December 3, 2018
Under consideration today is a troubling FINRA regulatory settlement involving two deceased customers, their stockbroker, and a whole host of developments involving powers of attorney, beneficiary designations, and trusts. As is sometimes the case with these eye-opening matters, we are left to ponder why the customers were so generous towards their stockbroker; and, at the same time, we are left uneasy as to why the stockbrokers engaged in the alleged subterfuge. In the end, there are far too many unanswered questions by FINRA -- for which publisher Bill Singer takes the self-regulatory-organization to task.
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, Cheryl Ann Stallings, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Cheryl Ann Stallings, Respondent (AWC 2016051267401, November 19, 2018).
The AWC asserts that Stallings entered the securities industry in 1979 but only first became registered in 1993. By 2009, Stallings was registered with FINRA member firm LPL Financial LLC, where she served as a Branch Office Manager in addition to a General Securities Representative.
April/May 2014: CC GPOA and IRA
The AWC alleges on Page 3 that:
In April 2014, Stallings acquired a general power of attorney over customer CC . . .
May 2014: CC Opens LPL IRA
The AWC alleges on Page 2 that:
On May 1, 2014, LPL customer CC, who was terminally ill, opened an IRA brokerage account at LPL with Stallings. CC funded the account by rolling over his employer funded retirement account valued at approximately $35,000. . .
Allegedly, Stallings failed to request prior approval from the firm to act in his general power of attorney ("GPOA") capacity. The AWC asserts that:
LPL's supervisory procedures required registered representatives to request and obtain firm approval prior to acting as a power of attorney for a firm customer.. .
SIDE BAR: On its Page 2, the AWC, introduces us to CC and fosters the impression that the terminally-ill customer first opened an LPL account (an IRA) on May 1, 2014, and that this customer was then assigned to be serviced by Respondent Stallings. On its Page 3, however, the AWC travels back in time and informs us that in April 2014, Stallings acquired a GPOA "over customer CC." As much as I am fascinated by time travel and the disruption of the time-space continuum, I don't believe that a FINRA AWC is the place to test such theories. The AWC's clumsy presentation of when CC became an LPL and/or Stallings customer leaves us with the following unresolved issue:
- If the IRA account opened in May 2014 was, in fact, CC's first LPL account, then at the time that Stallings acquired the GPOA in April 2014, CC was not an LPL customer serviced by Stallings.
Consequently, it is unclear whether the April 2014 granting of the GPOA by CC to Stallings occurred when CC was an LPL customer, notwithstanding that CC would subsequently become one in May 2014. This becomes an interesting issue because LPL's above-quoted GPOA procedures required that registered reps request and obtain prior approval when acting "for a firm customer." If CC was not a customer in April 2014, then the applicable procedures would not have been triggered, and there is no representation in the AWC whether pre-existing GPOAs had to be disclosed and subject to approval. Although FINRA member firms generally require disclosure (frequently in an annual compliance questionnaire) of any POAs held by associated persons, such disclosure is a separate and distinct issue from an obligation to seek and obtain a firm's approval before accepting such powers. Finally, if CC and Stallings had some non-familial social or business relationship prior to the May 2014 customer-stockbroker one, the AWC fails to address that.
LPL Custody and TOD Procedures
The AWC asserts that:
LPL's supervisory procedures strictly prohibited registered representatives from "taking custody of. . . money, or other property belonging to others." Additionally, LPL's procedures provided: "[Registered representatives] should not be listed on a (non-family) transfer-on-death account. If the client is still alive, the advisor should remove themselves as beneficiary immediately."
May 2014: CC TOD Designation
On May 30, 2014, Stallings accompanied CC to the customer's bank, where the customer designated Stallings as his Transfer-on-Death ("TOD") beneficiary and granted her with the authority to write checks and deposit/withdraw money from the account: CC and Stallings both signed the bank document to make these changes. CC funded the bank account by transferring money from his IRA brokerage account. Allegedly, Stallings failed to request prior approval from LPL to act in the cited capacities.
September 2014: CC's Death
Upon CC's death in September 2014, approximately $9,000 in CC's bank account passed to Stallings, presumably as a function of the TOD designation.
April 2011: MN Opens LPL Account
LPL Customer MN, an elderly customer, became Stallings' firm customer in or
about April 2011. . .
The AWC asserts that MN was not a relative of Stallings.
2014 Joint Owner and TOD Designation
In the summer of 2014, MN added Stallings as a joint owner to a bank account that MN held with her husband. Further, MN designated Stallings as the TOD beneficiary to the account. On or about August 19, 2014, Stallings and MN purportedly signed the bank form to implement the revised TOD designation. Allegedly, Stallings failed to request prior approval from the firm to act in the cited capacities.
December 2014: MN's Husband Dies
In December 2014, MN's husband died.
LPL Trustee and Beneficiary Procedures
The AWC states that:
LPL's supervisory procedures prohibited registered representatives from acting as
trustees or successor trustees without prior firm approval and, even then, only if
there was a family relationship. The firm's procedures also strictly prohibited
registered representatives from being beneficiaries of a customer's estate unless
the customer was an immediate family member. . .
June 2015 Trustee Appointment
The AWC asserts that on June 4, 2015, MN appointed Stallings as successor trustee over her living trust; and, allegedly, MN had informed Stallings of her intent to so appoint the stockbroker. Also, MN named Stallings as a beneficiary of the trust granting her a $248,000 payment from the trust. Allegedly, Stallings failed to request prior approval from the firm to act in the cited capacities.
August 2015: MN Dies
Upon MN's death on August 23, 2015, approximately $53,000 in the bank account passed to Stallings, presumably as a function of the TOD designation.
