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, Charles Bridgers submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Charles Bridgers, Respondent (FINRA AWC 2018057553801 / November 16, 2019)
The AWC asserts that Bridgers entered the industry in 1984 and by 1999, he was registered with FINRA member firm Wells Fargo Clearing Services, Inc. ("WFCS") The AWC asserts that "Bridgers has no relevant disciplinary history."
The AWC alleges that on January 6, 2018, a longtime client (referred to as "CS") of both Bridgers and WFCS died. Keep that January 6th date in mind.
The AWC alleges that on January 9, 2018, Bridgers entered two municipal bond orders in CS's account; however, the AWC concedes that the two cited trades were placed before Bridgers knew of CS's death. That may seem like a whopping amount of mitigation -- after all, you can't blame a stockbroker for thinking a client was alive if, in fact, that broker didn't know that the client had died. On the other hand, if you give that fact some more thought, it might dawn on you that the dead can't exactly authorize a trade from the grave (or wherever).
Chatting with CS (Ouija Board Sold Separately)
As is so often the case in life (and apparently in death), we humans have a propensity to turn a minor gaffe into a major screw-up, and, Bridgers embraced that penchant with a passion. For reasons not explained in the AWC, Bridgers entered notes on WFCS's client management system (known in industry jargon as the "CMS") indicating that he spoke with CS on both January 9th and January 11, 2018 -- now might be a good time to remember that earlier referenced date of death: January 6th. Those CMS notes stated that the client and stockbroker discussed the two bond orders placed on January 9th. The AWC alleges that:
Bridgers created these false notes in an attempt to circumvent the firm's internal controls and conceal that the transactions were unauthorized.
In a nice discreet footnote, the AWC explains that:
After learning of CS's death, WFCS determined that CS could not have authorized the transactions described above, and reversed them.
Online FINRA BrokerCheck records as of October 18, 2019, disclose that WFCS "discharged" Bridgers on February 5, 2018, based upon allegations that he had:
Entered two municipal bond orders in a customer's account without first talking to the customer. Trades subsequently cancelled.
In accordance with the terms of the AWC, FINRA imposed upon Bridgers a $10,000 fine and a three-month suspension from associating with any FINRA broker-dealer in any capacity.
Bill Singer's Comment
Missing from FINRA's AWC is an explanation as to what alerted Wells Fargo to the customer's death and the date when the firm had that information. Regardless, the firm acted swiftly in firing Bridgers within a month of the post-mortem trades.
Typically, a brokerage firm is alerted to a client's death when notified by the successor Estate that the account will be subject to probate -- or a beneficiary named pursuant to a "Transfer on Death" ("TOD") account seeks to obtain the assets. Given that a brokerage firm will likely be notified by the Estate or a beneficiary, it's a foolish undertaking by any stockbroker to engage in post-mortem trading because of the likelihood that the trade dates will easily come under scrutiny.
Generally, FINRA broker-dealers should have written supervisory procedures requiring that upon notice of an individual account holder's death, all "OPEN" orders are cancelled and further trading in the account is blocked. Similarly, the account should be denoted as in the name of a "DECEASED" and further activity suspended until the firm is in receipt of a death certificate or other legal notification. These steps are taken so as to ensure the preservation of assets for any estate and to limit the firm's exposure in any estate litigation. Thereafter, the name of the account is generally changed from that of the deceased into one reflecting the "ESTATE OF . . ." such alteration may require the production of various court orders or letters testamentary, as the circumstances may dictate.
In the absence of legal documentation and authorization from your firm's legal/compliance department, registered persons should not merely follow the instructions of a surviving spouse, sibling or any other individual claiming the right to control the deceased's assets. As is often the case, the assets of a deceased may be subject to a will-contest, or, in the absence of a valid will, judicial intervention on behalf of any purported beneficiary. Based upon years of dealing with the deceased, a stockbroker may believe that there is only a single surviving child or spouse who will inherit the account; however, life is full of surprises and your assumptions may be ill-informed.
Quite often, post-mortem trades are liquidating in nature and tend to remove market risk from the successor estate's portfolio. As such, we often see a misguided but well-intentioned stockbroker closing out open option positions or selling off a position in the face of a market pull-back. In some cases, a client and stockbroker had implemented an "understanding" whereby certain positions would be bought/sold in response to specific market conditions -- or a client granted a stockbroker purported "time and price" discretion. Unfortunately, such understandings often turn out to be compliance and/or regulatory violations notwithstanding that they persisted inter vivos without incident. For example, time and price discretion ("T&P") is governed by FINRA Rule 3260(d)(1), which states in pertinent part that Rule 3260: Discretionary Accounts shall not apply to [Ed: highlighting added]: