An irreverent Wall Street Blog
Fee Based Rep Seeks Expungement Over Commissions He Never Charged
December 4, 2019
Talk to enough stockbrokers, advisors -- even lawyers -- and you'll learn that there is an unease about taking on a so-called complaining client. If you're going to take on a customer who's sitting in your office fuming about the low-life piece of crap that screwed everything up, just keep in mind that there but for the grace of god goes I. That's not to diminish the rectitude of any client's complaint about the misconduct of any professional, but it does underscore the sense that some folks may be impossible to please. That being said, business is business, and, hey, maybe the former broker, advisor, or lawyer was a moron. In today's featured FINRA expungement arbitration, we consider the plight of a Merrill Lynch broker who opened an account for a customer who dumped her prior advisor after 20 years. Maybe the new advisor could do better? Then again, this is about an expungement!
Case In Point
In a FINRA Arbitration Statement of Claim filed in May 2019, associated person Claimant Napoli sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). Respondent Merrill Lynch took no position on the requested relief but asserted various affirmative defenses. After being notified about the expungement hearing, the customer did not participate in the hearing but supported Claimant's requested relief. In the Matter of the Arbitration Between Alexander A. Napoli, Claimant, v. Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Respondent (FINRA Arbitration Decision 19-01357)
https://www.finra.org/sites/default/files/aao_documents/19-01357.pdf
In recommending expungement, sole FINRA Arbitrator Annamaria Boccia Smith discharged her role with great diligence as evidenced by her thoughtful and compelling rationale:
The customer's complaint regarding account activity from November 2017 until November 2018 is the only disclosure on Claimant's BrokerCheck. Claimant testified that he has been in the business since March 2005. The customer's allegations were investigated and denied by Respondent. The evidence proffered at the evidentiary hearing supports Claimant's position that the disclosure in the BrokerCheck Report is "clearly erroneous," "factually impossible" and "false" within the meaning of FINRA Rule 2080 because the customer's account was a fee-based, managed account, and as such, no commissions were generated by the trades in the portfolio. The customer dispute arose from the customer's confusion surrounding the nature of the fee-based account and the customer's dissatisfaction with the decline in value of the investments in the portfolio. The customer apologized to Claimant and ultimately supported Claimant's request for expungement.Claimant testified that the customer became his client in December 2016 when she became dissatisfied with the service she was receiving from another advisor. Claimant testified that he had communications with the customer and her husband several times before she became his client.Claimant testified that the customer's investment objectives were "to grow assets and generate income" from the portfolio in order to replace the disability income her husband was receiving when it terminated. Claimant recalled that at that time, the portfolio was "very diversified". He stated that the customer's experience dated back "at least 20 years" with the prior advisor. Claimant testified that the customer had a moderate risk tolerance.Claimant testified that he recommended that the customer invest in a portfolio of "large cap, dividend-paying stocks" and utilize "covered calls against the positions" to hedge the portfolio. Claimant testified that he explained that the strategy was based on Respondent's proprietary covered call strategy. Claimant testified that he exchanged "dozens of emails" with the customer regarding her account.The customer granted Claimant discretion over her account. Claimant testified that he earned a 1% fee on the account. He explained that he earned no commissions on the account.During the period from May 2017 to November 2018, Claimant met with the customer in-person 4 or 5 times. He stated that he received approximately 80 emails from her during that same period and that she was "very involved in the management of the account."Claimant testified that after the customer's husband passed away, the business relationship between him and the customer changed. The customer's net worth increased as a result of receiving a death benefit from her deceased husband's insurance policy. The customer wanted to communicate with Claimant only via email. Claimant testified that the customer would email him instructions and changes to the account. He stated that he told her that instructions and changes to the account must be made verbally. At this time, the customer began asking questions regarding performance of her account. He explained to her that in the year 2017 she had "realized losses for tax purposes" but that there were "plenty" of "unrealized gains". Claimant testified that this explanation via email was misunderstood by the customer and she claimed he was not being "transparent" about the account.On November 13, 2018, the customer lodged a complaint against Claimant as acknowledged in correspondence from Respondent to the customer, dated December 20, 2018. Claimant stated that he, along with Compliance Management, had an in-person meeting with the customer and her daughters. He explained the fee-based nature of her account. He explained to her that given that the managed account was fee-based, the customer did not pay commissions on individual trades. She told him that her friend had told her that every time he made a trade, he was charging her a commission. Claimant stated it was a productive meeting. The customer apologized. This testimony is corroborated by the correspondence from Respondent to the customer, dated December 20, 2018. Claimant stated that the customer ultimately decided to transfer to another firm. This, too, is corroborated by that same letter.On December 20, 2018, following an investigation by Respondent, the customer's claim was denied. According to the Statement of Answer, the customer did not pursue her claim in arbitration or court. Notably, the customer ultimately submitted a sworn affidavit in support of Claimant's request for expungement. Both in its Answer and at the expungement hearing, Respondent took no position on Claimant's request for expungement.
