July 24, 2018
BrokeAndBroker.com Blog publisher Bill Singer is often tough (if not impossible) to please when it comes to the decisions, opinions, orders, memoranda, and what-not that endlessly spews from Wall Street's regulatory community and from those who adjudicate its disputes. As Bill often laments, in the apparent haste to churn the crap out, those tasked with drafting the necessary documents tend to do so without much concern about the adequacy of the content and context. Consequently, we often find ourselves reading published materials from courts, regulators, and arbitrators that fail to intelligibly explain who did what to whom, and why a finding was made or a sanction imposed. To Bill's surprise and immense satisfaction, today's featured FINRA Arbitration Decision is perfection. Perfection? Seriously?? Bill Singer is using the word "perfection" when it comes to something emanating from the dark recesses of FINRA? Yeah . . . he said it: Perfection!
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2017, associated person Claimant Garrison sought the expungement of a customer complaint (referenced as Occurrence #1648303) from his Central Registration Depository record ("CRD"). Claimant requested $1.00 in compensatory damages. In the Matter of the FINRA Arbitration Between David Max Garrison, Claimant, vs. Cambridge Investment Research, Inc. , Respondent (FINRA Arbitration 17-03205, July 19, 2018)
Respondent Cambridge Investment Research did not oppose the requested expungement but did seek the denial of Claimant's request for damages and the assessment of forum fees against him.
At the hearing, Claimant Garrison dismissed his request for all monetary damages.
The IRA Accounts Tax Penalty
As explained in the FINRA Arbitration Decision, Occurrence #1648303 involved the alleged complaints of customers who are identified only as "M.R." and "V.R.," both of whom were notified of the expungement hearing and did not participate. In reviewing various materials attendant to the requested expungement, the sole FINRA Arbitrator found that in furtherance of a settlement with the customers, Respondent Cambridge:
paid Customers M.R. and V.R. to cover a tax penalty that they incurred due
to an administrative error. The funds for settlement were deducted from Claimant's
commission statement. The Arbitrator found that the settlement amount was considered
nominal and no other terms were deemed relevant. The Arbitrator noted that the
settlement was not conditioned on Customers M.R. and V.R. not opposing the request
In recommending expungement, the Arbitrator found that pursuant to FINRA Rule 2080 the customers' claim, allegation, or information is factually impossible or clearly erroneous. In
providing his rationale, the Arbitrator offers a particularly lucid and compelling rationale:
The underlying facts are not disputed: Customers M.R. and V.R. opened
an IRA account with Claimant and Respondent and indicated a desire to
make early withdrawals. In order to minimize the mandatory penalty
associated with such withdrawals, Claimant recommended (and
Customers M.R. and V.R. agreed) to open two accounts of unequal value,
with the withdrawals to be made from the smaller account. Proper
instructions to open the accounts were given to Claimant's office staff, but
they were not followed. Only one account was opened and it contained
Customers M.R. and V.R.'s entire contribution. This error was discovered
when Customers M.R. and V.R. first sought an early withdrawal. The
settlement amount equaled the amount of tax penalty incurred. No
underlying investment was affected and no improper sales or investment
practice was ever suggested.
The claim is found to be clearly erroneous for the following reasons:
1. Customers M.R. and V.R. complained that Claimant did not follow their
instructions. Such conduct is addressed by FINRA Rule 2090 (the "Rule"),
which states in pertinent part:
Every member shall use reasonable diligence, in regard to the
opening and maintenance of every account....
The Rule covers Claimant's conduct in opening the account and, further,
the use of the word "reasonable" suggests that not every administrative
error violates the Rule. Claimant testified (from contemporaneous notes)
that he followed an established procedure that was used successfully in
many similar situations. For some reason, one of his employees did not. I
find that Claimant himself acted with reasonable due diligence in
administering the account, and, further, that his reliance on an employee
to carry out his instructions was also reasonable. Even if Claimant's employee's inaction is attributed to him, I further find that the failure to
open a second account was not an "unreasonable" practice as
contemplated by the Rule, under the facts and circumstances of this case.
2. The BrokerCheck Report states that matters involving alleged losses
of less than $5,000.00 are not included in the record. The amount involved
is clearly less than $5,000.00. At the time Respondent made the entry in
question, it reasonably believed it could not make a determination
regarding the total amount involved and so stated. This was reiterated at
the hearing by Respondent's counsel. As such, and with the benefit of
hindsight, the entry should not be there in the first place and should not be
Bill Singer's Comment
Wow! And I mean: Wow!
The sole FINRA Arbitrator provides us with a fact pattern, that explains what happened and why -- and a spot-on dissertation as to the appropriate weight that should afforded when adjudicating any rule pertaining to a "reasonable" act. That's a double-barreled dose of sufficient content and context. We got all the angels smiling in Wall Street Heaven and the celestial trumpets are blaring a lovely tune. And as cranky a bastard as I can be when it comes to poorly drafted FINRA documents of all hues and shades, I ain't got nuthin' to criticize here. This decision is perfection!
Finally, just to offer a bit more detail, online FINRA BrokerCheck records as of July 4, 2018, disclose that the customer complaint at issue was filed on February 5, 2013, and settled by Cambridge for $1,140.79 on March 29, 2013.