Post Mortem Sales Dig FINRA Grave For Stockbroker

May 8, 2014

The death of a brokerage customer is often more of a beginning than an end, as the mourning period may mark a prelude to the outbreak of hostilities over who gets what. Also, there may be lots of finger pointing by an executor, an administrator, or any number of disgruntled beneficiaries about the wisdom of recent trading activity and the management of the account.  Today's Blog explores a recent regulatory settlement involving a stockbroker's conduct upon learning of his customer's death.

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, Jeffery Bowman Ellis submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jeffery Bowman Ellis, Respondent (AWC 2012033802601, April 28, 2014).

In 1976, Ellis entered the securities industry and in 2001 he was registered Deutsche Bank Securities, Inc. until August 2012. Online FINRA records indicate that in 1996, Ellis was registered Alex Brown & Sons, Incorporated, which would be acquired by Deutsche Bank Securities in 1997. The AWC asserts that he had no prior relevant disciplinary history.

Grave Concerns

At Alex Brown, Ellis  serviced a customer whose account apparently transferred to Ellis and Deutsche Bank Securities. On April 24, 2012, that client died.

The AWC asserts that from April 26, 2012, through May 11, 2012, Ellis executed six securities transactions in the customer's account. The AWC advises us that said trades were entered without the deceased's "knowledge, authorization or consent." 

According to online FINRA records as of May 7, 2014, Deutsche Bank Securities "Discharged: Ellis on August 15, 2012, based upon allegations that:


In accordance with the terms of the AWC, FINRA imposed upon Ellis a $10,000 fine and a two-month suspension from association with any FINRA member firm in all capacities.

Bill Singer's Comment

Generally, FINRA broker-dealers should have written supervisory procedures requiring that upon notice of an individual account holder's death, all "OPEN" orders are cancelled and further trading in the account is blocked. Typically, the account should be denoted as in the name of a "DECEASED" and further activity suspended until the firm is in receipt of a death certificate or other legal notification. These steps are taken so as to ensure the preservation of assets for any estate and to limit the firm's exposure in any estate litigation. Thereafter,the name of the account is generally changed from that of the deceased into one reflecting the "ESTATE OF . . ." such alteration may require the production of various court orders or letters testamentary, as the circumstances may dictate.

In the absence of legal documentation and authorization from your firm's legal/compliance department, registered persons should not merely follow the instructions of a surviving spouse, sibling or any other individual claiming the right to control the deceased's assets. As is often the case, the assets of a deceased may be subject to a will contest or, in the absence of a valid will, the estate may require judicial intervention. Based upon years of dealing with the deceased, a stockbroker may believe that there is only a single surviving child or spouse who will inherit the account; however, life is full of surprises and your assumptions may be ill-informed.

Given the relatively modest sanction imposed upon Ellis I am going to assume (but I note that my inferences may be totally off base) that the few cited transactions were liquidating in nature for the limited purpose of removing market risk from the estate's portfolio and either moving the securities into cash or closing out relatively risky positions, e.g., options, leveraged ETF or ETN, etc. Another possibility is that the customer and Ellis may have previously discussed a strategy to close out certain positions by a given date and Ellis' executions attempted to comply with those prior instructions.  Although such actions may seem well-intentioned, the road to Hell is paved with such first inclinations. Among the problems that may arise from such sales are the realization of capital gains that may not subsequently have been desired by the estate or a beneficiary.  Further, you may have sold XYZ stock the day after notice of death for $20 but the following day the shares would have been worth $40 -- you want to guess how that's going to go for you when a lawyer for the estate or a beneficiary finds out about your improper post-mortem sales?

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