FINRA Bars Top Producer For Charging Commissions Instead Of Fees

August 3, 2015

The war continues between those advocating the registered investment advisor model and those proponents of the broker-dealer model. One battleground brings into play the dynamics of charging customers a transaction-based commission versus an assets-based fee. On another battlefield, we witness volleys over whether industry professionals should be handling customer accounts according to the dictates of the Suitability Rule versus the Fiduciary Rule. In a recent FINRA regulatory settlement, we see one registered representative waive the white flag in the face of the regulator's frontal assault on his position to conduct a largely commission-only business when it seems that a fee structure would have been fairer to many of his customers.

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, Thomas J. Buck submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Thomas J. Buck, Respondent (AWC   2015044745701, July 24, 2015).

In October 1981, Buck entered the securities industry and was registered with FINRA member firm Merrill Lynch, Pierce, Fenner & Smith, Inc., where he remained until April 2015, at which time he joined FINRA member firm RBC Capital Markets, LLC, where he remained until his July 21, 2015 resignation.

The Buck Group

The AWC asserts that from October 1981 until April 2015, Buck conducted business with 15 to 20 other registered and unregistered persons as "The Buck Group," whose customers consisted of over 3,000 customer accounts (about 800 households) with $1.3 billion in assets under management. Starting as late as 2009, The Buck Group allegedly generated from $6 to $10 million in annual revenues, of which about 85% was derived from Buck's personal production. The AWC asserts that some 80% of Buck's production was commission-based activity (in contradistinction to fee-based).  

Passing The Suitability Buck

The AWC asserts that beginning no later than 2009, Buck had failed to fully assess the suitability of offering his customers' a fee-based structure. The AWC asserts that when Buck opted to service his customers on a commission basis, he knew that in some instances the alternative fee-based structure would have been less expensive for customers. Further, the AWC alleges that Buck misled customers about the potential advantages of a fee structure. During the relevant times, the AWC asserts that the applicable fees were about 1 to 1  1/2 % of the account value.

The Buck Stops Here

According to online FINRA BrokerCheck records as of August 3, 2015, Merril Lynch "Discharged" Brown on March 4, 2015, based upon:


FINRA asserted that Buck engaged in unethical business practices, unauthorized trading, and unauthorized discretion. Pointedly, FINRA deemed that Buck had willfully committed fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 (Rule 10b-5 thereunder)  and violated FINRA Rules 2010 and 2020.

In accordance with the terms of the AWC, FINRA imposed upon Buck a Bar from association with any member in any capacity. The AWC includes the following provision:

I also understand that this settlement includes a finding that I willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that under Article III, Section 4 of FINRA's By-Laws, this makes me subject to a statutory disqualification with respect to association with a member.

Bill Singer's Comment

So lemme see if I sort of get the gist of one aspect of this AWC. FINRA asserts that way back in 2009, some six years ago, Buck should have known that charging commissions rather than a fee was unfair to his customers. And in presenting the scope of the respondent's transgressions, FINRA explains that the Buck Group -- a long-standing production team, if you will --- had over $1 Billion in assets spread over 3,000 accounts. That impressive group was bringing in between $6 and $10 million per year to Merrill Lynch.

Umm . . . you know . . . just out of curiosity, during all those years when those big Buck bucks were rolling in to Merrill, did the firm ever do its own due diligence and chastise its mega-producer about both commissions and suitability?  I would have liked to know that background in weighing FINRA's ire with Buck.  I mean, c'mon now, if this commission-based business warrants the ultimate sanction upon Buck's head, how is it that there's nary a word in this AWC about his employer's oversight (or possible lack thereof).

To disclose my own personal bias as is well-documented in my commentaries over the years, I am an unabashed advocate of the Fiduciary Rule and often prefer fee-based compensation. Moreover, I have often called for the right for registered representatives to propose to their customers a profit-sharing compensation subject to an equitable offset for losses incurred in the account. In my opinion, the brokerage commission system is not only unfair to many customers but it also forces many men and women stockbrokers to pursue careers as shills pressing their customers to engage in more frequent activity rather than investment professionals working with their customers to maintain assets and enhance return.

What FINRA fails to acknowledge in these types of regulatory cases is that folks such as Buck are captive to an industry model that FINRA too often serves to perpetuate.  Regardless of what the big guns at FINRA and that self-regulatory organization's supporters may proclaim, I continue to view the organization as little more than a glorified trade organization that largely seeks to preserve the interests of its larger member firms. In the Buck settlement, I sympathize with his customers given my antipathy for the commission model.

What exactly did FINRA imagine would happen if this big producer waltzed into Merrill's headquarters and announced that he was moving all his business into a fee-only model? You think he would have been welcomed with open arms and kisses on both cheeks? Do you recall how in December 2008, Merrill somehow found just shy of $4 billion o pay lavish bonuses (using a chunk of TARP funds) on the eve of the broker-dealer's acquisition by Bank of America? Should I remind you that 2009 marked the full onset of the Great Recession?