Bill Singer's Comment
Online FINRA BrokerCheck records as of December 4, 2019, disclose that Claimant Napoli was first registered in 2005 with FINRA member firm Merrill Lynch, where he is presently employed. The customer complaint at issue is the only regulatory disclosure on his 15 year career. Under the heading "Customer Dispute - Closed-No Action/Withdrawn/
Dismissed/Denied," BrokerCheck asserts that the complaint was received by the firm on November 13, 2018, and involved alleged excessive trading from November 2017 to November 2018. Merrill Lynch denied the claim on December 12, 2018.
Dismissed/Denied," BrokerCheck asserts that the complaint was received by the firm on November 13, 2018, and involved alleged excessive trading from November 2017 to November 2018. Merrill Lynch denied the claim on December 12, 2018.
The complaining customer first became Napoli's "client in December 2016 when she became dissatisfied with the service she was receiving from another advisor. Claimant testified that he had communications with the customer and her husband several times before she became his client." Following her husband's death, we are informed that;
[T]he customer's net worth increased as a result of receiving a death benefit from her deceased husband's insurance policy. The customer wanted to communicate with Claimant only via email. Claimant testified that the customer would email him instructions and changes to the account. He stated that he told her that instructions and changes to the account must be made verbally. At this time, the customer began asking questions regarding performance of her account. He explained to her that in the year 2017 she had "realized losses for tax purposes" but that there were "plenty" of "unrealized gains". Claimant testified that this explanation via email was misunderstood by the customer and she claimed he was not being "transparent" about the account.
As plain a recipe for disaster as you could imagine. First off, I'm not quite sure why "instructions and changes to the account must be made verbally." Assuming, for argument's sake, that Merrill Lynch required all instruction/changes be made "verbally," then that policy would not seem to preclude a rep receiving emails from a customer and promptly telephoning that individual in order to effectuate a "verbal" communication. We are all aware, for example, of brokerage policies prohibiting the leaving of orders via Voicemail; and we are all aware that there are warnings about "do not reply to this email address" when communicating about account instructions/orders. As to blanket policies against non-verbal communication, I thought that Merrill Lynch offered an online "Secure Message Center," so I'm a tad puzzled about this purported verbal-only policy.
As explained in the Arbitrtation Decision's rationale, the over-arching strategy for the account was a fairly moderate approach involving large cap stocks that paid dividends coupled with writing covered calls against those positions. The account was handled on the basis of a 1% fee and there were no commissions earned on any transactions. Ultimately, the source of friction in Napoli seems to have arisen when the widowed customer told the rep that "her friend had told her that every time he made a trade, he was charging her a commission." Make a note of that. Should you inherit an account or continue to service surviving customers, make sure to pointedly and exhaustively re-visit the nature of the services you are providing and to ensure that the surviving account-holder understands the nature/extent of any fees or commissions. Moreover, for good measure, confirm such a conversation in an email/letter, which you will retain for your protection. Unfortunately (or perhaps fortunately) for Napoli, the customer transferred out her account to another firm. Further, the customer never pursued her complaints via arbitration or in the courts. In the end, the customer submitted a supportive affidavit for Napoli. Alas, three yards and a cloud of dust.