February 26, 2019
Today's featured FINRA regulatory settlement was prompted by a complaint about a stockbroker's "dealings with a vulnerable individual." Who sent that complaint? We're not told. What we do know is that the stockbroker violated FINRA's rules by failing to inform his employer UBS Financial Services Inc. about his roles as a trustee and an attorney-in-fact. Also, various away account documents indicate that the stockbroker was an "attorney" or retired or unemployed. Not stated in the AWC was whether FINRA determined that the accounts at issue were profitable or sustained losses. In the end, there are more unanswered questions than compelling conclusions in this AWC.
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, Guy Stanley Waltman submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Guy Stanley Waltman, Respondent (FINRA AWC 2016050191701, February 15, 2019).
The AWC asserts that Waltman was first registered in 1998, and by May 2006, he was registered with FINRA member firm UBS Financial Services Inc. The AWC asserts that "Waltman does not have any relevant formal disciplinary history with the Securities and Exchange Commission, FINRA, any other self-regulatory organization, or any state securities regulator."
The AWC offers an unusual glimpse into what prompted a FINRA investigation. Pointedly, the AWC asserts that:
In June 2016, a complaint against Waltman was filed with FINRA related to
Waltman's dealings with a vulnerable individual named MBM, who had recently
passed away. FINRA conducted an investigation of Waltman after receiving the
Waltman met MBM approximately 25 years ago. Starting in 2006, Waltman
began assisting MBM with her financial affairs. In 2009, MBM's mother passed
away, and MBM inherited a large sum of money. At that time, Waltman referred
MBM to an attorney, who helped her to set up brokerage accounts for the
inheritance proceeds at a FINRA member firm ("Broker-Dealer I").
In 2010, MBM appointed Waltman as trustee of a trust on her behalf, the MBM
Trust. In addition, she appointed him as her attorney-in-fact pursuant to a power
of attorney, designating a broad range of powers to him, including the ability to
manage her financial affairs. In contravention of Firm policy, Waltman did not
disclose to UBS that he was serving as power of attorney and trustee for MBM
and the MBM Trust.
Let's put some of that information into a bullet-point timeline:
- 1994: Waltman and MBM met;
- 2006: Waltman began assisting MBM with her financial affairs;
- 2009: MBM's mother died MBM inherits large sum of money; and Waltman refers MBM to attorney, who set up Broker-Dealer I brokerage accounts for inheritance proceeds;
- 2010: MBM appoints Waltman Trustee of MBM Trust and as her Attorney-In-Fact pursuant to POA
- 2016: Waltman died and complaint filed with FINRA
MBM and MBM Trust Accounts
At the end of 2009, MBM allegedly consolidated the MBM and the MBM Trust accounts into a single account at Broker-Dealer I, and Waltman became that account's Power-of-Attorney in 2010. The AWC alleges that:
[S]oon after becoming trustee of the MBM Trust in 2010, Waltman
transferred MBM's assets held at Broker-Dealer I into new accounts he asked his
friend MA, a registered representative at Broker-Dealer II, to open for MBM and
the MBM Trust at Broker-Dealer II. These included two securities accounts for
which Waltman served as trustee. In 2011, MA moved to Broker-Dealer III and
transferred the MBM-related accounts with him. These also included two
securities accounts for which Waltman served as trustee.
Stockbroker, Attorney, Retired, Not Employed
During the relevant time of between 2010 and 2016, the AWC alleges that Waltman had investment control over five "outside" MBM and the MBM Trust securities accounts. Accordingly, the AWC asserts that in violation of NASD Rule 3050(c) and FINRA Rule 2010:
the fact that Waltman had discretionary authority over these accounts, Waltman
did not disclose them to UBS during the Relevant Period. Moreover, on an
annual basis between 2010 and 2015, Waltman completed a UBS Affirmation
Online entitled "Covered Accounts," on which he should have disclosed the
accounts. Waltman did not disclose any of the MBM or MBM Trust accounts on
any of the affirmations, even though he had previously disclosed a personal
outside account to the Firm. Waltman's lack of disclosure of the MBM and
MBM Trust accounts prevented UBS from properly supervising Waltman's
outside accounts, thereby exposing the Firm to risk, and curtailed the Firm's
ability to fulfill its regulatory obligations.
In addition, Waltman never disclosed his association with UBS to the outside
firms for the MBM and MBM Trust accounts. As noted, Waltman served as
power of attorney for the securities account that MBM held at Broker-Dealer I.
