Today's featured FINRA settlement involves yet another dispute about unauthorized discretion and the proper use of Time & Price discretion. Additionally, BrokeAndBroker.com Blog publisher Bill Singer, Esq. is troubled by an emerging trend of FINRA AWC Respondents submitting Corrective Action Statements. As Bill explains in his commentary at the end of the article, such statements are gratuitous and not required or mandated as part of the formal AWC. Sure, such recitations are often well intentioned but the road to Hell is paved with good intentions.
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, Luigi E. Mancusi submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Luigi E. Mancusi, Respondent (AWC 2015048159201, October 27, 2017).
The AWC asserts that Mancusi was first registered in 1992 and from September 2012 to November 2015, he was registered with FINRA member firm Oppenheimer & Co. Inc. The AWC asserts that Mancusi does not have "relevant disciplinary history."
Sometimes the line between discretion and authorization gets blurred. Within the context of a telephone call or email exchange between a customer and stockbroker, things get stated that may sort of seem like the customer gave the okay to place an order. It's that "sort of" aspect that can alter what looks like a bona fide non-discretionary order into one that involves the inappropriate exercise by the stockbroker of discretion, albeit limited and perhaps disputed. When such a sort-of order is accepted, it often occurs at a time when stockbroker was speaking to the customer on the phone while filling out an order ticket while also reading an email while also waving at an assistant to tell another customer to hold on for one more second while also watching the stock-market screen on his desk. That's the swirl of confusion that exists at most branch offices throughout most business days. That's the setting in which lots of industry violations occur.In an attempt to address circumstances when "sort of" orders often pop up, NASD Rule 2510(d)(1) carves out an exception for Time And Price ("T&P") discretion. T&P comes into play when there's a customer order for the purchase or sale of a definite amount of a specified security but it's left to the stockbroker's discretion to decide the time and price at which the order is entered. T&P is an effective order ONLY until the end of the business day on which the customer granted such discretion.
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 AccountNo 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.
The AWC asserts that between December 2012 and September 2014, without the prior written authorization of a customer referenced only as "SW" and without Oppenheimer's approval, Mancusi exercised discretion by effecting 45 transactions on 26 days in SW's non-discretionary account. The AWC asserts that Mancusi had exercised impermissible T&P discretion because he had not obtained prior-same-business-day-discretion as set forth in the rule.
FINRA deemed Mancusi's conduct pertaining to the cited SW transactions as constituting violations of NASD Rule 2510(b) and FINRA Rule 2010.
AWC also asserts that on March 14, 2014, a customer referenced only as "JB" was allegedly unreachable and out of the country; but, notwithstanding, Mancusi purportedly sold a security and, thereafter, used the proceeds to purchase two other securities. in JB's account. The AWC asserts that:
As a result, JB incurred fees, commissions, and ultimately a loss in disposing of an unwanted purchase into a new position, totaling $2,966.97.
FINRA deemd the cited JB transactions as constituting a violation of FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Mancusi a $10,000 fine; a two-month suspension in all capacities from association with any FINRA-registered firm; and ordered him to pay $2,966.97 in restitution to JB with interest.
Bill Singer's Comment
Under the AWC heading "Overview," both the cited SW and JB trades are characterized as constituting "violations of NASD Rule 2510(b) and FINRA Rule 2010."
In contrast, under the AWC heading "Facts and Violative Conduct" the SW trades are characterized as violations of "NASD Rule 2510(b) and FINRA Rule 2010," but the JB trades are only characterized as violations of "FINRA Rule 2010."
Corrective Action Statement
Mancusi's AWC includes a provision under "III. OTHER MATTERS" that states:
I may attach a Corrective Action Statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct. I understand that I may not deny the charges or make any statement that is inconsistent with the AWC in this Statement This Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.
As more fully explained in a 1998 NASD (FINRA's predecessor) document: "Regulatory Short Takes: NASD Clarifies Policy On Corrective Action And Mitigation Statements":
Respondents in a settled disciplinary action may submit a Corrective Action Statement and/or a Mitigation Statement to NASD Regulation. This article clarifies the NASD policies regarding such Statements.
A Letter of Acceptance, Waiver and Consent (AWC) permits a respondent in an NASD Regulation disciplinary action to settle the matter prior to the filing of a formal complaint. A Corrective Action Statement may be attached to the AWC, which is filed with the SEC and available to the public, provided such statement is: (1) limited to demonstrable steps taken to correct a problem associated with the disciplinary action; (2) generally no longer than 2-3 pages; and (3) contains the following legend:
This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by NASD Regulation, Inc., nor does it reflect the views of NASD Regulation, Inc., or its staff.
Separately, respondents may submit a Mitigation Statement for consideration by NASD Regulation and the National Adjudicatory Council. Generally, such Statements are used to describe mitigating circumstances surrounding the violation for the decision maker to consider in its review of the terms of a settlement. Unlike Corrective Action Statements, Mitigation Statements are not attached to the AWC or public order.
Respondents may also settle a matter after the complaint is filed by submitting an Offer of Settlement. While both Corrective Action and Mitigation Statements may be submitted to NASD Regulation in connection with Offers of Settlements, these Statements are not attached to the final Order Accepting the Offer of Settlement, which is filed with the SEC and available to the public.
