Written: December 19, 2014
We start with a wife and her children. We add a husband. We toss into that scene a stockbroker. Then come the redemptions. All of which sets the stage for a Wall Street reggae tune about pain, sadness, and a stinging regulatory rebuke. In the lyrics of Bob Marley's song:
Cause all I ever have:
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, Barbara Ann Corner submitted a Letter of
Acceptance, Waiver and Consent (“AWC”), which FINRA accepted.
In the Matter of Barbara Ann Comer, Respondent (AWC #2012034656401, December 10,
In 1989 Corner first became
registered with FINRA member firm Investacorp, Inc.. The AWC asserts that she
had no prior relevant disciplinary history with the Securities and Exchange
Commission, any self-regulatory organization, or any state securities
The AWC alleges that an Investacorp individual
account-holder (the “Wife”) also acted as trustee and/or custodian for two
lnvestacorp accounts held for her children. Apparently, the three accounts held
From October 2004 to January 2011, a total of
$197,927.73 involving redemptions from 22 mutual funds were allegedly made from
the accounts by the Wife’s husband, who had requested the redemptions from
Respondent Comer. In response to Comer’s requests to process the redemptions,
the mutual fund custodian issued checks payable to the Wife and those checks
were sent to her address of record.
At the time of the husband’s requests for
redemptions, the AWC asserts that there was no Power of Attorney or Letter of
Authorization on file that authorized him to seek the redemptions or to
authorize Corner to accept same. In
fact, the AWC asserts that Investacorp’s written supervisory procedures
prohibited its registered representatives from accepting third-party orders
without the accountholder’s prior written authorization.
In an Online FINRA BrokerCheck record as of December 17, 2014, Investacorp alleges that October 1, 2012, the firm received a customer complaint in the form of a FINRA Arbitration (12-03295) seeking damages in the amount of $239,832 arising in connection with mutual funds. The firm explained that:
CLAIMANT ALLEGES THAT MS. COMER ACTED WITHOUT HER AUTHORITY.
The online record further notes that the matter settled on August 6, 2013, in the gross amount of $47,500, of which Comer purportedly contribute $423.
As a consequence, FINRA deemed Comer’s
conduct to constitute violations of NASD Interpretive Material 2310-2; NASD
Conduct Rule 2510(b); and NASD Conduct Rule 2110; and FINRA Rule
In accordance with the terms of the AWC, FINRA
imposed upon Comer a Censure and $7,500
Oh my, there is soooooo much missing from this AWC that I'm not sure where to start with my critique. On the one hand, we are told that there were nearly $200,000 in redemptions, but, on the other hand, we are told that the payments were made to the Wife and sent to her address of record. Yeah, I get it, the husband was not authorized to request the redemptions and Comer should not have acted on his instruction. If you think that I'm clueless about this case, please re-read the prior sentence.
Like I said, I get it. Comer was wrong. Period. End of discussion.
What happened to those redemption checks? Did the Wife get them? Did the husband forge his wife's signatures on the redemption payments and convert the funds? Were criminal charges filed? Was there a divorce?
I mean, c'mon, the regulation of Wall Street should not be a game of 20 Questions.
And now for the musical interlude for today's blog. What else but the fabulous "Redemption Song" performed live in 1980 by the incomparable Bob Marley:
And for those of you who prefer the more traditional studio album cut:
Written: December 18, 2014
In a recent FINRA regulatory settlement, 18 registered folks sort of fell off their firm's compliance radar. It's not a case involving earth-shattering misconduct. Sometimes stuff just falls through the cracks. Every wrong on Wall Street isn't intentional. Ya got yer accidents. Ya got yer negligence. Nonetheless, after you've read today's column, walk about your branch office and make sure everything is plugged in and turned on.
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, Commerce Brokerage Services, Inc. submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Commerce Brokerage Services, Inc., Respondent (AWC #2014039170501, December 11, 2014).
Commerce Brokerage Services, Inc. has been a FINRA member since 1986 and employs about 93 registered individuals at 44 branch offices. The AWC asserts that the firm had no prior relevant disciplinary history.
Off The Radar
As required pursuant to former NASD Rule 3010(a) and (d), in order to comply with its obligations to reasonably supervise, Commerce was required to review the business-related electronic correspondence of its registered representatives. The AWC alleged that from October 2012 through April 2014, Commerce failed to include the email addresses of 18 reps in its electronic communication surveillance system; and, consequently, failed to review said communications of the unmonitored individuals.
FINRA deemed Commerce’s conduct to constitute violations of both NASD Rule 3010 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Commerce a Censure and $10,000 fine.
Bill Singer's Comment
Alas, FINRA does have this annoying tendency to stay tight lipped.
How come the Respondent member firm didn't monitor those 18 folks? Dunno 'cause the AWC doesn't say.
Was it a glitch? Dunno.
Did some third-party contractor screw up? Dunno.
How did FINRA find out that there was a failure to monitor? Hey, who the hell knows -- so stop asking me all these questions without apparent answers.
The expression goes: Out of sight, out of mind. Clearly, FINRA doesn't think that the aforementioned should be a compliance department's motto, and it's hard to argue with that perspective. At first blush, 18 unmonitored reps doesn't come off as a particularly huge number; however, when you consider that it was about 20% of Commerce's staffing, that does present a legitimate regulatory concern.
Ultimately, it would have been helpful for this AWC to explain how these 18 folks fell through the cracks so that other FINRA member firms could learn from that lesson. Regardless, one beneficial aspect of reporting about these types of miscues is that it often prompts others to check their own compliance policies and see if they too have similar problems. So . . . you've been warned!
