According to NASD Conduct Rule 3050: Transactions for or by Associated Persons, prior to opening an account or placing an initial order for the purchase or sale of securities with another member, an associated person is required to provide written notice to both the employer member and the executing member of his or her association with the other member. However, if the account was established prior to the association with the employer, the associated person is required to promptly notify in writing both members after becoming associated.
Cases in Point
In July 2011, FINRA barred Alfonso Fiero (FINRA #2008015329001) , in part, for maintaining a corporate brokerage account which he controlled at another member firm . In that same month, Brian Daniel Parker (AWC/2008015729701) was fined $5,000 and suspended for 30 days pursuant to an Acceptance, Waiver and Consent settlement ("AWC") for, in part, failing to provide written notice prior to opening an away account.
NOTE: FINRA AWC's are regulatory settlements entered into by the Respondent without admitting or denying the allegations but consenting to the entry of findings and violations, and to the imposition of sanctions
In March 2011, FINRA imposed a $7,500 fine and a 60-day suspension upon William Echeverri (AWC/2009016948201) for his failure to disclose an outside brokerage account to his member firm, and for having falsely provided a written attestation that such an away account did not exist.
In February 2011, Andy Young Lee (AWC/2008015985601) was fined $10,000 and suspended 30 days for opening an away account without the requisite prior written notice. Lee placed hundreds of trades in that account.
In a recent FINRA National Adjudicatory Council ("NAC") Decision on away accounts, that appellate body confirmed the findings of a hearing panel that the Respondent (proceeding pro se) had failed to provide written notice of his outside brokerage accounts and broker-dealer employment, and falsely stated that he had no outside brokerage accounts.
Either by way of defense or mitigation, the Respondent asserted that he had given oral notice to his firm's president and director of compliance. In response, the NAC cited the provisions of Rule 3050 (c) as requiring prior written notice. The NAC was similarly unmoved by Respondent's assertions that his prior association with one of the firms that carried his brokerage accounts put that firm on notice that he was a registered person.
Notwithstanding that it sustained the prior findings of the hearing panel, the NAC rejected the $15,000 fine and a one-year suspension imposed by the hearing panel and increased the sanctions to a $25,000 fine and a two-year suspension. In the Matter of FINRA Department of Enforcement, Complainant, v. Howard Braff, Respondent (Decision, FINRA Complaint No. 200701193700, May 13, 2011). In setting forth the basis for its increased sanctions, the NAC explained:
Our consideration of the evidence in the record convinces us that Braffs misconduct is egregious. Braffs misrepresentations on PGP Financial's and PHD Capital's outside brokerage account disclosures and his testimony at the proceedings below reinforce that his failure to disclose the brokerage accounts was not a matter of mere administrative oversight. To the contrary, the record in this case establishes that Braff made a concerted effort to conceal his outside brokerage accounts and personal trading activities from the employer and executing members. Indeed, this is what we find troubling about this case. Braff purposely thwarted safeguards intended to protect the integrity and transparency of the securities industry, and in so doing, created an environment ripe for customer abuse. Furthermore, Braff has not demonstrated remorse for his actions, and he has attempted to underplay the significance of NASD Rule 3050′s protections.
Bill Singer's Comment
As is obvious by the recent FINRA enforcement actions and underscored by the Braff case, there are serious consequences for Wall Street's associated persons should they fail to provide prior written notice of outside brokerage accounts. While not readily apparent to those unfamiliar with the industry's regulatory scheme, there are important reasons for brokerage firms to be able to review the securities transactions of their employees. For starters, such oversight provides a first-line of defense with frontrunning or insider trading issues. Moreover, the trading in a given analyst's, trader's, or stockbroker's accounts may raise concerns as to the integrity of the employer firm's research, recommendations, and regulatory reports.
The reasons for maintaining an Away Account are not always nefarious. It may have been a previously opened account at a former employer. It may be a joint account with a spouse that was opened by the spouse. Frankly, it may also be an account opened at another firm that charges lower commissions and fees. Notwithstanding the legitimate reasons for opening or maintaining such accounts, all that FINRA asks is for prior written notice (or prompt notice for pre-existing accounts).
How do these Away Accounts become regulatory matters? Having defended many industry respondents in such matters during my career on this issue, I know that there are three typical explanations.
One, is plain and simple deceit. The individual in trouble was trying to hide from his/her employer cash or securities payments. Similarly, those under scrutiny by regulators often are engaging in insider trading or trying to get an edge on a soon to be released recommendation from their firm. In such cases, there's often little more to do than pay the fine and do the time.
Two, it's an oversight. A fairly dormant account was opened a few years earlier and forgotten. A spouse wanted to maintain an account at another firm and it just didn't "click" that this needed to be disclosed - even though it was a joint account.
Three, it's just plain old ignorance - Bill, you mean to tell me that I can't maintain an online discount brokerage account? Where's that written? Oh, geez, I never knew that.
NASD Conduct Rule 3050. Transactions for or by Associated Persons
(a) Determine Adverse Interest
A member ("executing member") who knowingly executes a transaction for the purchase or sale of a security for the account of a person associated with another member ("employer member"), or for any account over which such associated person has discretionary authority, shall use reasonable diligence to determine that the execution of such transaction will not adversely affect the interests of the employer member.
(b) Obligations of Executing Member
Where an executing member knows that a person associated with an employer member has or will have a financial interest in, or discretionary authority over, any existing or proposed account carried by the executing member, the executing member shall:
(1) notify the employer member in writing, prior to the execution of a transaction for such account, of the executing member's intention to open or maintain such an account;
(2) upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to such account; and
(3) notify the person associated with the employer member of the executing member's intention to provide the notice and information required by subparagraphs (1) and (2).
(c) Obligations of Associated Persons Concerning an Account with a Member
A person associated with a member, prior to opening an account or placing an initial order for the purchase or sale of securities with another member, shall notify both the employer member and the executing member, in writing, of his or her association with the other member; provided, however, that if the account was established prior to the association of the person with the employer member, the associated person shall notify both members in writing promptly after becoming so associated.
(d) Obligations of Associated Persons Concerning an Account with a Notice-Registered Broker/Dealer, Investment Adviser, Bank, or Other Financial Institution
A person associated with a member who opens a securities account or places an order for the purchase or sale of securities with a broker/dealer that is registered pursuant to Section 15(b)(11) of the Act ("notice-registered broker/dealer"), a domestic or foreign investment adviser, bank, or other financial institution, except a member, shall:
(1) notify his or her employer member in writing, prior to the execution of any initial transactions, of the intention to open the account or place the order; and
(2) upon written request by the employer member, request in writing and assure that the notice-registered broker/dealer, investment adviser, bank, or other financial institution provides the employer member with duplicate copies of confirmations, statements, or other information concerning the account or order;
provided, however, that if an account subject to this paragraph (d) was established prior to a person's association with a member, the person shall comply with this paragraph promptly after becoming so associated.
(e) Paragraphs (c) and (d) shall apply only to an account or order in which an associated person has a financial interest or with respect to which such person has discretionary authority.
(f) Exemption for Transactions in Investment Company Shares and Unit Investment Trusts
The provisions of this Rule shall not be applicable to transactions in unit investment trusts and variable contracts or redeemable securities of companies registered under the Investment Company Act of 1940, as amended, or to accounts which are limited to transactions in such securities.