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, Curtis Leonard Mazer submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Curtis Leonard Mazer, Respondent (AWC 2011029274001, July 31, 2012).
Mazer first became registered as a General Securities Representative in 1988; and from 2001 was registered with American Portfolios Financial Services, Inc. The AWC asserts that Mazer had no prior disciplinary history.
The AWC alleged that in July 2010, without providing any prior notice to American Portfolios, Mazer issued to one of his customers a $4,500 personal check, which constituted a refund of fees intended to reimburse that customer for losses; and, accordingly, a violation of FINRA Rules 2150(c):Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts and 2010: Standards of Commercial Honor and Principles of Trade.
In accordance with the terms of the AWC, FINRA imposed upon Mazer a $5,000 fine and a 10 business-day suspension from association in any capacity with any FINRA member firm.
FINRA's rule against guaranteeing against losses in a customer's account tends to trip up a number of folks whose intent is to quietly resolve minor customer disputes. The theory behind such payments is often to keep a good (but presently unhappy) customer. The rationale is that it's worth forking over a few hundred or thousand dollars as the cost of retaining thousands of dollars in annual commissions or fees. Without question, this is a violation that involves brokers at nearly all industry firms. A major producer at Merrill Lynch, Morgan Stanley, JP Morgan, Wells Fargo, or UBS is just as likely to go the route of handing over a piddling sum to assuage an unhappy customer as a counterpart at a smaller local/regional firm. A perceived nuisance is a nuisance no matter how large or small the member firm.
While, in some instances, the customer-service goal may be commendable, unfortunately, the execution of this scenario often runs afoul of engaging in undisclosed settlements and guaranteeing against losses. In more stark terms, whatever the motivation behind the payments, they tend to come off looking more like hush money than honorable compensation. Of course, let's be honest here: Quite often that's exactly what these payments are - a broker figures it's easier and cheaper to shut up a client before the firm finds out and before a regulator starts poking around.
FINRA Rule 2150 couldn't put the prohibition any clearer: you can't "guarantee a customer against loss in connection with any securities transaction or in any securities account of such customer." That's pretty much as blanket a No-No as there is. The exceptions to that proscription permit sharing in losses and profits subject to a number of conditions:
Registered persons would do well to focus on all the "prior" requirements and the "direct proportion" proscription. All of which pretty much eliminates the sliding of a check to your unhappy client at the nearby diner. For a more detailed consideration, read the full-text rule:
FINRA Rule 2150: Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts
(a) Improper Use
No member or person associated with a member shall make improper use of a customer's securities or funds.
(b) Prohibition Against Guarantees
No member or person associated with a member shall guarantee a customer against loss in connection with any securities transaction or in any securities account of such customer.
(c) Sharing in Accounts; Extent Permissible
(1)(A) Except as provided in paragraph (c)(2), no member or person associated with a member shall share directly or indirectly in the profits or losses in any account of a customer carried by the member or any other member; provided, however, that a member or person associated with a member may share in the profits or losses in such an account if:
(i) such person associated with a member obtains prior written authorization from the member employing the associated person;
(ii) such member or person associated with a member obtains prior written authorization from the customer; and
(iii) such member or person associated with a member shares in the profits or losses in any account of such customer only in direct proportion to the financial contributions made to such account by either the member or person associated with a member.
(B) Exempt from the direct proportionate share limitation of paragraph (c)(1)(A)(iii) are accounts of the immediate family of such member or person associated with a member. For purposes of this Rule, the term "immediate family" shall include parents, mother-in-law or father-in-law, husband or wife, children or any relative to whose support the member or person associated with a member otherwise contributes directly or indirectly.
(2) Notwithstanding the prohibition of paragraph (c)(1), a member or person associated with a member that is acting as an investment adviser may receive compensation based on a share in profits or gains in an account if:
(A) such person associated with a member seeking such compensation obtains prior written authorization from the member employing the associated person;
(B) such member or person associated with a member seeking such compensation obtains prior written authorization from the customer; and
(C) all of the conditions in Rule 205-3 of the Investment Advisers Act (as the same may be amended from time to time) are satisfied.