NASD Regulation will not accept Corrective Action or Mitigation Statements that deny the allegations or are inconsistent with the findings in the settlement. . .
FINRA AWCs permit the attachment of a Corrective Action Statement to demonstrate the steps taken by a respondent to prevent future misconduct subject to the understanding that such an attachment may not deny the charges or make any statement that is inconsistent with the AWC. Further the Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.
I am no fan of Corrective Action Statements and rarely, if ever, advocate their use. Given that the premise of an AWC is a settlement made without admitting or denying the findings, I don't understand why anyone would voluntarily submit a statement that typically make admissions of facts and findings; promises to correct situations that have not necessarily been acknowledged or admitted to; and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statement, then ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal. If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it.
Some think that a Corrective Action Statement gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. As with any post-game analysis, it's just not going to change the score. Moreover, if during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in your statement, or, it is alleged that you failed to implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission.
I notie that settling Respondents are submitting a Corrective Action Statement that appears to be presenting a proposed or in-place supervisory scheme at a current FINRA member firm. All of which looks more like a proposed scheme of enhanced supervision attendant to the filing of a FINRA Membership Continuance Application (the "Form MC-400") for a statutorily disqualified individual. I find that an ill-advised practice because most AWC Respondents are merely suspended and fined and are not subjected to any further regulatory constraints after the time is served and the dollars paid. Frankly, I'm old school: Don't volunteer anything and don't answer questions that weren't asked.
If FINRA wanted to impose specific supervisory conditions upon a settling Respondent or require the submission of an undertaking by the registered rep or member firm, then so be it. On the other hand, why any member firm would draft an extensive list of compliance Do's and Don'ts to which a suspended rep would be subjected upon his or her return to production baffles me. I appreciate that some employer member firms may think that this gives some some edge against future misconduct but I don't agree. If a firm harbors such concerns that it needs to impose a multi-paragraph proposed supervisory protocol over a suspended rep, then maybe that firm should terminate the individual. You think that's harsh? Just imagine what some customer's lawyer will do with that published list of restrictions if the stockbroker engages in a disputed trade and all that language about strict supervision is then turned against the brokerage firm as an indication that they knowingly unleashed a problem stockbroker on the victimized customer.
Notwithstanding my opinion, Mancusi apparently determined that it was advisable to submit this Corrective Action Statement:
FINANCIAL INDUSTRY REGULATORY AUTHORITY
LETTER OF ACCEPTANCE, WAIVER AND CONSENT
EXAM NO. 20150481592
STATEMENT OF CORRECTIVE ACTION
(This Corrective Action Statement is submitted by the Respondent. lt does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA, or its staff.)
To: Department of Enforcement
Financial Regulatory Authority ("FINRA")
From: Luigi E. Mancusi
CRD No. 2193040
In connection with the Letter of Acceptance, Waiver and Consent (AWC") in this matter, Exam No. 20150481592, Luigi E. Mancusi (CRD No. 2193040) makes the following Statement of Corrective Action.
Mr. Mancusi is currently a registered representative with David A. Noyes & Company ("Noyes"). Mr. Mancusi is the registered representative for clients who have accounts at Noyes. Noyes has the following procedures for Mr. Mancusi.
First, all client interactions, especially trading, are required to be documented using the First Clearing Client Dashboard Resource ("CRM"). Notes on these interactions must be made contemporaneously with the conversation, and will be reviewed weekly by Noyes Supervisory Staff. Depending on the velocity of trading, Noyes, Supervisory Staff will be reviewing a sample of trades versus Mr. Mancusi's client notes. Missed, inaccurate or informationally insufficient notes will lead to a greater sample number, or a follow-up conversation with the client. Notes must be entered in the CRM, handwritten notes will not be considered as meeting this requirement.
Second, Noyes is implernenting a calling and client outreach process to follow up on trading with Mr. Mancusi's clients. The Supervisory Staff, while monitoring daily trades, will compile a list of Mr. Mancusi's daily trades and contact a sample number of those clients for whom trades were placed on a weekly basis. The Supervisory Staff will compare the details of these calls with Mr. Mancusi's CRM notes for accuracy. All of these client conversations will be further documented in the CRM for Mr. Mancusi's review.
Third, Mr, Mancusi resides in the Lake Forest, Illinois branch office of Noyes, and supervision is performed by the Chicago Office of Supervisory Jurisdiction. Noyes will have a Series 24 Incensed supervisor based in Mr. Mancusi's office. This individual wiII provide supervisory support to the Branch Manager and Senior Compliance Officer who act as Mr. Mancusi's supervisory team, and they will assist in providing onsite supervision relative to client interaction and activity.
Mr. Mancusi submits that the activity described herein are concrete and demonstrable steps taken to correct any problem as outlined in the AWC. Thus, Mr, Mancusi believes he is fully complying with the trading authority requirernents of FINRA and his firm, Noyes. In addition, Mr. Mancusi is being supervised by Noyes to insure that his trading activity is and remains proper. . .