Welcome to the jungle . . . the Wall Street jungle, where herds of stockbrokers and investment advisor representatives are coming into increasing conflict over diminishing territory. The broker-dealer prairie continues to shrink while the registered investment advisor wetlands are drying up. On top of that habitat crisis, corrupt politicians, compromised regulators, and self-interested industry groups are preying upon the most vulnerable. Everyone wants in on the hunt as the fading world of the broker-dealer collides with the unstable world of the RIA. If you read a recent FINRA regulatory settlement, you almost hear Guns N' Roses singing: Welcome to the jungle it gets worse here everyday
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, Paul George Liebezeit submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Paul George Liebezeit, Respondent (AWC 2014043011201, August 11, 2016).
Liebezeit first became registered in 1994. By November 2010, when his employer was acquired by FINRA member firm LPL Financial LLP, Liebezeit became registered with that latter member firm. While registered with LPL, Liebezeit also served as an Investment Advisor Representative ("IAR") with a registered investment advisory ("RIA"). After leaving LPL, in November 2014, Liebezeit became registered with another FINRA member firm. The AWC asserts that Liebezeit had no prior disciplinary history with the Securities and Exchange Commission, FINRA, any other self-regulatory organization or any state securities regulator.
The AWC asserts that during the relevant period between December 2013 and February 2014, while associated with LPL, Liebezeit served in the dual capacities of an LPL General Securities Representative and as an RIA's IAR (the RIA's name is not mentioned in the AWC).
Sometime around December 2013, a married couple, who were customers of Liebezeit's RIA, consulted with him about certain investment opportunities recommended to them by others; and, thereafter, Liebezeit recommended that the couple invest in a fund of hedge funds, which was purportedly similar to the opportunities presented to the couple by others. The AWC asserts that the fund recommended by Liebezeit was "away from the Firm, which was not approved for sale through LPL."
SIDE BAR: The AWC characterizes the married couple as "Liebezeit's RIA customers ("Investors")" and there is no reference to them also being broker-dealer customers of Liebezeit's at LPL. They may have been. They may not have been. The AWC didn't specify, so we don't know.
In furtherance of his recommendation, between January and February 2014, Liebezeit allegedly:
facilitated Investors' investment by introducing them to the fund's representatives, assisting them with paperwork for the transaction, and facilitating the transfer of their investment amounts from an LPL custodial account to the fund. Investors invested $1,000,000 in the investment. Liebezeit did not provide prior written notice of his participation in this transaction. In addition, he did not obtain LPL's written approval to participate in the transaction.
SIDE BAR: Despite the AWC's indication that the Investors were not LPL customers of Liebezeit, it appears that the couple had an "LPL custodial account," which was the apparent source of funds for the investment at issue. That account may have been serviced by a registered representative other than Liebezeit. Once again, a detail left unstated in the AWC.
FINRA deemed Liebezeit's conduct to constitute his participation in a private securities transaction ("PST") in violation of NASD Rule 3040 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Liebezeit a $5,000 fine and a 6-month suspension from association in all capacity with any member.
Sorry but I'm not buying whatever the hell it is that FINRA is selling concerning nearly any aspect of this case. Certainly, I don't see, even remotely, a FINRA PST Rule violation based upon the AWC's recitation of facts. Let's note some of the salient aspects of this settlement:
Liebezeit was an IAR and a registered rep with LPL; and the employer firm knew of and had approved of both roles.
The married couple were clients of Liebezeit's RIA and there is no assertion of any relationship among the couple and Liebezeit involving LPL's broker-dealer business.
The couple transferred money from their LPL custodial accounts but there is no assertion that Liebezeit was or was not their LPL servicing stockbroker.
If there is no LPL broker-dealer relationship among stockbroker Liebezeit and the couple, how could there even be an "away" transaction under those circumstances?
Under FINRA's online BrokerCheck file heading "Employment Separation After Allegations" as of August 23, 2016, LPL disclosed that on September 5, 2014, it "Discharged" Liebezeit based upon allegations that:
REPRESENTATIVE PROVIDED ADVICE TO CUSTOMER REGARDING ONE SECURITIES INVESTMENT PRODUCT THAT WAS NOT APPROVED BY THE FIRM. THE CUSTOMER SOUGHT GUIDANCE FROM THE REPRESENTATIVE REGARDING THE POTENTIAL IMPLEMENTATION OF CERTAIN INVESTMENT RELATED STRATEGIES THAT WERE INTRODUCED TO THE CUSTOMER BY OTHER INVESTMENT FIRMS (I.E., PORTFOLIO INSURANCE, COVERED CALLS, AND ALTERNATIVE INVESTMENTS). TO THE FIRM'S UNDERSTANDING, THE REPRESENTATIVE DID NOT RECEIVE ANY COMPENSATION IN CONNECTION WITH THE TRANSACTION.
In response to the above disclosure, BrokerCheck provides this response from Liebezeit:
AN RIA CLIENT ASKED THE ADVISOR TO COMMENT REGARDING INVESTMENT IDEAS PRESENTED BY OTHER ADVISORS. CLIENT INVESTED IN ONE OF THE STRATEGIES AWAY FROM THE ADVISOR. NO FINRA VIOLATION. NO COMPENSATION FOR THE ADVISOR.
LPL's "Discharge" narrative states that Liebezeit "provided advice to customer . . ." That doesn't speak the language of a PST violation. All that the employer asserted was that its former RR had provided "advice" to a customer regarding a purportedly non-approved security. It's not specified whether the "customer" was an RIA customer or an LPL brokerage customer serviced by Liebezeit. This characterization of the "customer" is important, particularly when you consider that Liebezeit's reply to his employer's "Discharge" narrative specifies that the "customer" is "an RIA client."
If FINRA wants readers of its AWCs to play guessing games, then let the games begin:
Was LPL pissed off with Liebezeit because he had provided advice to the couple that resulted in their transferring $1 million from LPL to the fund investment?
Would LPL have also been upset with Liebezeit if, for example, the couple's $1 million wound up in a so-called LPL "approved" fund?
Did the couple ever complain about Liebezeit's advice?
Did the couple lose money on the fund in which they invested?
I accept the fact that both FINRA and LPL may well be correct in their positions and actions. On the other hand, even if I fully accept LPL's version of events and fully accept FINRA's statement of facts, I'm not sure that I understand what horrific conduct Liebezeit did to earn him a $5,000 fine and 6-month suspension. A private securities transaction? Are you kidding me -- I mean, c'mon, let's all get serious here: This settlement has very, very little to do with a violation of FINRA's much used (perhaps over-used?) PST Rule.
Okay, sure, I see where it's alleged that Liebezeit purportedly recommended an "unapproved" investment but I don't see where it says that the recommendation was made to individuals who were his customers at LPL's broker-dealer. Does an IAR's "guidance" or "comment" rise to the level of recommending an unapproved security to a broker-dealer's customer -- and if the answer is "YES," is that always, sometimes, or only in the unique facts of this case?
If you ask me -- go ahead, ask me (thanks!) -- I smell less a violation of FINRA's broker-dealer rules and more of the stench of the growing conflict between the Suitability Rule and the Fiduciary Standard. Is this a tussle over who eventually emerges as the King of the Jungle? This all smacks more of a turf war than broker-dealer regulation. And if I have it all wrong, and I often do, then don't blame me: blame the lousy AWC for failing to present adequate content and context.