September 2015: Stallings Seeks Trustee Permission
On September 14, 2015, Stallings requested LPL's permission to act as trustee for MN's trust. On the request form, Stallings falsely stated that MN was her aunt; and based on Stallings' misrepresentation, LPL subsequently approved her request.
$5,300 in Transfers
The AWC alleges that in September and October 2015, (after customer MN's death and before her estate had settled), two automatic transfers from MN's LPL account totaling approximately $5,300 were made into the bank account, which had then passed to Stallings. MN had designated these brokerage funds to beneficiaries other than Stallings. Rather than return the $5,300 (dividends and interest) to the beneficiaries of the brokerage account, Stallings allegedly improperly used these funds to pay for her personal expenses.
In addition to Stallings' lie that MN was her aunt, the AWC alleges that Stallings made false statements on the following Annual Compliance Questionnaires ("ACQs"):
- 2014: falsely denying she had been granted any POA over a firm customer when she had CC's GPOA;
- 2015: misrepresenting that she was not a successor trustee or beneficiary of any customer trust despite being a trustee and beneficiary of MN's trust; and
- 2014 and 2015: falsely stating she had not been granted control over any customer assets notwithstanding that she had control over MN's and CC's bank accounts.
The AWC alleges that on August 3, 2017, LPL filed a Form U5 stating that Stallings was discharged for "Violation of Firm policy regarding fiduciary capacities and being a joint owner on two different clients banking accounts." Thereafter, she registered with another FINRA regulated broker-dealer until resigning on February 9, 2018.
In summarizing the various charges against Stallings, FINRA alleged the following:
- In violation of FINRA Rule 2010:
- between May 2014 and December 2016, Stallings circumvented LPL's supervisory system and procedures and prevented the firm from properly supervising her by failing to disclose that she:
- was named as power of attorney for customer CC;
- had custody of firm customers' CC and MN's bank accounts; and
- was named as successor trustee and beneficiary of a firm customer's trust; and
- Stallings made false statements and misrepresentations to her firm on annual compliance questionnaires and on a request form to act as trustee; and
- In violation of FINRA Rules 2150 and 2010, upon customers CC and MN's deaths, more than $60,000 passed to Stallings from the customers' bank accounts and she received $248,000 as beneficiary of MN's estate; and Stallings also improperly used approximately $5,300 of MN's fund.
In accordance with the terms of the AWC, FINRA imposed upon Stallings a Bar from associating with any FINRA member firm in any capacity.
Bill Singer's Comment
I take great pride in the fact that I literally read each and every matter posted on FINRA's online arbitration and disciplinary sites. As such, I've likely read thousands of arbitration decisions and disciplinary settlements and decisions. Not every such document is well written -- and much should be said of some of the crap that gets posted by me on the Securities Industry Commentator and the BrokeAndBroker.com Blog. Writers have their off days. Writers get colds, feel lousy, and suffer from life's distractions. I freely admit that despite by best intentions, I too publish disjointed content and articles that should have been better drafted. In that spirit of self deprecation, I have to characterize the Stallings AWC as among the worst FINRA published content that I have come across in many years. The AWC poorly weaves the issues involving two different customers into a challenging fact pattern and timeline that fails to proceed in a cogent, linear fashion.
Why do I raise such a pointed critique about the Stallings AWC? The simple answer is that in my role as a practicing attorney, I have come across the issues noted in the settlement many times -- and they raise extremely troubling concerns about the potential for predatory practices, elder fraud, and theft/conversion. As with many such presentations by FINRA, the Stallings AWC is more important than its own facts. The warnings and lessons of today's AWC could deter many customers from engaging in the same practices, and should educate many registered persons and compliance staff as to how to better implement and follow the various protocols designed to oversee the cited conduct.
I fully concur with FINRA's decision to bar Stallings. On the other hand, we should not lose sight that Stallings was a 39-year industry veteran (judged from her 1979 entry into the biz) and it may well be that the Bar merely hastened a planned retirement or coincided with her plans for the same. Moreover, the AWC fails to explain whether Stallings returned any of the $300,000-plus that she is alleged to have received (and there is no assertion in the AWC or by me that her receipt of said funds was "illegal" versus merely in "violation" of FINRA rules and LPL's policies). If Stallings' choice was to keep six-figures in former clients' money and get on with her planned retirement, then agreeing to a Bar doesn't come off as all that difficult a choice. Pointedly, we should be careful to note that there are NO allegations that CC or MN did not view Stallings as a friend or confidant or a valued human resource; and there are NO allegationa that Stallings engaged in predatory or illegal conduct. What is before us is a melange of alleged violations of rules and policies promulgated by a securities industry self-regulatory-organization and one of its member firms.
Finally, as I often complain, FINRA has failed to leverage this AWC into a teaching tool. Given the unsettling implications raised by the underlying facts:
What are the best (or better) practices that FINRA would urge industry compliance staff to implement?
How does FINRA believe that LPL could have or should have ferreted out the existence of the GPOA, TOD, and/or trust designations?
What oversight could CC's and MN's families and concerned colleagues have exercised that might have allowed for earlier inquiry and intervention.
How could a public customer and an honorable, valued friend who is also that customer's servicing stockbroker achieve the goals sought by CC, MN, and Stallings -- or is there no way to get to there from here?
I am NOT advocating for any lessening of the existing rules, regulations, and policies that are properly designed and in place to protect customers from the undue influence of financial industry professionals. We have seen far too many horrific stories in recent years of the consequences of such abuse. I am advocating that FINRA do more than merely report about the issues raised in its AWCs and, when appropriate, use such opportunities as teaching tools for the industry and investing public. And "no," endless numbers of podcasts, droll videos, and published alerts are not a substitute for dissecting a specific case and offering instruction on what to do and criticism of what should not have been done. Customers CC and MN are dead. I urge FINRA to breathe some life into its settlement with Respondent Stallings.