With Wall Street's Baby Boomers heading into retirement and new blood angling to take over the departing reps' accounts, today's featured FINRA disciplinary settlement offers some guidance concerning what appears to be a succession plan that arranged to migrate shared accounts to the exclusive oversight of the eventual successor rep. As with such hand-offs of business from the former to the new guy, not everything was anticipated and it seems that no one fully thought through how the former rep would stay connected with customers during the transition. You got "my" business, you got "our" business, and you got "your" business and all those different states came crashing together in a problematic fashion. By way of comparison, consider how the New York Giants football team has to decide this weekend whether Eli Manning will be the starting QB for the rest of the season and who will be the General Manager and Coach. Some things you plan for, some things you have to deal with on the run, and some things you have to fudge.
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, Isaac Stevens submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Isaac Stevens, Respondent (AWC 2016051642201, November 27, 2017).
The AWC asserts that since 1976, Isaac Stevens has been continuously registered with Edward Jones since first entering the securities industry in 1976. By way of "Relevant Disciplinary History," the AWC states:
In February 1993, a New York Stock Exchange hearing panel found that Stevens made certain unsuitable recommendations in violation of former NYSE Rule 476(a)(6). As a result, Stevens was censured, suspended for 30 days and fined $5,000.
The AWC asserts that during an unspecified period, Stevens and another registered representative referenced only as "Representative A" had "shared a number of customers." Pursuant to what is described as a "prearranged succession plan," in early 2016, the shared customers became customers solely of Representative A.
Have A Look
After the transition of the customers from the shared status to solely Representative A's, Stevens purportedly was unable to view those customers' accounts using his Edward Jones' log-on credentials and, accordingly, Representative A gave his log-on credentials to Stevens so that he could access the firm's systems and view account information of the customers' at issue:
when formerly-shared customers contacted Stevens rather than Representative A with questions or service requests.
Sometime in late May 2016, the AWC asserts that a formerly-shared customer met jointly with Stevens and Representative A and that they both recommended the purchase of a specific stock, which the customer gave authorization to purchase. At this point, the AWC asserts that:
[T]he order was not entered until two or three weeks later, in June 2016. Because Representative A was out of the office travelling on the day the order was placed, Stevens placed the order after logging on to the Edward Jones system using Representative A's log-on credentials. During the weeks between discussing the order with the customer and placing the order, Stevens had not reconfirmed the order with the customer.
The AWC alleges that:
SIDE BAR: NASD Conduct Rule 2510: Discretionary Accounts
(a) Excessive Transactions
No member shall effect with or for any customer's account in respect to which such member or his agent or employee is vested with any discretionary power any transactions of purchase or sale which are excessive in size or frequency in view of the financial resources and character of such account.
(b) Authorization and Acceptance of Account
No member or registered representative shall exercise any discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer or manager, duly designated by the member, in accordance with Rule 3010.
(c) Approval and Review of Transactions
The member or the person duly designated shall approve promptly in writing each discretionary order entered and shall review all discretionary accounts at frequent intervals in order to detect and prevent transactions which are excessive in size or frequency in view of the financial resources and character of the account.
This Rule shall not apply to:
(1) discretion as to the price at which or the time when an order given by a customer for the purchase or sale of a definite amount of a specified security shall be executed, except that the authority to exercise time and price discretion will be considered to be in effect only until the end of the business day on which the customer granted such discretion, absent a specific, written contrary indication signed and dated by the customer. This limitation shall not apply to time and price discretion exercised in an institutional account, as defined in Rule 3110(c)(4), pursuant to valid Good-Till-Cancelled instructions issued on a "not-held" basis. Any exercise of time and price discretion must be reflected on the order ticket;
(2) bulk exchanges at net asset value of money market mutual funds ("funds") utilizing negative response letters provided:
(A) The bulk exchange is limited to situations involving mergers and acquisitions of funds, changes of clearing members and exchanges of funds used in sweep accounts;
(B) The negative response letter contains a tabular comparison of the nature and amount of the fees charged by each fund;
(C) The negative response letter contains a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased; and
(D) The negative response feature will not be activated until at least 30 days after the date on which the letter was mailed.
Under previous iterations of the NASD Suitability Rule there was no intra-day limit on Time and Price discretion ("T&P"), which explains why industry veterans often mistakenly believe that they can still use T&P the next day(s) rather than within the same trade date, as is now promulgated under NASD Rule 2510(d)(1). Speaking of the old days, why is this still an "NASD" rule and not updated to a FINRA rule? FINRA was formed in 2007. Does it really take over a decade to transition from the old NASD rulebook to the superseding FINRA one?
The AWC alleges that Stevens exercised T&P without written authority in violation of NASD Rule 2510 and FINRA Rule 2010' and that he entered a trade order using another registered representative's log-on credentials, thereby causing Edward Jones's books and records to be inaccurate in violation of FINRA Rules 4511 and 2010.
In accordance with the terms of the AWC, FINRA imposed upon Stevens a $5,000 fine and a 10-business-day suspension in all capacities.
Bill Singer's Comment
I mean, seriously? As a 35-year industry veteran and former Series 7/63, I certainly understand not only how the above events transpired but I also know that it is unlikely that Stevens and/or Representative A engaged in any intentional fraud for the purpose of deceiving the customer. Were there violations of Edward Jones policies? Yes. Were there violations of FINRA rules? Yes. I'm not going to defend the cited conduct and I'm not going to pretend that both individuals exercised good judgment. On the other hand, just what the hell took place here that necessitated a $5,000 fine -- and let's also not pretend that such a fine is chump change for an individual rep. Similarly, why did Stevens need a 10-business-day sit down? If I take the AWC at face value -- which is all that I can do -- then FINRA has not made a case that persuades me that Stevens needed to be fined and suspended. Seems to me a Letter of Caution may have been acceptable given the allegations and underlying facts.
You may feel differently. That's fine and I respect our disagreement. I'm just letting you know that the succession-plan-shared-accounts-transitioning-to-sole-accounts presents a situation that does not suggest that any improper intentions were at work here. My instincts suggest that this was more likely a case where a veteran rep was trying to keep an eye on things in order to facilitate the migration of his business. None of which excuses the cited conduct but all of which provides "context" that puts things in a somewhat different light.