February 6, 2019
You've been there. You sent the customer a gazillion documents with yellow stickies as to where to sign and, sure enough, 99% of the gazillion documents were filled out properly, but a few came back with empty check boxes and missing current dates. Now what? The customer was agitated as it were with having to fill out everything and sign here, sign there, initial, initial here, sign there too, and, also, initial here too. You sure as hell don't want to bother the customer and risk having the whole transaction blow up and the account closed. After all, it's not like you forged any signatures. It's not like "Today's Date" isn't the same one that was properly filled out in numerous other places on the documents. It's not all that big a deal if you enter a check in the "YES, I AGREE" boxes given that the customer initialed assent notwithstanding failed to put a mark in the box. Then there's the supervisor or compliance officer who comes across the somewhat obvious and clumsy efforts of the stockbroker to fill in the blanks. Obvious because the after-the-fact revisions are clearly in different handwriting or there's white-out all over the place. Clumsy because the customer used blue ink and the idiot stockbroker had his assistant use black ink. At this point, some industry folks think it's about customer service and, you know, just do what ya gotta do, and, well, no-harm-no-foul, but, c'mon, keep your mouth shut and don't send any emails about it. At this same point, however, other industry folks recognize all the customer service issues but also realize that there are serious compliance and regulatory concerns that arise. There's customer service. And then there's compliance and regulation, which could lead to fines, suspension, or bars.
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, Christopher T. Dallas submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Christopher T. Dallas, Respondent (FINRA AWC 2017052426601, February 5, 2019).
The AWC asserts that Dallas was first registered in 2008 and by May 2011, he was registered with FINRA member firm World Equity Group, Inc. ("WEG"). The AWC asserts that "Dallas has no disciplinary history."
The AWC alleges that on February 27, 2017, a registered representative referred to only as "BB" and his secretary had completed four variable annuity exchange transactions for two customers (husband and wife). These forms were signed by the customers
On March 2, 2017, Dallas, who was a home office principal for WEG, approved the four variable annuity exchange transactions
despite what the AWC asserts was his knowledge that "the disclosure forms had
been altered after the customers had signed them." As alleged in the AWC in pertinent part:
noted some errors or ambiguities on the disclosure forms relating to the fees
associated with the exchanges, and rationale underlying the transactions. Thus, he
returned the paperwork to BB for corrections. BB or his secretary whited-out the
information identified by Dallas, wrote new information over the whited-out
sections, and then returned the forms to Dallas for review and approval. The
additional information that BB wrote on the whited-out portions of the forms
made the forms more accurate. Dallas knew that the altered forms were never
provided to the customers to review or sign, and knew (or should have known)
that the customers were not even notified of the changes. Nonetheless, he
approved the transactions. Approximately a year after the transactions were
approved, the customers were notified of the errors in the paperwork that they had signed. The customers were not harmed by the transactions, and expressed
satisfaction with the transactions despite the erroneous disclosure documents.
Completion and Updates
During the times relevant to Dallas' review and approval of the cited transactions, the AWC asserts that WEG's written supervisory procedures ("WSP") characterized Dallas' variable annuity transaction responsibilities as including the following:
[T]he Variable Annuity Disclosure Form must be completed with the
Client and reviewed for all sales or exchanges in Deferred Variable
Annuities. The RR and Client must sign and date the Disclosure Form, and
then must be forwarded to the Principal along with the other required
paperwork . . . for Principal review and approval.
All supervisors responsible for reviewing and approving variable annuity
transactions must ensure that the Variable Annuity Disclosure Form
submitted by the representative has been adequately completed and has
enough relevant information to determine suitability. . . .The supervisor
should also review the fees presented in the side-by-side sections of the
multi share class sections and the exchange sections on the disclosure
form to ensure accuracy. Any errors discovered should be discussed with
the representative and/or updated paperwork should be requested.
FINRA Rule 2330
In addition to citing FINRA Rule 3110: Supervision, the AWC pointedly admonished that:
[F]INRA Rule 2330(b)(3) requires that
"promptly after receiving information necessary to prepare a complete and correct
application package for a deferred variable annuity, a person associated with a
member who recommends the deferred variable annuity shall transmit the
complete and correct application package to an office of supervisory jurisdiction
of the member." Finally, FINRA Rule 2330(c) contains language requiring that
principal review and approval of any variable annuity transaction comply with
FINRA Rule 2330(b), including the requirement that a variable annuity package
submitted for review be "complete and correct."
The AWC asserted that Dallas' cited conduct violated FINRA Rule 3110: Supervision (a): Supervisory System, FINRA Rule 3110: Supervision (b): Written Procedures, and FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade by failing to reasonably supervise the annuity transactions. In accordance with the terms of the AWC, FINRA imposed upon Dallas a $5,000 fine and a 30-calendar-day suspension in a principal capacity.
Bill Singer's Comment
All in all, a very well drafted AWC replete with sufficient content and context so as to make FINRA's case. Moreover, the sanctions seem perfectly tailored to the allegations -- specifically, FINRA's willingness to limit the suspension to principal-capacity only.
Perspective makes all the difference.
From the perspective of many associated persons and broker-dealer management, the key fact in the Dallas AWC was:
Approximately a year after the transactions were approved, the customers were notified of the errors in the paperwork that they had signed. The customers were not harmed by the transactions, and expressed satisfaction with the transactions despite the erroneous disclosure documents.
From the perspective of many regulators and compliance staff, the key fact in the Dallas AWC was:
Ya wanna guess as to which perspective resulted in the imposition of a fine and suspension?
Dallas knew that the altered forms were never provided to the customers to review or sign, and knew (or should have known) that the customers were not even notified of the changes.