For one reason or another, stockbrokers may not want to maintain their personal accounts at their employer's brokerage firm. Some of the reasons often have to do with confidentiality and preventing an employer from freezing an account should an employment dispute arise. Other reasons frequently involve attempts to hide prohibited transactions from the inquiring eyes of an employer's compliance department. Consider this regulatory settlement involving one stockbroker's "away" accounts.
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, Abhishek Ghuwalewala submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Abhishek Ghuwalewala, Respondent (AWC #2013036256501, October 20, 2014).
In 2010, Ghuwalewala entered the securities industry with FINRA member firm Stifel, Nicolaus & Company, Inc., where he remained until March 2013. The AWC asserts that he had no prior formal disciplinary history.
The AWC alleges that in October 2010, when Ghuwalewala began his employment at Stifel, he notified his employer and obtained the firm's approval to maintain an individual brokerage account in his name at another broker-dealer ("Away1").
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.
Around August 10, 2012 (about two years after getting permission to maintain Away1), Ghuwalewala allegedly opened a second "away" brokerage account at the other broker-dealer ("Away2"). In submitting the new account forms to the other broker-dealer, Ghuwalewala did not disclose that his "current employer" was Stifel but provided the name of his "previous employer." Moreover, in response to a question inquiring whether he was currently employed by a "broker/dealer," he answered "No." The AWC asserts that he did not notify and did not obtain approval from Stifel concerning the maintenance of Away2.
SIDE BAR: Although not indicated in the AWC, it appears that the "current employer" disclosed on the Away2 new account forms by Ghuwalewala was not a broker-dealer but a "previous employer." According to online FINRA records as of October 31, 2014, Ghuwalewala had been employed by from 2008 to 2010 by the Kellogg School of Management and from 2001 to 2008 by National Instruments.
More puzzling, the AWC fails to explain whether Ghuwalewala had notified the other broker-dealer where he maintained Away1 that he was employed at Stifel as of 2010. Since the AWC asserts that Ghuwalewala had been given permission by Stifel to maintain Away1, Rule 3050 imposes an obligation upon the registered person to notify the executing brokerage firm of his industry status. All of which prompts the question as to whether the other broker-dealer had a disclosure on its books and records that Ghuwalewala was registered with Stifel; and why that circumstance did (or didn't) set off compliance alarms when he opened Away2 but denied being registered with Stifel.
Around August 14, 2012, Ghuwalewala requested permission from Stifel to open what his employer would have understood was a second "away" brokerage account at the other broker-dealer (in fact, this would have been the third) ("Away3"). On the same day that he sought Stifel's permission to maintain Away3, Ghuwalewala submitted the new account application to the other broker-dealer, notwithstanding that his employer had not responded to his request for permission. It is not specified whether he did or didn't disclose his current employer as Stifel on the account documentation.
Pursuant to a newly enacted policy, on August 14, 2012, Stifel instructed Ghuwalewala to close or transfer the proposed "away" account to Stifel. Contrary to those instructions, on August 15, 2012, Away3 was opened at the other broker-dealer and Ghuwalewala did not close or transfer the account to Stifel.
SIDE BAR: You got all of that? Really?? Okay, by way of recap, Ghuwalewala apparently did everything by the book with the October 2010 Away1. Comes August 10, 2012, however, he opens Away2 without following the rules and then makes material misstatements that conceal his industry employment. Then, in August 2012, he goes ahead and opens Away3 but apparently goes through the motions of asking permission from Stifel, notwithstanding that he didn't wait for his employer's authorization, which was not forthcoming.
A Slow Moving Experience
For reasons not explained in the AWC, Stifel contacted the other broker-dealer around September 2012, and was informed by the other firm that Ghuwalewala had opened two new accounts ("new" in the sense that Stifel apparently only knew about Away 1 but not Away2 and Away3). The AWC alleges that for "several months, Stifel attempted unsuccessfully to have Ghuwalewala move the accounts from B-D to Stifel, pursuant to Stifel's policy prohibiting employees from holding outside brokerage accounts."
