November 22, 2017
The BrokeAndBroker.com Blog's publisher, Bill Singer, Esq., often criticizes the Financial Industry Regulatory Authority for what he calls a lack of "content and context" in its various published arbitration and regulatory documents. As Bill sees it, FINRA has an obligation to say what it means and mean what it says. After all, the regulation of Wall Street is serious business that involves both public customers and industry participants. As such, you got lots of folks who have a vested interest in understanding what's going on in the industry and how FINRA is determining when and whether to fine and suspend.
In a recent FINRA regulatory settlement, the lack of explanation as to the basic elements of the case is baffling. Either the regulator doesn't think the facts are important or it never got the facts or it lacks the ability to convey such information. You judge for yourself.
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, Daniel I. Wilson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Daniel I. Wilson, Respondent (AWC 20150479464101, November 16, 2017).
The AWC asserts that Wilson entered the securities industry in 1982 with FINRA member firm Northwestern Mutual Investment Services, LLC. The AWC asserts that he had "no disciplinary history with the Securities and Exchange Commission, FINRA, any other self-regulatory organization or any state securities regulator."
During the relevant period from September 2007 through June 2013, the AWC asserts that Wilson was the servicing agent for a customer who is not identified by name or initials in the published settlement document - but we can infer from the presentation of facts that the customer was a "wife."
During the relevant period, the AWC alleges that the customer's husband requested Wilson effect 19 mutual fund liquidations in his wife's account. The proceeds of those transactions funded about $193,000 in withdrawals. The AWC further alleges that the customer did not have any authorization over his wife's accounts.
SIDE BAR: Consider the pertinent FINRA "Discretionary" Rule, which, go figure, is still titled as an "NASD Conduct Rule" over a decade after that former regulator was replaced by FINRA:
NASD Conduct Rule 2510: Discretionary Accounts
(b) Authorization and Acceptance of Account
No 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; . . .
The AWC alleges that Wilson had mistakenly assumed that the husband had the authority to direct the liquidations/withdrawals at issue. Notwithstanding his belief, Wilson never obtained the customer's authorization for the cited transactions. The customer was purportedly fully reimbursed for the withdrawals.
FINRA deemed Wilson's conduct to constituted violations of NASD Rules 2510(b) and Rule 2110 (for conduct on or before December 14, 2008) as well as FINRA Rule 2010 thereafter. In accordance with the terms of the AWC, FINRA imposed upon Wilson a $7,500 fine and a 30-business-days suspension from association with and FINRA member firm in any capacity.
Bill Singer's Comment
This AWC strikes me as among the worst drafted that I have read in a long time.
Six years of unauthorized sales
First and foremost, there is absolutely no discussion as to the "relevant period," which covered nearly six years from September 2007 through June 2013. I mean, c'mon, how the hell does a brokerage account engage in some six years of allegedly unauthorized transactions and the client doesn't notice or say anything. Then there is the omission of the number of and dollar amounts of the unauthorized sales. Over the six-year relevant period, were there 4 of 100 allegedly unauthorized sales? Were the proceeds of each sale under $100 or in excess of $100,000? To be clear, there are, indeed, many explanations for how such protracted activity could persist without a customer's awareness, and it is exactly such information that was needed in this AWC in order to provide the necessary content and context.
Six years of withdrawals
Similarly, there is no adequate presentation in the AWC as to the issue of the withdrawals of the proceeds from the unauthorized sales. How many withdrawals took place over the six years at issue? What was the dollar amount of each such withdrawal? Moreover, just exactly what is meant by the term "withdrawal" -- were the proceeds of the liquidations forwarded by wire, check, or any other method to the wife's address of record and solely in the wife's name? Did the husband intercept the payments, forge his wife's name, and convert the funds to his own use? Further, did the wife file criminal charges against the husband?
Compounding the above lack of information, the AWC should have indicated - one way or the other - whether the wife had previously given Wilson authorization (oral or written) to enable her husband to engage in various transactions in her account. Similarly, there is no indication as to whether the husband lied to Wilson and fraudulently stated that he was acting at his wife's behest.
Yes, a rule says what it says, and in the case of NASD Rule 2510(b), that rule requires prior written authorization in order for a registered representative to exercise any discretionary power. On the other hand, even if "guilty with an explanation" is still guilty, the concept of "mitigation" is contemplated in FINRA's "Sanctions Guidelines." Given the oddball set of facts in this AWC, it would have been appropriate for FINRA to explain how the fine and suspension were calculated and what, if any, consideration was given to the questions that I raised above.
Some Flesh on the Bones
According to FINRA's online BrokerCheck records as of November 22, 2017, under the heading "Customer Dispute - Settled," is a disclosure that "NMIS LLC" reported the following "Allegations":
On September 16, 2013, client alleged representative did not verify if withdrawal of monies/policy loans were authorized & they were not authorized. April 13, 2014 amendment alleged representative negligently empowered unlawful activity. May 18, 2015 motion to amend alleged intentional interference, negligent misappropriation, and conversion by representative. Court denied motion on September 8, 2015.
This BrokerCheck disclosure indicates that process was served in the above lawsuit in Iowa District Court on October 2, 2013, and that on November 23, 2015, the case settled for $411,000 of which Wilson allegedly contributed $299,696.33. I'm goin' out on a limb here but I'm guessin' that "NMIS LLC" was Wilson's employer Northwestern Mutual Investment Services, LLC.
I mean, for godsakes, it's sort of ridiculous for a self-regulatory-organization to have more information about the facts at issue in a regulatory settlement on its public online database than in the formal settlement document. Frankly, I was shocked to learn that the dollars at issue were at least $411,000. I sort of assumed from the lack of content and context that the AWC was addressing a matter involving a few thousand at most. Which brings me back to my quesetion: How does a customer not notice that at least $411,000 in sales and withdrawals occurred in her account over a six year span? I'm not saying that the dollars and dates are correct. I'm not blaming the customer. I'm not saying that Wilson should have known better. I'm simply noting that I should NOT be asking such questions after reading through Wilson's AWC.