Despite the fact that Waltman and MA were aware that Waltman was a registered
representative, none of the account opening documents for that account reflected
that Waltman was associated with a broker-dealer. On the contrary, the form
Waltman signed which designated him as power of attorney for the account
falsely listed his occupation as "attorney."
Similarly, the new account documents for the MBM Trust accounts at BrokerDealers II and III failed to disclose that Waltman was associated with UBS. For
the MBM Trust accounts at Broker-Dealer II, the account-opening forms prepared
by MA reflected that Waltman was "retired" and not employed by a FINRA
member. Along the same lines, the account-opening forms for the MBM Trust
accounts at Broker-Dealer III reflected that Waltman's employment status was
In accordance with the terms of the AWC, FINRA imposed upon Waltman a $5,000 fine and a three-month suspension from associating in any and all capacities with any FINRA member firm.
Bill Singer's Comment
$5,000 and a three-month suspension? Ummm, okay, maybe FINRA took into consideration Waltman's 22-year relationship with MBM and found that the stockbroker's intentions were honorable and the context of his dealings with the widow were exemplary. The thing about that inference, however, is that FINRA has an obligation to the industry and the investing public to say what it means and mean what it says. There should be no guessing games when it comes to announcing a regulatory settlement involving allegations about a stockbroker's failure to disclose to his employer his role as a trustee and attorney-in-fact. Notwithstanding that FINRA's investigation was prompted by a complaint against Waltman after MBM's death, there is no explanation of the source of the allegations or their nature -- which may be an intentional bit of non-disclosure by FINRA but at least indicate that in a footnote.
Where's that 2016 complaint?
Then there's this assertion in the AWC:
In June 2016, a complaint against Waltman was filed with FINRA related to Waltman's dealings with a vulnerable individual named MBM, who had recently passed away. FINRA conducted an investigation of Waltman after receiving the complaint.
No such complaint is disclosed on Waltman's online FINRA BrokerCheck record as of February 26, 2019. That seems odd. If, in fact, the cited 2016 complaint should have been disclosed on BrokerCheck, you would like to think that FINRA would have that confirmed fact prior to publishing the AWC.
The only "Customer Dispute" disclosure is found under the BrokerCheck heading "Customer Dispute -- Closed-No Action /Withdrawn/Dismissed/Denied" and references an August 12, 2017 complaint alleging in excess of $5,000 in damages arising from alleged "investments in the account without the client's approval." UBS denied the allegations on October 5, 2017, and Waltman's statement asserts that the account at issue was fully discretionary, that the client's approval was not required for the cited transactions, and that the manner of the account's investing was discussed "in detail with the client who suggested and agreed to an asset allocation." Other than the disclosure of the instant AWC, there are no other disclosure events on Waltman's BrokerCheck.
He Didn't Say. Did FINRA Ask Why?
Troubling in the AWC is its lack of explanation as to why Waltman failed to disclose to UBS his multiple outside roles over an extended period of years. I re-read the AWC several times just to make sure that I hadn't missed some attribution to Waltman as to why he didn't disclose his role as a trustee or as an attorney-in-fact. I was right, there is no such explanation. Similarly, there is no explanation as to why various outside account forms listed Waltman's occupation as "attorney" or that he was "retired" or "not employed."
In the end, it sure as hell looks like FINRA went very easy on Waltman with only a three-month suspension. Could have been the result of great lawyering by Waltman's attorney. Could have been a wholly justified and appropriate sanction but for FINRA's lack of explanation. Such questions should not continue to float above a FINRA AWC after it is published.
The FINRA Rulebook
NASD CONDUCT RULE 3050. Transactions for or by Associated Persons
(effective through April 2, 2017)
(a) Determine Adverse Interest
A member ("executing member") who knowingly executes a transaction for the purchase or sale of a security for the account of a person associated with another member ("employer member"), or for any account over which such associated person has discretionary authority, shall use reasonable diligence to determine that the execution of such transaction will not adversely affect the interests of the employer member.
(b) Obligations of Executing Member
Where an executing member knows that a person associated with an employer member has or will have a financial interest in, or discretionary authority over, any existing or proposed account carried by the executing member, the executing member shall:
(1) notify the employer member in writing, prior to the execution of a transaction for such account, of the executing member's intention to open or maintain such an account;
(2) upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to such account; and
(3) notify the person associated with the employer member of the executing member's intention to provide the notice and information required by subparagraphs (1) and (2).
