It ain't cheap to trade stocks at some of the household names of Wall Street. Compare the costs of round-trip tickets at Merrill Lynch, Morgan Stanley, JP Morgan, Charles Schwab, and E*Trade, and you'll see quite the range of charges. And it's not a fact lost upon the hundreds of thousands of registered persons who work in the securities industry. Some of those folks are active traders and a few dollars in additional ticket charges imposed by their employer versus what can be had at some discount firm add up - in fact, could be the difference between a profit or a loss. That's one reason why some registered folks want to trade outside or away from their employing firm - save a few bucks. Of course, there's another reason that also comes up: Trying to fly under the radar and not letting your employer know that you're trading securities that you're not supposed to.
If handled in accordance with industry rules and company policy, it's quite common to get permission to trade away. You notify the firm with which you are registered of your intention to open a brokerage account at another firm (known as an Outside Account or an Away Account), and obtain written authorization for such an account. Further, you then notify the outside/away brokerage firm that you're registered with another firm and you arrange to have duplicate statements and confirmations sent to your employing brokerage firm. On the other hand, if you try to do this without proper disclosure, it can be a career disaster.
From September 1993 through June 12, 2000, Howard Braff (who was first registered in 1983) was associated with Scottrade, Inc. On June 15, 2000, after a seven-year association with Scottrade, Braffleft that brokerage firm but opened an individual retirement account to roll over his 401(k). So far, so good - but not for long, according to the Financial Industry Regulatory Authority ("FINRA") and the Securities and Exchange Commission ("SEC").
On January 28, 2004, while associated with Milestone Group Management LLC, Braffcompleted an account application with TDWaterhouse Investor Services, Inc. and under the section titled "Occupation," indicated that he was a "solar energy engineer" and marked "No" in the box asking whether he was employed by a broker-dealer. Ummm, solar energy engineer? Oh my, this doesn't seem like it's going to end well, not at all.
On October 25, 2005, Braff completed two employment application documents with PGP Financial, Inc., indicating that he had no outside brokerage accounts. In January 2006, Braffexecuted a purchase agreement with PGPFinancial's owners to acquire 20% of the firm's stocks and to serve as branch manager, and sole on-site Principal and Supervisor for a branch. While associated with PGP Financial, Braff placed numerous trades in his Scottrade and TD Waterhouse accounts - many of these trades involved Document Security Systems, a security that PGP Financial salespersons (including some supervised by Braff) contemporaneously recommended to customers. Braff left PGP Financial on October 5, 2006.
On October 10, 2006, Braff became associated with PHD Capital and served as a compliance manager for a branch office. On October 5, 2006, Braffcompleted a document titled, "Transaction for or by Associated Person - Conduct Rules (NASD)," which required PHD Capital employees to disclosein writing any outside brokerage account, and which further admonished that the compliance department would approve or reject the account and, for approved accounts, required that duplicate statements and confirmations be sent to the firm's compliance officer for review. Once again, Braff indicated that he had no outside accounts. The day after completing the outside-account document described above, Braff effected several trades in his TD Waterhouse account - two of these trades were purchases of 2,000 shares of Document Security Systems, which PHD Capital salespersons also were recommending to their customers. While associated with PHD Capital, Braff actively traded in his Scottrade and TDWaterhouse accounts. Braff left PHD Capital on January 17, 2007.
From March 21, 2007 through April 2, 2007, Braff was associated withPointe Capital, and received a copy of the firm's written supervisory procedures, which stated, in part:
Securities Accounts. All personnel must advise Pointe Capital, Inc. of all accounts at "notice-registered broker/dealers" . . . maintained in their name . . . . Pointe Capital, Inc. does not as a matter of policy permit any Registered Representative or employee to maintain a securities account with another broker-dealer without express prior written permission of the designated Principal.
Duplicate Confirmations. Duplicate confirmations, statements and/or other information related to all non-Pointe Capital, Inc. account transactions must be sent contemporaneously to the designated Principal.
On July 27, 2009, FINRA instituted disciplinary proceedings and held a hearing on March 16, 2010. Braff represented himself pro se.
Braff stipulated that he failed to notify Scottrade or TD Waterhouse that he was associated with PGP Financial or PHD Capital; and that he failed to notify PHD Capital that he had accounts with Scottrade and TD Waterhouse He did not stipulate as to Pointe Capital. Braff acknowledged at the FINRA hearing that he had placed hundreds of trades totaling $3,744,406 in his Scottrade and TD Waterhouse accounts while working at PGP Financial, PHD Capital, and Pointe Capital; and that he had traded Document Security Systems while associated with PGP Financial and PHD Capital.
Braff testified that he considered it to be standard industry practice for an associated person to assume that an employer would notify an outside brokerage firm of the employee's firm association. On the other hand, he admitted that he had personally provided written notification toScottrade and TD Waterhouse on one occasion in July 2003 about his pending association with Milestone. The contradiction between what Braff claimed to believe and what he had done was not lost on FINRA.
