by Bill Singer
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, Wade Mitchell Wacker submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Wade Mitchell Wacker, Respondent (AWC 2010021740701, October 22, 2012).
Wacker entered the securities industry in May 1991 and was registered with Invest Financial Corporation since 2003. The AWC asserts that Wacker has no prior relevant disciplinary history.
Managed Outside Customer Account
Bill Singer
Pursuant to an investment analysis and financial plan that Wacker had prepared for a customer, in late 2005, the stockbroker had recommended, among other things, the opening of an options-trading account at an online broker-dealer unaffiliated with Invest Financial. Wacker proposed to manage the account for a fee of $1,000 per year.
Following the customer’s acceptance of the proposal, Wacker prepared a consulting services agreement dated December 21, 2005, to which Invest Financial and the customer were parties; and, as required by his firm, Wacker signed in his capacity as an Invest Financial Investment Advisor Representative. Although the Agreement set forth Wacker’s $1,000 annual fee, it did not reference any particular outside brokerage accounts or any securities activity that would occur at any unaffiliated broker-dealer.
Wacker provided his supervisor with the Agreement and account-opening documents for the customer’s outside account. Although Wacker’s supervisor approved the Agreement and some correspondence concerning the outside account, the AWC asserts that Invest Financial never:
On December 21, 2005, the outside account was opened and the customer executed a “Limited Trading Authorization” giving Wacker discretion. In January 2006, the customer deposited about $140,000 in the outside account.
For some four years from January 2006 through December 2009, Wacker regularly traded in the outside account, which loast about $10,000 during that time. Until Wacker voluntarily terminated his management fee in mid-2007, he received $1,500 for that service.
In response to Invest Financial compliance questionnaires that he completed in 2007, 2008, and 2009, the AWC alleges that Wacker wrongfully:
In January 201, the customer file a complaint with Invest Financial concerning the options trading in his outside account. Following the firm’s investigation but without Wacker’s input or participation, Invest Financial settled the complaint. Thereafter, Wacker was placed on heightened supervision.
Wife’s Accounts
In 2003 and 2007, two brokerage accounts were established in Wacker’s wife’s name and the AWC alleged that he had an indirect financial interest in these accounts, one of which purportedly engaged in securities transactions. The AWC alleged that Wacker never notified his firm of his wife’s accounts’ existence.
Making The Case
In consideration of the above outside account concerns involving the customer and the wife, the AWC alleged that Wacker had facilitated the opening of an unaffiliated outside account for a customer for which Wacker was compensated and he had failed to obtain prior written approval for such activity, in violation of NASD Conduct Rule 3040, NASD Conduct Rule 2110, and FINRA Rule 2010.
Additionally, the AWC alleged that Wacker’s failure to disclose his wife’s two unaffiliated accounts in which he had an indirect financial interest violated NASD Conduct Rule 3050, NASD Conduct Rule 2110, and FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Wacker a $13,500 fine and a 20-business-day suspension in all capacities.
Bill Singer‘s Comment
My reaction to this case is a bit of an “ehhh,” tempered by my understanding that there are genuine regulatory issues at stake.
My ambivalence is driven by the AWC’s assertion that Wacker had provided his firm’s supervisor with the Agreement and the new account forms for the customer’s outside account and the supervisor had approved the Agreement and attendant correspondent. I mean, c’mon, at that point Invest Financial was at least on notice that there was one helluva a likelihood that its registered person was “involved” with an outside account for which compensation would be paid and discretion exercised. To take those predicate facts and somehow argue that the firm never gave explicitapproval seems a bit disingenuous to me; however, none of that excuses the annual compliance questionnaire misstatements — or, to some extent, the firm’s apparent half-hearted efforts to inquire as to the status of the outside account previously referenced in a submitted Agreement.
As to the wife’s account, the first was opened in the same year that Wacker joined Invest Financial, but it’s unclear to me whether that account pre-existed his arrival at the firm. If there was some prior existence of this account, it could simply have been an inadvertent omission. As to the second account, that seems less debatable a proposition and if the AWC’s assertion that Wacker had a financial interest in that second account is correct, then that was a violation. Of course, just what constitutes a disclosable “indirect financial interest” in a spouse’s brokerage account would likely raise many eyebrows and engender much debate.