SIDE BAR: The AWC loses me here. Stifel was aware that Ghuwalewala had asked and was approved to maintain Away1 in October 2010. Apparently, in September 2012, Stifel not only learns that Ghuwalewala had opened Away2 but apparently also learns, for the first time, about Away3, which was never disclosed to the firm. Stifel's response to those revelations was to spend "months" attempting to convince its non-compliant employee to transfer the two subject accounts (assuming that he was permitted to retain the first "away" account at the other firm)?
Did FINRA have any issue with Stifel's response? In the AWC, Stifel's conduct comes off as lackadaisical and inexplicable. Is that the false impression fostered by an inarticulate AWC or, in fact, is that what FINRA intended to imply? Simply put, why didn't Stifel terminate Ghuwalewala upon learning that he had opened two "away" accounts in contravention of the firm's policies?
If nothing else but consistent, in February 2013, Ghuwalewala opened a fourth "away" account at the other broker-dealer ("Away4"). As of this date, he had still not complied with Stifel's requests to transfer the previously opened and unauthorized accounts. Further, he had purportedly submitted the new account forms to the other firm with the non-disclosure of his "current" employment by Stifel and listed a previous employer.
SIDE BAR: Ummm . . . I'm lost here. I thought that in September there was a dialog between Stifel and the other broker-dealer. Didn't that other firm realize that Ghuwalewala was not answering the question honestly? How the hell did that "away" account get opened by the other broker-dealer in February 2013? Did FINRA have an issue with that?
This (A)Way Out
According to online FINRA records as of October 31, 2014, Stifel "Discharged" Ghuwalewala on March 5, 2013 based upon allegations that he was in:
VIOLATION OF COMPANY POLICY AND FINRA RULES REGARDING OUTSIDE SECURITIES ACCOUNTS
FINRA deemed Ghuwalewala's conduct in violation of NASD Rule 3050 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed a $5,000 fine upon Ghuwalewala and a two-month suspension from association with any FINRA-registered firm in all capacities.
For those of you who need some music to ponder this mess, I give you a choice of "Not Fade Away" by Buddy Holly and the Rolling Stones. Oh, but, seriously, make sure to scroll down below the Stones video for my brilliant insights and pithy comments about this case. You wouldn't want to miss my amazing musings, would you?:
Bill Singer's Comment
I'm sorry but this AWC strikes me as garbage because it is a mess of implications and inferences that leave far too much to the reader's imagination in terms of filling in important compliance and regulatory blanks.
Starting in August 2012 and running through February 2013, Ghuwalewala opens Away2, Away3, and Away4 without Stifel's authorization and fails to disclose his employment with Stifel on the other firm's new account forms. Upon learning these facts, he not only fails to timely repatriate the accounts to Stifel, but the employer inexplicably takes "months" trying to accomplish that goal. Oddly, the AWC fails to indicate whether Away1, Away2, and/or Away3 were ever transferred to Stifel.
The AWC is unclear whether the other firm was notified in October 2010 or thereabouts by Ghuwalewala that he was registered with Stifel. The AWC asserts that he had asked for and had received permission to maintain Away1 by his industry employer, but there is no indication as to whether the other firm was duly notified of the Rule 3050 disclosure items. As such, we can't understand whether the other firm was duped by Ghuwalewala or had some complicity. Of course, FINRA has conveniently protected that other firm by not disclosing its identity -- which may be appropriate if that firm was victimized. We do know that by September 2012, Stifel had contacted the other firm about the subject away accounts; but, notwithstanding, the other firm opened Away3 and Away4.
What, if anything, did FINRA do in terms of the unnamed brokerage firm's apparent complicity with at least opening Away4? What, if anything, did FINRA do in terms of Stifel's less-than-aggressive compliance effort following its learning about its employee's repeat violations of its policies? No answers to those questions are provided in the AWC. If, in fact, both brokerage firms were victimized by Ghuwalewala and their compliance efforts stand muster, then the AWC does a disservice to those members.
Either this AWC has taken dramatic liberties with the facts in an effort to make a relatively minor case look far more dire than it is; or, the fact pattern is accurate and FINRA has given this Respondent an early Christmas gift. How Ghuwalewala was only sanctioned with a relatively modest fine and an inexplicable two-month suspension is something that I cannot reconcile with the AWC. Oh my, I guess that I'll just fade away . . .