June 20, 2017
You may have been reading recently about the ongoing FINRA push to burnish its image and attack the problem of recidivist stockbrokers and overly accommodating brokerage firms. In truth, the data does show that a disturbing select few FINRA member firms have a dubious concentration of registered representatives with multiple offenses. Moreover, regulatory disclosures indicate that some reps have a history of customer complaints that takes on the appearance of a rap sheet. After a lot of negative publicity about the revolving door at the self-regulatory organization through which repeat offenders come and go, management is in the midst of a speaking tour and media blitz. Ya never know. Maybe the new management team at FINRA is serious. Maybe these new folks will really clean up the biz and restore investor confidence. On the other hand, while FINRA is pointing fingers at others, perhaps it should also point a finger at itself. Let's consider a recent regulatory settlement in which FINRA seems as much of the problem as the solution.
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, Abed Adam Darwish submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Abed Adam Darwish, Respondent (AWC 2015045720901, June 9, 2017).
Darwish entered the securities industry in 2007 and in 2010, he became registered with FINRA member firm Key Investment Services, Inc. ("KIS"). The AWC asserts that "Darwish has no relevant disciplinary history in the securities industry."
No Time-Space Continuum
The AWC asserts in pertinent part under "FACTS AND VIOLATIVE CONDUCT" that:
On March 8, 2013, Darwish visited the investor website of a third-party FINRA-regulated broker-dealer and, using the personal identification information of Bank customers JC and BC, established online access for the joint brokerage account JC and BC held at the third party broker-dealer. Darwish used the information he obtained to prepare alternate investment recommendations for JC and BC that might convince them to transfer their brokerage account to the Firm. As a registered representative of KIS, Darwish had access to JC and BC's personal banking information; however, neither JC nor BC authorized Darwish to establish online access for their third-party brokerage account.
SIDE BAR: Ummm . . . did anyone at FINRA actually read that above paragraph before clearing the AWC for publication?
It's usually best to present the underlying fact pattern in an official regulatory document in a linear timeline that begins with the earliest date through the most recent. The apparent, linear order here would have been that Darwish wanted to persuade the customers to transfer their third-party brokerage account to KIS, in furtherance of that plan, he reviewed the customers' data on the affiliated bank's system, then used that data without customer authorization to set-up online access to their third-party brokerage account, then used the brokerage account information to prepare alternative recommendations, and finally, used those recommendation to persuade the customers to move their brokerage business to KIS.
Takin' a Stab At The Fact Pattern
In any event, as best I can figure it out from the cited paragraph, it appears that Darwish wanted to persuade JC and BC to transfer their brokerage account at another firm to KIS. Not explained in the AWC is how Darwish came to know JC and BC, how he knew that they had an account at another brokerage firm, and why the hell he was nosing around in their bank files to begin with. If appears that JC and BC were clients of a KIS Affiliated Bank but apparently not clients of KIS's FINRA member firm. And Darwish came to learn about all of this how?
The AWC asserts that Darwish obtained personal banking information about JC and BC from the KIS Affiliated Bank's records, which he purportedly had "access to." I'm not exactly sure what FINRA is implying with its choice of "access to." Does that term imply that:
- the affiliated bank and brokerage firm were on the same premises and that fact gave Darwish "access" to the bank records; or
- Darwish's duties at the brokerage firm entitled him to review the records of bank customers; or
- Darwish was also a bank employee?
Missing from this whole "access to" characterization is whether Darwish had violated any industry rules or in-house policies by merely accessing the personal banking information of the affiliated bank's customers. The AWC does NOT charge that Darwish improperly reviewed or downloaded JC and BC's banking information; pointedly, the AWC only alleges that he used the information without the customers' authorization in order to establish online "access" to the third-party brokerage account. Someone at FINRA is truly hooked on that word "access." In the end, FINRA deemed Darwish's cited conduct to constitute a violation of FINRA Rule 2010.
The AWC further alleges that in January 2015, Darwish had a KIS customer identified only as "IS" sign an incomplete change of beneficiary form for her variable annuity. The eye-poppin' aftermath to this beneficiary change is that Darwish allegedly added his wife as a 50% primary beneficiary to IS's variable annuity. Okay . . . sure . . . like no one will ever ask any questions about that minor change?
Surprise, surprise, surprise!!!
Approximately ten days later, when customer IS received notification from the annuity company advising her of the addition of Darwish's wife as a beneficiary, IS
immediately notified Darwish and requested that her husband be named as the sole
beneficiary ofthe variable annuity. Darwish corrected customer IS's annuity beneficiary
designations that day.
The AWC further informs us that:
Shortly thereafter, the Firm received an anonymous complaint regarding Darwish's handling of IS's variable annuity. During the course of the Firm's investigation into the errors on customer IS's change-of-beneficiary form, Darwish made false statements to the Firm regarding the reason for, and events that led to the submission of, the change of beneficiary for IS's variable annuity. Among other things, Darwish stated that the changes to IS's variable annuity were the result of his determining that IS had not designated any contingent beneficiaries. That statement was false since, at the time of the proposed change, IS had already designated her husband's estate as the contingent beneficiary of her variable annuity . . .
I mean, geez, just what the hell is the AWC asserting happened here?
- Did Darwish simply add his wife as a 50% beneficiary and hope the customer would drop dead and no one would notice?
- Had there been any discussion whatsoever between Darwish and the customer about adding Darwish's wife as beneficiary?
- Was there any family or social relationship between Darwish and the customer beyond the business one?
- What whopper of an explanation did Darwish offer to KIS that justified his version of events as a mere "error" that was rectified by "correcting" the account so as to remove his wife's 50% benefit and replace it, in whole, with the customer's husband?
In addition to finding that Darwish's inclusion of his wife as an "unauthorized and incorrect beneficiary" caused KIS to make and preserve false and inaccurate records, FINRA deemed that same underlying conduct to constitute a violation by Darwish of FINRA Rule 4511 and 2010.
Permitted to Resign
Online FINRA BrokerCheck records as of June 20, 2017, disclose that KIS permitted Darwish to resign on May 15, 2015, based upon allegations that the:
REGISTERED REPRESENTATIVE RESIGNED WHILE UNDER INTERNAL INVESTIGATION. INTERNAL INVESTIGATION WAS PROMPTED BY AN ANONYMOUS COMPLAINT BY A FAMILY MEMBER OF A CLIENT, NOT RELATED TO THE REGISTERED REPRESENTATIVE, WHO ALLEGED THAT THE CLIENT SIGNED A BENEFICIARY DESIGNATION ON WHICH REGISTERED REPRESENTATIVES'S WIFE WAS LISTED AS A PRIMARY BENEFICIARY. REGISTERED REPRESENTATIVE MAINTAINED THE ERROR WAS CLERICAL.
In accordance with the terms of the AWC, FINRA imposed upon Darwish a $7,500 fine and 18-month suspension from associating with any FINRA member-firm in any capacity.
Bill Singer's Comment
Either the AWC has way, waay, waaaaaaay, overstated the seriousness of Darwish's misconduct or FINRA thinks it's okay to unleash this guy on the public again. Whatever the explanation, just what the hell does it take to get barred by FINRA? Apparently, not the unauthorized use of confidential banking records coupled with the unauthorized access to a third-party brokerage account coupled with adding your wife as an unauthorized annuity beneficiary coupled with making "false statements" to your firm's compliance staff. Given everything involved here and Darwish's insistence to the bitter end that "the error was clerical" (as noted on BrokerCheck), FINRA figured that an 18-month suspension was the appropriate response? If all of Darwish's misconduct does not add up to a Bar, what else would have been required to achieve that goal?