As now set forth in relevant part of current FINRA Rule 3110. Supervision
(b) Written Procedures
(1) General Requirements
Each member shall establish, maintain, and enforce written procedures to supervise the types of business in which it engages and the activities of its associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.
. . .
(4) Review of Correspondence and Internal Communications
The supervisory procedures required by this paragraph (b) shall include procedures for the review of incoming and outgoing written (including electronic) correspondence and internal communications relating to the member's investment banking or securities business. The supervisory procedures must be appropriate for the member's business, size, structure, and customers. The supervisory procedures must require the member's review of:
(A) incoming and outgoing written (including electronic) correspondence to properly identify and handle in accordance with firm procedures, customer complaints, instructions, funds and securities, and communications that are of a subject matter that require review under FINRA rules and federal securities laws.
(B) internal communications to properly identify those communications that are of a subject matter that require review under FINRA rules and federal securities laws.
Reviews of correspondence and internal communications must be conducted by a registered principal and must be evidenced in writing, either electronically or on paper.
Written: December 17, 2014
The road to Hell is paved with good intentions and a recent FINRA regulatory settlement involving a customer's email request for a wire transfer certainly proves that point. Presented for your consideration is a stockbroker who appears to have tried to deliver the best in customer service; unfortunately, in going the extra mile, she took some detours and short-cuts around a couple of rules. In the end, FINRA takes an intelligent and somewhat compassionate posture.
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, Susan L. Ellerbrook submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Susan L. Ellerbrook, Respondent (AWC # 20130396126,December 10, 2014).
In 1995 Ellerbrook first became registered and by 2002 she was associated with City Securities Corporation, where she remained until January 2014. The AWC asserts that she had no prior disciplinary history.
November 25th Email
The AWC alleges that in April 2013 Ellerbrook became involved in an “email string” with a particular City Securities customer, and, thereafter, on November 25, 2013, she received another email in apparent continuation of the April online exchange. In the November 25th email, the customer requested a $28,000 wire transfer from his City Securities account to a third party.
I'll Take $22,000
In reply to the customer, Ellerbrook emailed that she needed to speak with him and that the initial wire could not be satisfied because only $22,423 was in the account at the time. In response to Ellerbrook's advisory, the customer emailed that he had sent to the stockbroker a fax authorizing the transfer of $22,000.
The AWC concedes that Ellerbrook again attempted to comply with City Securities’ policies, which required her to reach the customer by phone and verbally confirm the instructions. Notwithstanding her attempt, she was only able to leave the customer a voicemail message; however, Ellerbrook then submitted an internal electronic form requesting the wire on which she falsely indicated that she had verbally verified the requestor's identity and confirmed his instructions. As a result, the $22,000 wire was processed to the third party.
An interesting nuance in this matter was that the customer apparently had a standing order to distribute from the account $7,000 per month. Following the November 25th wire, there was an insufficient cash balance in the account and the monthly distribution could not go forward.
From Bad To Worse
In order to satisfy the $7,000 monthly distribution, Ellerbrook telephoned the customer on November 25th to get authority to sell 1,000 shares of HSBC Preferred but was, again, unable to directly reach the customer and left another voicemail message. Not having heard back from the customer and apparently deeming the monthly distribution as a mandatory directive, Ellerbrook sold the HSBC shares without prior authorization from the customer.
On November 26, 2013, City Securities learned that customer’s email account had been hacked and the relevant emails were fraudulent. On November 27, 2013, City Securities credited the account in full.
Permitted To Resign
Online FINRA BrokeCheck records as of December 15, 2014, indicate that City Securities permitted her to resign on December 13, 2013 pursuant to allegations that:
MS. ELLERBROOK FAILED TO COMPLY WITH COMPANY POLICY WITH RESPECT TO A THIRD PARTY DISTRIBUTION FROM A CLIENT’S ACCOUNT AND EXECUTED A TRANSACTION IN SUCH CLIENT’S ACCOUNT WITHOUT THE CLIENT’S VERBAL AUTHORIZATION.
In a further “Firm Statement,” City Securities noted that:
MS. ELLERBROOK TOOK THE ABOVE ACTIONS BELIEVING SHE WAS ACTING IN THE CLIENT’S BEST INTEREST. MS. ELLERBROOK RETIRED EFFECTIVE DECEMBER 31, 2013.
FINRA deemed Ellerbrook's conduct to constitute violations of FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Ellerbrook a $10,000 fine and a two-month suspension from association in all capacities with any FINRA registered firm.
Bill Singer's Comment
As this case amply demonstrates, few regulatory matters start and end in simple fashion -- one seemingly harmless violation cascades into others and, when all is said and done, a well-intentioned registered rep sits amid the rubble of a career.
I mean, sure, as far as it goes Ellerbrook was victimized by a hacker. Let's at least agree on that predicate circumstance. On the other hand, the reason for all the verification and confirmation policies is to specifically prevent this type of fraud on a stockbroker and a brokerage firm. I have written about these email hackings for years in the vain hope that enough folks will read my commentary and learn the lessons. Alas, Ellerbrook appears not to have been one of my loyal readers.
In keeping with my distaste for hypocrisy, let me applaud FINRA in this settlement. The underlying misconduct in this AWC occurred a little over one year ago and the self-regulatory organization managed to tie up its case within a year from the date of Ellerbrook's termination. Those are commendable timeframes.
Further, rather than unload upon this individual with a massive suspension, FINRA imposed a $10,000 fine and only a two-month suspension, which I believe are both measured responses and appropriate for the circumstances. Ultimately, for those who support self regulation, this is a classic case that shows how that oversight works best.