(c) Obligations of Associated Persons Concerning an Account with a Member
A person associated with a member, prior to opening an account or placing an initial order for the purchase or sale of securities with another member, shall notify both the employer member and the executing member, in writing, of his or her association with the other member; provided, however, that if the account was established prior to the association of the person with the employer member, the associated person shall notify both members in writing promptly after becoming so associated.
(d) Obligations of Associated Persons Concerning an Account with a Notice-Registered Broker/Dealer, Investment Adviser, Bank, or Other Financial Institution
A person associated with a member who opens a securities account or places an order for the purchase or sale of securities with a broker/dealer that is registered pursuant to Section 15(b)(11) of the Act ("notice-registered broker/dealer"), a domestic or foreign investment adviser, bank, or other financial institution, except a member, shall:
(1) notify his or her employer member in writing, prior to the execution of any initial transactions, of the intention to open the account or place the order; and
(2) upon written request by the employer member, request in writing and assure that the notice-registered broker/dealer, investment adviser, bank, or other financial institution provides the employer member with duplicate copies of confirmations, statements, or other information concerning the account or order;
provided, however, that if an account subject to this paragraph (d) was established prior to a person's association with a member, the person shall comply with this paragraph promptly after becoming so associated.
(e) Paragraphs (c) and (d) shall apply only to an account or order in which an associated person has a financial interest or with respect to which such person has discretionary authority.
(f) Exemption for Transactions in Investment Company Shares and Unit Investment Trusts
The provisions of this Rule shall not be applicable to transactions in unit investment trusts and variable contracts or redeemable securities of companies registered under the Investment Company Act of 1940, as amended, or to accounts which are limited to transactions in such securities.
FINRA Rule 3210. Accounts At Other Broker-Dealers and Financial Institutions
(a) No person associated with a member ("employer member") shall, without the prior written consent of the member, open or otherwise establish at a member other than the employer member ("executing member"), or at any other financial institution, any account in which securities transactions can be effected and in which the associated person has a beneficial interest.
(b) Any associated person, prior to opening or otherwise establishing an account subject to this Rule, shall notify in writing the executing member, or other financial institution, of his or her association with the employer member.
(c) An executing member shall, upon written request by an employer member, transmit duplicate copies of confirmations and statements, or the transactional data contained therein, with respect to an account subject to this Rule.
.01 Account Opened Prior to Association With Employer Member. If the account was opened or otherwise established prior to the person's association with the employer member, the associated person, within 30 calendar days of becoming so associated, shall obtain the written consent of the employer member to maintain the account and shall notify in writing the executing member or other financial institution of his or her association with the employer member.
.02 Related and Other Persons. For purposes of this Rule, the associated person shall be presumed to have a beneficial interest in, and to have established, any account that is held by: (a) the spouse of the associated person; (b) a child of the associated person or of the associated person's spouse, provided that the child resides in the same household as or is financially dependent upon the associated person; (c) any other related individual over whose account the associated person has control; or (d) any other individual over whose account the associated person has control and to whose financial support the associated person materially contributes.
For purposes of paragraphs (a) and (b) of this Supplementary Material .02, an associated person need not be presumed to have a beneficial interest in, or to have established, an account if the associated person demonstrates, to the reasonable satisfaction of the employer member, that the associated person derives no economic benefit from, and exercises no control over, the account.
.03 Transactions and Accounts Not Subject To This Rule. The requirements of this Rule shall not apply to transactions in unit investment trusts, municipal fund securities as defined under MSRB Rule D-12, qualified tuition programs pursuant to Section 529 of the Internal Revenue Code and variable contracts or redeemable securities of companies registered under the Investment Company Act, as amended, or to accounts that are limited to transactions in such securities, or to Monthly Investment Plan type accounts.
.04 Accounts At a Financial Institution Other Than a Member. With respect to an account subject to this Rule at a financial institution other than a member, the employer member shall consider the extent to which it will be able to obtain, upon written request, duplicate copies of confirmations and statements, or the transactional data contained therein, directly from the non-member financial institution in determining whether to provide its written consent to an associated person to open or maintain such account.
.05 Other Financial Institution. For purposes of this Rule, the terms "other financial institution" and "financial institution other than a member" include, but are not limited to, any broker-dealer that is registered pursuant to Section 15(b)(11) of the Exchange Act, domestic or foreign non-member broker-dealer, investment adviser, bank, insurance company, trust company, credit union and investment company.