September 17, 2014
Ah yes, here we go again with another one of Bill Singer's infamous "Yes but . . ." columns. We start off with a somewhat oddball fact pattern in which two -- count 'em -- two registered persons get whacked by FINRA for accepting an oral authorization to permit a third party to transact business in a trust's account. The trustee, however, ratified in writing the cited trades. How does all of that become a violation? How does all of that warrant thousands of dollars in fines? Okay, now that your intrigued, you're just gonna have to read on!
Case In Point
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, Harry Appel and Patricia I. Bergman each submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Harry Appel, Respondent, and Patricia I. Bergman, Respondent (FINRA AWC 2013036631201, September 8, 2014).
SIDE BAR: You know all those FINRA AWCs that I criticize because they cite Respondent Reggie Repp and "JD" and "JP" for engaging in a seemingly related violation but the AWC for Respondent Repp doesn't refer to "JD" or "JP" by their names? And then, if by chance, you happen to locate the AWC for registered representative Jane Doe (who was the unnamed "JD" in Respondent Repp's AWC) -- you then read in her AWC references to "RR" and "JP." And, to get even more absurd, if you find a third AWC for Respondent John Public, you will see in his AWC references to "RR" and "JD."
See, for example, "BS Breaks FINRA KH AWC Code" (BrokeAndBroker.com Blog, June 4, 2014) or "Drilling Partnership Gives Supervisor And Stockbroker FINRA Gas" (June 16, 2014). Then there is the recent and, frankly, somewhat bizarre approach of presenting the cases of three registered persons involved in a related violation in the form of three separate AWCs! "Undisclosed Customer Settlement By 3 Brokers Comes To Light" (BrokeAndBroker.com Blog, September 3, 2014).
Why the hell does FINRA now have a single AWC with two individual respondents, Appel and Bergman, while it persists in meticulously hiding the identities of so many other purportedly "related" registered persons involved in the same underlying violations? Yes, there is a problem with a foolish consistency being the hobgoblin of little minds but, geez, the emphasis in that quote is on "foolish."
Appel and Bergman were each associated in non-registered capacities with FINRA member firm Royal Alliance Associates, Inc. until they became registered from 2011 to April 2013. The AWC asserts that neither individual had any prior relevant disciplinary history.
Putting Words In His Mouth
In 2011, Appel and Bergman opened a securities account for a pension plan, at which time the plan Trustee was the only person with written authority to transact the plan's business in the account. The Trustee had orally advised Appel and Bergman that they could accept account instructions from a plan participant identified in the AWC as "MG."
Ratified In Writing
Apparently, in reliance of that verbal authorization, Appel and Bergman accepted purchase orders from MG on 14 occasions from January 14, 2013 through February 26, 2013. The AWC acknowledges that the Trustee "ratified the transactions in writing . . ."
Stickler For Details
The AWC alleges that Appel and Bergman did not obtain a written authorization from the Trustee and did not obtain a written acceptance from Royal Alliance for MG's to transact account business, all of which was deemed to constitute violations of NASD Rule 2510(b) and FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Appel and Bergman fines of $5,000 each.
Bill Singer's Comment
Hmmmm . . . I'm just not sure about this one. Strikes me as a bit ticky tacky and an exaltation of form over substance; on the other hand, I am also fully onboard with the need to get third-party trading authorizations in writing, particularly when it comes to the business of a trust. Consequently, I find myself uncomfortably straddling a fence and finding myself espousing that iffy "Yes but . . ." position.
I'm not going to criticize FINRA for investigating and charging in this case. The regulator is obligated to do its job and there is much merit with the outcome of this case -- but only to a point. Where I ultimately find myself parting ways with FINRA is in the imposition of $10,000 in fines divided equally between Appel and Bergman.
You know, $5,000 may not be much money to a Washington, D.C.-based bureaucracy like FINRA, but for most men and women employed on Wall Street, it's a sizable sum. Here, we have a somewhat unique and somewhat technical violation that is predicated -- and I heavily weigh these factors -- upon an oral authorization from a trustee and a subsequent written verification by that trustee of the orders at issue. Pointedly, had the trustee not subsequently verified in writing each and every trade, I may well have espoused a different view.
As such, did FINRA have a justification for imposing a fine? Okay, sure, maybe something for a few hundred bucks or so but $10,000? For what? Re-read the facts and tell me why such a huge price-tag was attached to this violation. Moreover, let's be clear here, the fine got paid to FINRA. All of which smacks as more of a regulatory speed trap than a measured sanction for the specific cited misconduct.
In fairness to FINRA, and it certainly is a point that undermines my position, these AWCs were the result of a purportedly voluntary settlement agreement by Appel and Bergman, and they apparently were happy to write out the two $5,000 checks. If it didn't bother the respondents, then who the hell am I to wage a battle on their behalf?
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.