The scheme of Wall Street regulation effectively consists of three levels: federal regulation via the Department of Justice for criminal prosecution and via the Securities and Exchange Commission for civil matters; state regulation; and self regulation. Although one would hope that such a three-pronged attack would prove effective, in reality, we have regulators building, maintaining, and protecting their "turf." An unfortunate byproduct of such competition is that investigations become duplicative, resolutions are delayed, and each regulator runs to take the first victory lap. As a recent regulatory settlements warns, we still waste limited regulatory resources by having different regulators pursue the same violations by the same respondent.
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, William D. Crain submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of William D, Crain, Respondent (AWC #2014040452301, January 27, 2015).
Respondent entered the securities industry in December 2003, and from 2004 through February 2014, he was registered with FINRA member St. Bernard Financial Services, Inc.
The AWC asserts that in December 2005, one of Crain's customers opened an individual retirement account ("IRA"). The executed investment-advisory agreement ("IAA") provided for a 1% annual management fee and Crain was granted discretionary trading authority. The sole designated beneficiary of the IRA was the customer's wife.
The Precious Metals Strategy
In 2012, pursuant to the customer's approval, Crain implemented in the IRA what the AWC characterizes as a "precious metals-based investment strategy." Although noting the nature of this strategy, the AWC does not indicate the extent or specifics of any trading thereunder.
On February 2, 2013, the customer died. As a matter of law and industry policy, the discretionary trading granted pursuant to the IAA expired upon the customer's death.
Notice of Death
In late March 2013, Crain was informed by the customer's wife of her husband's death, and, accordingly, the stockbroker instructed her to come to his office in order to complete forms that would re-title the IRA into her name. Purportedly, Crain advised the wife that pending re-titling:
In response to Crain's communications, the wife responded that she was not yet able to deal with the matters requested and she asked if the office visit and documentation changes could wait. The AWC asserts that Crain offered to hold off reporting the husband's death to the clearing firm and that he would continue to "manage" the account in the interim.
The AWC asserts that by October 2013, at which time Crain was noted as having contacted the wife in an effort to finalize the re-titling, she had still not completed the account re-titling documentations. Eventually, in December 2013, the wife finally completed the necessary paperwork and effective January 2014, the account was re-titled into her name.
Although Crain allegedly had informed the wife that no monthly distributions would occur from around March 2013 until re-titling was effective, the AWC asserts that between March 1, 2013 and December 31, 2013, the wife continued to receive IRA monthly distributions.
SIDE BAR: Notwithstanding the discrepancy between what Crain advised the wife and the AWC's disclosure to the contrary, the settlement document inexplicably offers no explanation as to why the distributions continued. It may very well be that Crain did not notify his employer and/or the clearing firm of the husband's death, which seems the logical inference. It may also be that the payments continued in error. Whatever the case, this issue should have been better reported by FINRA in the AWC.
From March 1, 2013 through December 31, 2013, the AWC alleges that Crain executed 45 trades in the IRA; which FINRA characterizes as a "a continuation of the investment strategy that Respondent had begun in 2012." Although the AWC allows that Crain had executed the trades with the knowledge and implicit consent of the wife, Crain was cited for not obtaining a new written discretionary trading authority from the wife.
Violations And Sanctions
FINRA asserted that Crain's exercise of discretion in the IRA from March 2013 through December 16, 2013, was undertaken without prior written authorization in violation of NASD Conduct Rule 2510 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Crain a $5,000 fine and a one-month suspension from association with any FINRA member in any capacity.
Bill Singer's Comment
There is no explanation in the AWC as to when Crain formally notified his firm of the husband's death. It seems a fair inference that he held off on such notification until December 2013 but a published regulatory settlement should not require guessing as to substantive facts. Similarly, as to what constituted Crain's so-called precious metal strategy, that too is not provided by the AWC.
The AWC references an earlier regulatory settlement between Crain and the Arkansas Securities Commissioner. On February 28, 2014 (nearly a year before FINRA issued the AWC), the Arkansas Securities Commissioner entered a Temporary Order of Suspension against Crain based upon his failure to cooperate with a February 27, 2014, on-site examination of his office. Thereafter, on August 11, 2014, nearly six months before the publication of the FINRA AWC, Crain and Arkansas entered into a Consent Order addressing the very same IRA account at issue in the AWC.
If you compare the January 27, 2015, FINRA AWC with the August 11, 2014, Arkansas Order, you may wonder what the hell was FINRA investigating during that half a year between the Arkansas settlement and the self-regulator's At best, the self-regulatory organization appears to have engaged in the dubious and plodding exercise of simply stepping into the prior footprints of a more nimble and aggressive state regulator.Under those circumstances, the FINRA settlement seems more like regulatory piling on than anything remotely representing effective regulation.
As readers of the BrokeAndBroker.com Blog know, I am a frequent critic of the lack of "context and content" in many FINRA AWCs. In considering the separate handling of settlements with Crain by FINRA and Arkansas, we are once again confronted with an AWC lacking meaningful disclosure as to the nuts-and-bolts of a respondent's cited misconduct: The stark contrast between the statement of facts in the Arkansas and FINRA settlements clearly demonstrates the issues. In the AWC there is no mention of a single product that was allegedly traded without authorization by Crain. In contrast, consider this recitation in the Arkansas Securities Department's Consent Order with Crain (NOTE: "AR2" in the Order is the "wife"):
5. On July 10, 2013, Crain bought shares of the inverse and leveraged ProShares Ultrashort Euro Exchange Traded Fund (ETF) that were held in AR2's account for four weeks. Also, twice on May 28, 2013, Crain bought shares of an inverse and leveraged Credit Suisse VelocityShares Silver Exchange Traded Note (ETN) that were held in AR2's account for anywhere from four to thirteen weeks. The ProShares Ultrashort Euro prospectus stated that this inverse and levearaged ETF was designed to achieve its objective in one trading day. In addition, the prospectus for the Credit Suisse ETN clearly stated that this inverse and leveraged ETN was intended to be a daily trading tool for sophisticated investors to manage daily trading risks. These types of trades were made in Crain's other customer accounts.
6. AR2 was not an experienced or speculative investor.
Pursuant to to August 11, 2014, Consent Order, In the Matter of William David Crain, Respondent (Arkansas Securities Commissioner, Case S-14-0019, August 11, 2014), Crain's registration as an investment adviser and an agent of a broker-dealer was suspended for four months, at the end of which time he may reapply only after retaking the requisite exams. Also, he was fined $5,000 and ordered to repay $1,400 in advisory fees and $4,112.53 in market losses to the wife.
So . . . you tell me, what the hell does the AWC actually accomplish?
Some six months ago, a state regulator beat FINRA to the punch and suspended Crain for four months and imposed about $9,000 in fines and restitution. Citing facts that seem indistinguishable from that of its fellow state regulator, half a year later, FINRA imposes a one month suspension and a $5,000 fine on Crain. You may find that effective regulation. To me, it seems a duplicative waste of time and resources.