March 5, 2021
Low standards in high places. High standards in low places. Sort of sounds like lyrics from a country song, no? In today's blog, publisher Bill Singer considers a FINRA regulatory settlement that cited alleged misconduct. As Bill concedes, the conduct at issue is wrong and half-assed, but he isn't quite sure it rises to the level of a regulatory violation. Frankly, Bill wonders why FINRA wastes time with crap like this. Likely, FINRA wonders why Bill wastes time with crap like this. Ahhh, a lovely crapfest!
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, Kerry M. Moy submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Kerry M. Moy, Respondent (FINRA AWC 2019061333101)
The AWC alleges that Kerry M. Moy was first registered in 1999, and from August 2012 to June 2019, he was registered with Morgan Stanley. The AWC asserts that Moy "does not have any relevant disciplinary history."
In part, the AWC alleges that:
Between July 1, 2014 and May 17, 2019, Moy submitted numerous expense reports seeking reimbursement of business meals that he knew included false information about the attendees at those meals. At all relevant times, Morgan Stanley required employees and associated persons to include the names of all attendees when submitting expense reports seeking reimbursement of business meals. Moy delegated the preparation of expense reports to his assistant, but Moy often neglected to inform his assistant of the names of the clients or prospective clients who had attended business meals with him. When this occurred, Moy's assistant would insert randomly selected names of her choosing on Moy's expense reports. Despite knowing that this was his assistant's practice, Moy failed to correct those reports to list the actual attendees of the business meals and instead submitted the deliberately inaccurate expense reports for reimbursement. Notably, had Moy submitted the expense reports with the correct names of the attendees, the underlying expenses would have been reimbursable under Morgan Stanley's business expense policies.
In accordance with the terms of the AWC, FINRA found that Moy violated FINRA Rule 2010, and the self regulator imposed upon him a $5,000 fine and a two-month suspension from associating with any FINRA member in all capacities.
Although Moy wined and dined customers, he didn't always provide the assistant with those customers' names when it came to preparing expense reports seeking reimbursement. Consequently, in the absence of the correct names of the entertained customers, the AWC alleges that "Moy's assistant would insert randomly selected names of her choosing on Moy's expense reports." What seems to be at the heart of FINRA's ire is that despite "knowing that this was his assistant's practice, Moy failed to correct those reports to list the actual attendees of the business meals and instead submitted the deliberately inaccurate expense reports for reimbursement." In an abundance of fairness to Moy, however, the AWC concedes a very, very critical point: "had Moy submitted the expense reports with the correct names of the attendees, the underlying expenses would have been reimbursable under Morgan Stanley's business expense policies."
So, sure, Moy's conduct is . . . is what? How should we best describe Moy's actions? Lazy? Silly? Ill-advised? I got no problem with any of that. On the other land, FINRA charged Moy with violating FINRA Rule 2010:
FINRA Rule 2010. STANDARDS OF COMMERCIAL HONOR AND PRINCIPLES OF TRADE
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
Did Moy engage in conduct inconsistent with high standards of commercial honor and just and equitable principles of trade?
You may see it.
I am mindful the haunting words of Ferdinand Pecora, a truly amazing lawyer, who was charged with investigating the causes of the 1929 Crash and the ensuing Great Depression: "shocking disclosure of low standards in high places." The NASD and then FINRA codified a core self-regulatory rule that spun Pecora's rebuke around into an effort to foster high standards in high places. It's one thing to draft and promulgate a rule of conduct. It's another thing to believe that such a code of conduct is widely accepted and observed. For starters, I would love for you to look me in the eyes, no, don't look away, look at me, here, yeah, okay, and now, maintaining eye contact, tell me that Wall Street has "high standards" of commercial honor. That's what I thought -- you can't look me in the eye and say that without laughing.
On Wall Street, cutthroat practices are enshrined in industry lore. Traders do whatever it takes to make a trade at a profit. Full disclosure? You kidding me -- there's not a deal where some language isn't "fudged." Suitability? C'mon, firms pressure stockbrokers to push all sorts of in-house product that's pretty much crapola. High standards of commercial honor? You shittin' me? Remember when the market was crashing and your trading screen froze and you couldn't get anyone in Customer Service to even answer your phone call? You like sausage? Don't visit the sausage plant.
Assuming that we agree, for the moment, to drop that "high" modifier and just consider Wall Street's run-of-the-mill standard of commercial honor (and, while we're at it, let's toss in that just and equitable principles of trade), the question is whether Moy's alleged misconduct rose to the level of commercial dishonor or unjust/inequitable principles of trade? Did Moy engage in a regulatory violation?
If, in fact, Moy intended to defraud Morgan Stanley into repaying expenses that were not incurred, then, sure, I invite FINRA to fine him and suspend him. I trust that's clear enough for you? On the other hand, if Moy's misconduct is about laziness and sloppy recordkeeping but the business expenses were otherwise bona fide, then I'm not seeing the need for FINRA's involvement. In my view, if Morgan Stanley wanted to impose an in-house fine on Moy or suspend him without pay, have at it. If Morgan Stanley wanted to fire Moy, I'm not going to shed any tears. The issue is whether Moy's half-assed oversight of the submission of his expenses rose to the level of a regulatory violation. In my eyes, given the specific facts set forth in the AWC, the answer is "no."
I'm not going to try and convince you that FINRA's sanctions were excessive because Moy has happy enough to enter into the regulatory settlement and he agreed to the fine and suspension. It is not my place to second guess him. On top of that, I don't know what I don't know, and who knows what facts may have been negotiated out of the AWC or massaged to seem less severe. Consequently, chalk all of this up to the musings of a dyspeptic industry gadfly. Hey, it's a living.