January 29, 2014
Sometimes you see your customer as a friend -- perhaps an old friend. When asked to do a favor, the closeness of your relationship may dampen your concerns about in-house compliance policies and industry rules and regulations. It's not that you're trying to do wrong; no -- it's simply that you just didn't realize that what you were preparing to do was going to create a mess. After all, I know him, I know her, we've spoken regularly for years, and, there's nothing improper going on here. Alas, the proverbial calm before the storm!
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, John Lucas submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of John Lucas, Respondent (AWC 2013036890201, January 23, 2014).
Online FINRA records suggest that Lucas was first registered in 1956 and was associated with FINRA member firm Wedbush Morgan Securities / Wedbush Securities since 1991. The AWC asserts that he had no prior disciplinary history.
Word Of Mouth
The AWC alleges that from May 2011 through November 2012, Lucas and a customer had an oral agreement that the stockbroker would liquidate securities in the customer's account in an amount sufficient to send $4,000 per month via electronic Automated Clearing House to the customer's individual bank account in order to pay for care as her health declined.
In accordance with the purported liquidation agreement, on May 4, 2011 and June 27, 2011, Lucas allegedly sold securities in the customer's account; and the trades were respectively executed six days and one day after the customer and Lucas had spoken to confirm the transactions. Subsequent to these two dates, Lucas allegedly executed twelve additional sales but without any prior conversation with the customer.
Caregiver Gives Instructions
In August 2011, the customer's caregiver instructed Lucas to increase the monthly distributions from $4,000 to $10,000 in light of the increasing costs of care. Although Lucas complied with the caregiver's request beginning in September 2011 through November 2012, the AWC asserts that the stockbroker did not obtain oral or written authorization from the customer permitting the caregiver to give instructions concerning the handling of the securities account; moreover, Lucas allegedly failed to confirm the sales with the customer after first obtaining the caregiver's instructions.
FINRA alleged that Lucas's conduct constituted the unauthorized exercise of discretion because he did not obtain prior written authorization from the customer and further failed to obtain Wedbush's express acceptance of the exercise of discretion. Further, he improperly permitted the caregiver to exercise third-party discretion in the customer's account. The cited misconduct was deemed to be in violation of NASD Conduct Rule 2510 and FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Lucas a $5,000 fine and a three-month suspension from associating with any FINRA member in any capacity.
Bill Singer's Comment
At first glance, you might be inclined to utter "ehhh." Lucas is a veteran broker and you might infer from the facts that this was an old client with whom the stockbroker had a long relationship. Whether that inference is correct or not is an open question because FINRA failed to provide us with sufficient background to offer a more meaningful context for this case. Regardless of the nature of the customer/broker relationship, I fully appreciate FINRA's concerns in this case, even if Lucas was well-intentioned and he didn't personally profit from any of the alleged misconduct. Frankly, the relatively modest fine and suspension suggest that the regulator recognized that there were mitigating circumstances here.
On the other hand, oddly missing from the AWC is a more ominous disclosure that underscores why these seemingly benign compliance and regulatory short-cuts can open up a world of hurt for the stockbroker and the brokerage firm. Online FINRA records as of January 29, 2014, note that on April 2, 2013, Wedbush received a customer complaint seeking $147,601.64 in damages and alleging
A $147,601.64 damage request ain't nuthin' to sneeze at. All of which should remind you that not only is the road to Hell paved with good intentions but no good deed goes unpunished. If you are ever presented with a similar circumstance, get it in writing and get it approved by your firm before you act on your impulse to simply enter the trade and wire the proceeds. For those of you unfamiliar with the cited rule, here it is in full-text:
THEROUGH [sic] HER ATTORNEY, CLIENT CLAIMS REGISTERED REPRESENTATIVE PLACED TRADES AND WITHDREW FUNDS TO BANK ACCOUNT AS DIRECTED BY CLIENT'S CAREGIVER. CAREGIVER WAS NOT GIVEN WRITTEN AUTHORIZATION TO DIRECT AC ACTIVITIES. ARBITRATION FILING INCLUDES CLAIMS FOR UNAUTHORIZED TRADING; BREACH OF FIDUCIARY DUTY; ELDER FINANCIAL ABUSE; NEGLIGENCE; NEGLIGENCE PER SE; BREACH OF CONTRACT; AND UNJUST ENRICHMENT.
NASD Conduct Rule 2510. Discretionary Accounts
(a) Excessive Transactions
No member shall effect with or for any customer's account in respect to which such member or his agent or employee is vested with any discretionary power any transactions of purchase or sale which are excessive in size or frequency in view of the financial resources and character of such account.
(b) Authorization and Acceptance of Account
No member or registered representative shall exercise any discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer or manager, duly designated by the member, in accordance with Rule 3010.
(c) Approval and Review of Transactions
The member or the person duly designated shall approve promptly in writing each discretionary order entered and shall review all discretionary accounts at frequent intervals in order to detect and prevent transactions which are excessive in size or frequency in view of the financial resources and character of the account.
This Rule shall not apply to:
(1) discretion as to the price at which or the time when an order given by a customer for the purchase or sale of a definite amount of a specified security shall be executed, except that the authority to exercise time and price discretion will be considered to be in effect only until the end of the business day on which the customer granted such discretion, absent a specific, written contrary indication signed and dated by the customer. This limitation shall not apply to time and price discretion exercised in an institutional account, as defined in Rule 3110(c)(4), pursuant to valid Good-Till-Cancelled instructions issued on a "not-held" basis. Any exercise of time and price discretion must be reflected on the order ticket;
(2) bulk exchanges at net asset value of money market mutual funds ("funds") utilizing negative response letters provided:
(A) The bulk exchange is limited to situations involving mergers and acquisitions of funds, changes of clearing members and exchanges of funds used in sweep accounts;
(B) The negative response letter contains a tabular comparison of the nature and amount of the fees charged by each fund;
(C) The negative response letter contains a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased; and
(D) The negative response feature will not be activated until at least 30 days after the date on which the letter was mailed.