May 31, 2019
Yet again, we come across another FINRA regulatory matter involving the alleged misconduct of a registered representative during his transition from his former employer. No . . . it's not a sympathetic case for the Respondent rep, as our publisher Bill Singer makes clear. In light of the recurring nature of these battles over who "owns the customer," Bill takes the opportunity to chastise FINRA for sitting in the stands eating cotton candy rather than blowing the whistle as an impartial referee.
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, Alexander Michael Panas, III, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Alexander Michael Panas, III, Respondent (FINRA AWC 018057545401, May 28, 2019)
The AWC asserts that Panas was first registered in 1992, and by July 2005, he was registered with FINRA member firm Summit Equities, Inc. The AWC asserts that "Panas has no relevant formal disciplinary history with the Securities and Exchange Commission, any self-regulatory organization, or any state securities regulator."
Customers' Personal Information
The AWC alleges that in January 2018 (after Panas had accepted an offer to join another FINRA member firm), he removed from his then-employer Summit Equities nonpublic personal information involving 87 customers and 177 accounts. The AWC alleges that said nonpublic information was removed without the cited customers' knowledge or consent.
SIDE BAR: Regulation S-P: Privacy of Consumer Financial Information and Safeguarding Personal Information prohibits firms from disclosing "nonpublic personal information" about a customer unless the customer receives proper notice and an opportunity to opt out. Non-public personal information generally means any information provided by customers to a broker-dealer to obtain any product or service. It includes, but is not limited to, account numbers, social security numbers, birth dates, and account balances. READ the FULL-TEXT of Regulation S-P
In removing the information, Panas allegedly:
[P]opulated an Excel spreadsheet with the customers' nonpublic personal information, including, among other items, their addresses, dates of birth, social security numbers, driver's license numbers, net worths, annual incomes, and investment objectives. Panas then uploaded the spreadsheet to a website hosted by a third-party vendor.
Panas downloaded additional customer files containing nonpublic personal information to an encrypted flash drive, which he later uploaded to his personal laptop and an encrypted cloud-based server. Panas subsequently used the information he took from Summit to assist him with transitioning customers to his new firm.
The AWC asserts that on February 21, 2018, Summit filed a Uniform Termination Notice for Securities Industry Registration ("Form U5"), which stated that Panas had voluntarily terminated as of January 24, 2018; but that he was under internal review concerning "why client data was placed on a spreadsheet with the name of a competing firm."
FINRA deemed that Panas' cited conduct had caused Summit to violate Regulation S-P, and in so doing, he violated FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Panas a $5,000 fine and a 10-business-day suspension from association in any and all capacities with any FINRA member firm.
Bill Singer's Comment
Under no circumstances will I defend or justify Panas' conduct. As I see it, Panas not only did something wrong in appropriating the nonpublic personal information cited, but he also engaged in what I consider idiotic behavior by creating a spreadsheet that he uploaded onto a third-party's site -- the only saving grace is that he used encrypted drives and servers for some of the cited data. Frankly, I can't express my disapproval any clearer than that.
Having concurred with FINRA's findings and sanctions, now let me part ways with the self-regulatory-organization.
For starters, Panas is a 27-year-veteran-registered-representative. During his nearly three decades on the Street, Panas was registered with Summit for 12 years until he departed for FINRA member firm Kestra Investment Services, LLC.
Imagine that you worked in the widget business for 27 years, and for 12 years of those years, you worked for Summit Widgets. You cold called. You signed new clients. You serviced your clients. You made money for your employer, your clients, and yourself. After 12 years, for whatever reason, you decided that you would be happier working for Kestra Widgets.
In virtually every industry that I can think of, when you would leave Summit Widgets, you would naturally contact your clients and let them know that you were relocating to Kestra Widgets. If you are a class act and a professional, you would not speak ill of Summit. You would appreciate the decade-plus that you spent at your former employer, wish the firm and your former colleagues well, and simply let your clients know that you had moved on to another shop. In letting your clients know of your new job, you would use the customer contact list that you had built and maintained during your 12 years at Summit. The same contact list that you used to send out holiday cards. The same contact list that you used to announce the launch of a new product line or the opening of a new office. Does that contact list need to include the clients' social security numbers, their birth-dates, their mother and father's first and last names, their favorite pet, and the numbers of their bank accounts? Of course not. The point that I'm hoping to make is that in virtually any business involving commissioned salespersons, the salespersons maintain customer contact lists.
Wall Street is an odd workplace because the employers have their own regulator. The employers are the only market participants to have any vote on every rule and every elective office at FINRA. Not the public customer. Not the registered representative. Not the associated person. Only the member firm. Isn't that lovely? The industry has its own private lap-dog that does its bidding -- and, if necessary, its biting. Given that pro-employer bias of Wall Street's self-regulatory regime, it's no wonder that FINRA acts as the henchman for its member firms whenever a former employee seeks to relocate to another employer or start up their own brokerage firm. Oh sure, FINRA mouths the words about how it won't get "involved" in the "debate" about "who owns the customer," but, in reality, FINRA is very much involved on behalf of its member firms.
As I have argued for much of my nearly four decades on Wall Street, the customer owns his or her account. The customer should have the unfettered right to close an account. The customer has the right to reolcatae an account to whatever brokerage firm and with whatever stockbroker that customer desires. Having said that, I fully respect, understand, and appreciate the position of FINRA's member firms that they have invested time and money into marketing, which often attracts new accounts -- and that they have an investment in ongoing efforts to maintain and service existing accounts. To the extent that a FINRA member firm would argue that a customer account is an asset of that firm, I agree. Similarly, it's absurd to pretend that a registered representative has not invested sweat equity into virtually every account that he or she services -- and that extends to the investment of time inherent in making endless cold calls, sending out numerous mailers, and making countless trips to prospects' homes and offices. As such, both the member firm and the servicing registered rep have rightful claims to any customer's account but only subordinate to the desires of the customer.
Instead of entering the fray with a solution that ends decades of industry infighting, FINRA prefers to sit on the sidelines as a mere spectator. That's outrageous! FINRA is a Wall Street self-regulator entrusted with protecting the investing public and the industry. When FINRA only responds to its member firms' dog whistle, when FINRA only investigates and sanctions the misconduct of reps who take customer information, FINRA is neither protecting the public or promoting a culture of compliance in the industry. It's time for FINRA to get off its goddamn ass and wade into the midst of the unsavory scrum. It's time for FINRA to blow the whistle, call time-out, and convene a balanced industry panel to propose a simple, comprehensive rule that will permit departing reps to contact their clients without exposing those employees to the wrongful retaliation of their former employees or the wrath of the industry's self-regulator.
Frankly, the solution is simple. You ask a customer to sign a written authorization authorizing the servicing registered representative to retain a contact list with the customer's name, address, email, and telephone number (or whatever information the customer will permit). You make it clear to the customer that they may withdraw that approval at any time. You make it clear to the registered representative that said information is to be retained and maintained in confidence. In the event the rep leaves one FINRA member firm for another, the rep may use all contact information approved by all customers for the limited purpose of notifying those accounts of a new affiliation. Further, I would urge the industry to draft a form letter of notice that would be the only correspondence permitted to be transmitted to customers during a "cooling off period" attendant to a registered rep's announced intention to depart. I would take not issue if the rep was required to send a written notice to a former employer that a mailing had been sent out using the contact list within X business days of each use. Note that under NO circumstances am I recommending that the contact list include confidential information such as social security numbers, account numbers, etc. Finally, I would urge FINRA to create a special arbitration panel to consider on an expedited basis any disputes concerning the use and transmission of the contact list.