With respect to PGP Financial, Braff seemed to try to shift some of the blame for his non-disclosure to Ellen Lozinski, PGP Financial's former president and chief compliance officer. Braff claimed that Lozinski told him that he "should write none on the [disclosure] form in terms of having duplicate statements sent from the two [brokerage] firms," given that he was going to be the branch office's compliance officer. Lozinski testified, however, that she did not speak with Braff about his outside brokerage accounts, and that, if she had, she would have him to arrange for duplicate confirmations and statements to be sent directly to the firm for review by an individual other than him.
Although Braff testified that he had notified PointeCapital orally and in writing about his outside brokerage accounts, Paul Chuz (the firm's former director of compliance) testified that:
Moreover, Braff testified that it was more important to him to be able to have an outside brokerage account than to have a job with a member firm. Perhaps not the best explanation to proffer as it suggests that Braff might have been disposed to hiding the existence of an away account given his description of how important such a factor was for him. As if to erase any doubt in that regard, Braff testified that "if I cannot get a brokerage firm to allow me to have outside accounts, I will not work there." He reasoned that "you have to go to a discount broker . . . because I would have gone broke doing my hobby, trading actively, at $20 a ticket charge" if he traded where he worked. Braffalso testified it is "just a bad idea to have an account at the same firm you worked for" because "if there is a problem at the clearing company or that firm, they freeze your accounts."
On May 19, 2010, FINRA's Hearing Panel found that Braff violated Rule 3050(c) and Rule 2110 by failing to disclose his outside brokerage accounts to PGP Financial, PHD Capital, and Pointe Capital and failing to disclosehis associated person status to Scottrade and TD Waterhouse; and that he also violated Rule 2110 by making false statements on the PGP Financial and PHD Capital disclosure documents. The Hearing Panel fined Braff$15,000 and suspended him from associating with a member firm in all capacities for one year.
Braff appealed the Hearing Panel's decision to FINRA's National Adjudicatory Council ("NAC"), where he continued to represent himself pro se.
On May 13, 2011, the NAC affirmed the findings of violation but increased the sanctions to a two-year suspension and $25,000 fine. The NAC concluded that "the Hearing Panel's sanctions [we]re inadequate to remedyBraff's misconduct and insufficient to deter Braff from engaging, again, in the type of misconduct presented here." For purposes of assessing the sanctions, the NAC aggregated the two counts of the complaint, reasoning that Braff's misconduct stemmed from "a single systemic problem or cause," i.e., his failure to disclose the existence of his outside brokerage accounts.
Braff appealed pro se FINRA's findings and sanctions to the SEC. In the Matter of the Application of HOWARD BRAFF For Review of Disciplinary Action Taken by Financial Industry Regulatory Authority, Inc. (Securities and Exchange Commission Opinion, Securities Exchange Act of 1934 # 66467; Admin. Proc. File #3-14417 / February 24, 2012). The SEC affirmed FINRA's findings.
The SEC noted that (footnotes omitted):
Rule 3050(c) is intended to prevent associated persons from engaging in improper trading "by providing the employer member with more complete knowledge of its associated persons' trading activities." The written notification requirement allows member firms to create and enforce internal compliance procedures and "facilitate more direct and early detection of the existence of potential rule violations," such as conflicts of interest with the firm or its customers. A firm's ability to effectively monitor and address trading activity that may result in violative conduct is therefore highly dependent on the receipt of accurate and comprehensive information about an associated person's brokerage accounts.
Having affirmed the finding of liability, the SEC then considered the appropriateness of the imposed FINRA sanctions. In considering whetherBraff's misconduct was "egregious" (which enhanced the sanctions), the SEC found that (footnotes omitted):
[B]raff made intentional efforts to conceal his outside brokerage accounts and personal trading activities from his employers. The documents that Braff completed when he joined PGP Financial and PHD Capital contained unambiguous language requiring the disclosure of outside brokerage accounts. Yet, Braff falsely stated on the documents that he had no such brokerage accounts. While associated with Pointe Capital, Braff signed a document stating that he had read, understood, and would comply with the firm's written supervisory procedures, which included explicit language regarding outside brokerage accounts. He nonetheless failed to comply with those procedures.
Braff's extensive experience, including having been in the securities industry for twenty-two years, is further evidence that he intended to conceal his outside brokerage accounts in violation of Rule 3050(c). Moreover, while at PGP Financial, Braff assumed supervisory and compliance responsibilities that included reviewing all confirmations and statements regarding employees' personal brokerage accounts. He also oversaw annual compliance meetings addressing, among other things, requirements related to outside brokerage accounts. Yet, despite his supervisory responsibilities in these areas, he repeatedly failed to disclose his outside brokerage accounts.
Finally, the SEC dismissed Braff's assertion that he was remorseful and particularly noted that in contradistinction to that professed personal acceptance of his misconduct, that he:
[A]ttempted to minimize the severity of his actions by characterizing these proceedings as a mountain made out of a "molehill," his violations as an "insignificant infraction," and his trading in Document Security Systems as a "big so what?" He also blamed Ellen Lozinskifor the manner in which he completed the PGP Financial disclosure document and insisted that his employer firms should have notified the brokerage firms about his associations. Braff's attempt to shift blame for his violations to others and his failure to appreciate the fundamental duty to provide the notification required by Rule 3050(c) justifies the imposition of a serious sanction, particularly given his twenty-two years in the securities industry.