Given the recent pressures of the Great Recession many registered persons found themselves in need of or enticed by the possibility of extra income away from their employer FINRA member firm. For some stockbrokers, this meant engaging in outside businesses, or selling so-called non-securities product such as insurance or offering investment advisory services, or seeking out private securities transactions. Such opportunities for additional income were as likely to bedazzle those at indie firms such as LPL, at discount firms such as Charles Schwab, or at any major player the likes of JP Morgan, Morgan Stanley Smith Barney, Merrill Lynch, or Wells Fargo. If you feel compelled to engage in outside business activities or private securities transactions, make sure to follow industry rules/regulations and to abide by your employer’s in-house requirements. Otherwise, you could be paying dollars out of your own pocket while you’re sitting on the sidelines.
NASD Conduct Rule 3040. Private Securities Transactions of an Associated Person
(a) Applicability
No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.
(b) Written Notice
Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person’s proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.
(c) Transactions for Compensation
(1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member:
(A) approves the person’s participation in the proposed transaction; or
(B) disapproves the person’s participation in the proposed transaction.
(2) If the member approves a person’s participation in a transaction pursuant to paragraph (c)(1), the transaction shall be recorded on the books and records of the member and the member shall supervise the person’s participation in the transaction as if the transaction were executed on behalf of the member.
(3) If the member disapproves a person’s participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly.
(d) Transactions Not for Compensation
In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.
(e) Definitions
For purposes of this Rule, the following terms shall have the stated meanings:
(1) ”Private securities transaction” shall mean any securities transaction outside the regular course or scope of an associated person’s employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 3050, transactions among immediate family members (as defined in IM-2110-1, “Free-Riding and Withholding”), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded.
(2) ”Selling compensation” shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder’s fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.
NASD Conduct Rule 3050. Transactions for or by Associated Persons
(a) Determine Adverse Interest
A member (“executing member”) who knowingly executes a transaction for the purchase or sale of a security for the account of a person associated with another member (“employer member”), or for any account over which such associated person has discretionary authority, shall use reasonable diligence to determine that the execution of such transaction will not adversely affect the interests of the employer member.
(b) Obligations of Executing Member
Where an executing member knows that a person associated with an employer member has or will have a financial interest in, or discretionary authority over, any existing or proposed account carried by the executing member, the executing member shall:
(1) notify the employer member in writing, prior to the execution of a transaction for such account, of the executing member’s intention to open or maintain such an account;
(2) upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to such account; and
(3) notify the person associated with the employer member of the executing member’s intention to provide the notice and information required by subparagraphs (1) and (2).
(c) Obligations of Associated Persons Concerning an Account with a Member
A person associated with a member, prior to opening an account or placing an initial order for the purchase or sale of securities with another member, shall notify both the employer member and the executing member, in writing, of his or her association with the other member; provided, however, that if the account was established prior to the association of the person with the employer member, the associated person shall notify both members in writing promptly after becoming so associated.
(d) Obligations of Associated Persons Concerning an Account with a Notice-Registered Broker/Dealer, Investment Adviser, Bank, or Other Financial Institution
A person associated with a member who opens a securities account or places an order for the purchase or sale of securities with a broker/dealer that is registered pursuant to Section 15(b)(11) of the Act (“notice-registered broker/dealer”), a domestic or foreign investment adviser, bank, or other financial institution, except a member, shall:
(1) notify his or her employer member in writing, prior to the execution of any initial transactions, of the intention to open the account or place the order; and(2) upon written request by the employer member, request in writing and assure that the notice-registered broker/dealer, investment adviser, bank, or other financial institution provides the employer member with duplicate copies of confirmations, statements, or other information concerning the account or order;provided, however, that if an account subject to this paragraph (d) was established prior to a person’s association with a member, the person shall comply with this paragraph promptly after becoming so associated.(e) Paragraphs (c) and (d) shall apply only to an account or order in which an associated person has a financial interest or with respect to which such person has discretionary authority.
(f) Exemption for Transactions in Investment Company Shares and Unit Investment Trusts
The provisions of this Rule shall not be applicable to transactions in unit investment trusts and variable contracts or redeemable securities of companies registered under the Investment Company Act of 1940, as amended, or to accounts which are limited to transactions in such securities.