Conduct Rule 3030 was in effect but that is now superseded by FINRA Rule 3270.
NASD Conduct Rule 3030. Outside BusinessActivities of an Associated Person
No person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member. Such notice shall be in the form required by the member. Activities subject to the requirements of Rule 3040 shall be exempted from this requirement.
FINRA Rule 3270. Outside Business Activities of Registered Persons
No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided priorwritten notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of NASD Rule 3040 shall be exempted from this requirement.
.01 Obligations of Member Receiving Notice. Upon receipt of a written notice under Rule 3270, a member shall consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person's responsibilities to the member and/or the member's customers or (2) be viewed by customers or the public as part of the member's business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Based on the member's review of such factors, the member must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including where circumstances warrant, prohibiting the activity. A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040. A member must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).
The AWC alleged that Fricks violated NASD Rule 3030 and FINRA Rule 2010 by failing to provide prompt written notice to SagePoint regarding his sales of American Equity EIAs to 17 investors and his receipt of approximately $62,581 in commissions from the sale of these unapproved products. In accordance with the terms of the AWC, FINRA imposed upon Fricks a $5,000 fine and a four-month suspension from associating with any FINRA registered broker-dealer in any capacity.
EIA sales have attracted the scrutiny of many state regulators and FINRA. Many brokers complain that it's not about sincere regulation but merely a phony-baloney witch hunt whose only purpose is to generate money in the form of fines. Consumer advocates and regulators argue, quite to the contrary, that there is far too much fraud attendant to the sale of these products.
Among the more common areas of dispute are the terms of the purported guarantee - particular when a consumer complains that it didn't cover the full purchase price. Then there are all those screaming matches about undisclosed surrender charges and tax penalties imposed for cancellation. And, as if those issues weren't enough, there are the complaints about how the gain is calculated using the referenced index. Finally, even if the sales pitches were pristine and the representations on point, we have lots of regulatory cases alleging forged signatures and fabricated documents.
Regardless of your view on the EIA cases and the OBA violations, they're on the books and enforced. EIA and OBA violations are found all over Wall Street - at major firms such as Merrill Lynch, Wells Fargo, Morgan Stanley, and JP Morgan; and at indie/regionals such as LPL and Charles Schwab. Rather than an egregious consumer fraud, many of these EIA and OBA violations are little more than a financially beleaguered broker trying to earn a few extra bucks to pay off mounting bills. On the other hand, as FINRA often admonishes, the truly egregious violations often involve consumer fraud and can impose crippling liability upon the unknowing employer firm. I get that, which is why I'm not completely up in arms over the issue.
READ these "Street Sweeper" columns involving EIAs:
Broker's EIA Sales Earn FINRA Fine And Suspension
Broker Fined And Suspended For Equity Indexed Annuities and Whole Life Outside Business Activities