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FINRA Fines and Suspends Rep for Transferring Customer List to New Employer
September 10, 2020
Another day, another registered representative gets jammed up over alleged misconduct during the exiting of a former firm and the onboarding to the new one. As is often the case, FINRA saw the inappropriate transmission of customers' nonpublic personal information. And FINRA saw a violation of Regulation S-P. And FINRA saw a violation of its Rule 2010. And FINRA imposed a fine and sent the rep to the penalty box.
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, Patrick J. Knox submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Patrick J. Knox, Respondent (FINRA AWC 22019062346201)
https://www.finra.org/sites/default/files/fda_documents/2019062346201
%20Patrick%20J.%20Knox%20CRD%201206837%20AWC%20va.pdf
%20Patrick%20J.%20Knox%20CRD%201206837%20AWC%20va.pdf
The AWC alleges that Patrick J. Knox was first registered in 1983 and by 1988, he was registered with Lincoln Investment. The AWC asserts that Knox"does not have any disciplinary history with the Securities and Exchange
Commission, any state securities regulators, FINRA, or any other self-regulatory organization."
In pertinent part, the AWC asserts that:
While he was still registered through an association with Lincoln, and in anticipation of moving to the New Firm, Knox printed his Lincoln customer list and gave it to the New Firm. This list included non-public personal information for more than 300 Lincoln customers, including, among other information, social security numbers and birth dates, which was information provided to Lincoln by the customers. Knox improperly removed the customers' nonpublic personal information and gave it to the New Firm without Lincoln's or the customers' knowledge or consent.
Nonpublic Personal Information
Regulation S-P prohibits firms from disclosing "nonpublic personal information" about a customer unless the customer receives proper notice and an opportunity to opt out. Nonpublic 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:
FINRA Sanctions- Investment Adviser and Broker-Dealer Compliance Issues Related to Regulation S-P - Privacy Notices and Safeguard Policies (Risk Alert; SEC Office of Compliance Inspections and Examinations / April 16, 2019)
In accordance with the terms of the AWC, FINRA found that Knox had caused Lincoln to violate Regulation S-P, which, resulted in his violating FINRA Rule 2010; and, the regulator imposed upon Knox a $2,500 fine and a 10-business-day suspension with any FINRA member firm in any and all capacities.
Bill Singer's Comment
First and foremost, compliments to FINRA for a balanced sanction. Given the allegations and Knox's decision to settle, a $2,500 fine is not excessive for the cited misconduct, and the suspension is about as light as is ever ordered by FINRA.
Online FINRA BrokerCheck records as of September 10, 2020, disclose that Knox has been employed by LPL Financial LLC since June 2018.
As I have long noted, I am not a fan of the broad anti-solicitation and anti-competition provisions that are routinely embedded in FINRA member firms' employment agreements. Such provisions are lop-sided and rarely procured via bargaining by the parties. The final draft of far too many Wall Street employment agreements is an unfair arrangement whereby the registered representative is relegated to a non-professional status akin to a drone and given virtually no credit for cold calling, onboarding, and nurturing clients. On the other hand, many Wall Street reps are highly compensated and enjoy many benefits from these agreements -- unfortunately, too few reps retain a lawyer to counsel them on the onerous impact of many contractual provisions. Far too often, I am contacted by a besieged rep only after service of the former employer's TRO papers, and that Defendant laments that he had not retained a lawyer to review the employment agreement before signing it. Similarly, I tend to get lots of panicky calls from reps who just received a FINRA Rule 8210 demand letter seeking information and testimony about alleged misconduct attendant to their departure from a former firm.
Few . . . and I mean "few" . . . issues come to my attention with more frequency that questions by registered representatives about their contemplated resignations and what and how they can migrate their customers from their soon-to-be-former firm to a new one. It is a matter of great frustration for most of my clients when I begin to explain to them what they can't do and what they can't take and what they should not do. In response to my litany of "No's," clients often ask me what's the worst that can happen to me, Mr. Singer, assuming that my former firm even catches me? Oh, trust me, a lot of bad things! For starters, you could wind up in court subject to a smothering temporary restraining order ("TRO"); for example, see: "Edward Jones Wins TRO Against Former Employee In Solicitation And Trade Secrets Case" (BrokeAndBroker.com Blog / August 24, 2020)
http://www.brokeandbroker.com/5389/edward-jones-ameriprise-tro/ In the case featured in my August 24th blog above, Edward D. Jones & Co., L.P., Plaintiff, v. Samuel "Ed" Clyburn, Jr. , Defendant (United States District Court for the Western District of Virginia, 20-CV-433), the Court awarded a TRO in favor of Edward D. Jones & Co., L.P. and against its former employee Samuel Clyburn, Jr.
Courts and arbitration panels really, really, really (that enough reallys for you?) detest efforts by a rep to contact "current" customers and try to persuade them to move to a "future" brokerage firm. There is something that just strikes many folks as wrong when you're still getting paid by Firm X but you're bad mouthing that firm while still employed there, and, adding insult to injury, you're trying to solicit clients to move to Firm Y. Oh yeah, sure, you're a pretty clever fellow as you yourself proclaim and, sure, how the hell is anyone going to prove what you said to entice your clients to transition with you? Well, Mr. Smarties Pants, why don't you re-read the above Edward Jones case and FINRA's Knox AWC. Quite simply, you should never be soliciting clients to move their accounts while you're still employed at your current firm. There will be phone logs showing dates and times. There will be emails with date/time stamps. There will be dated instant/direct messages. There will be logs of online social media exchanges. Again, re-read the Edward Jones case, and ask yourself how FINRA found out about Knox's transmission of Lincoln's customer list.
For some Wall Street clients, the relationship is with you personally. They've known you for years. They consider you like a friend or family. Where you go, they will follow. For other clients, the relationship is with your firm. They like the television ads. They respect your employer's stature. For For the clients that are enamored with you, it's not going to take any solicitation to pry them away. You leave. They call you. The ACAT paperwork is generated and in the mail. You just need to be careful not to screw things up during that period when you're going and coming.
Ultimately, there are legal, ethical, moral ways for a departed rep to let his clients know that he's newly onboard at a new firm -- and the same applies to that rep's use of the contact information for his customers. I grant you that most reps consider that the customers are their property; but you also have to accept the fact that the former employer thinks the same. It's an old dispute with well-drawn battle lines and many casualties. In Knox's case, FINRA's ire is not about his efforts to contact his former customers but about the mechanics by which he "printed his Lincoln customer list and gave it to the New Firm." First, there is the issue of whether it was appropriate for Knox to do that while still registered with Lincoln. Second, there is the question as to his failure to obtain Lincoln's or any subject customer's prior consent.