February 25, 2020
In today's featured FINRA regulatory settlement, we come across the case of a Merrill Lynch employee who signed off on agreements without apparent authorization. It's an odd set of facts because the rep's unauthorized executions come off, to some extent, as misguided customer service -- all the more so because there are no allegations that the employee received any financial benefit from his displays of penmanship. Did FINRA's sanctions fit the misconduct? Too much? Too little? Just right? See what you think.
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 M. Murphy submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Thomas M. Murphy, Respondent (FINRA AWC 2018058148801)
The AWC alleges that Murphy entered the industry in 2009 with FINRA member firm Merrill, Lynch, Pierce, Fenner & Smith Inc., and was first registered with Merrill Lynch in 2010. The AWC asserts under "Relevant Disciplinary History" that Murphy "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization."
Matters of "Authorized" Signatory
As alleged in part in the FINRA AWC:
In September 2014, while serving as a registered representative in the Firm's self-directed brokerage business, Murphy was approached by a Firm client who sought his help in transferring cash from her existing self-directed Individual Retirement Account ("IRA") at Merrill Lynch to an account at a third-party fund manager for the purpose of making a qualified investment in a private real estate fund outside of her account. In assisting the client, Murphy signed the fund's subscription agreement as an "authorized signatory" of Merrill Lynch in its capacity as custodian of the client's IRA.
Subsequently, in 2017, while a financial advisor in-training for the Firm's full-service brokerage business, Murphy was approached by the same third-party fund manager to help additional investors use cash held in self-directed IRAs at Merrill Lynch to make qualified investments in private real estate funds outside of their Firm accounts. Murphy, as part of his efforts to assist these self-directed clients, executed an additional fourteen subscription agreements between August and November 2017 as an "authorized signatory" of Merrill Lynch. Murphy executed seven of the subscription agreements after October 19, 2017, when Merrill Lynch instructed him to cease any involvement with the third-party fund manager. Murphy did not receive any compensation from the third-party fund manager for his actions.
Murphy was not authorized by Merrill Lynch to execute the subscription agreements, and the Firm's policies prohibited employees, such as Murphy, from executing documents on the Firm's behalf. Murphy's conduct created confusion over Merrill Lynch's role in the investments and whether the transfers from the clients' IRAs to the private funds would be treated as qualified distributions.
Online FINRA BrokerCheck records as of February 25, 2020, disclose under the heading "Employment Separation After Allegations" that Merrill Lynch "discharged" Murphy on March 14, 2018 based upon allegations of:
Signing subscription agreements with a non-affiliated, third-party investment advisor on behalf of the Firm without authorization, and failing to comply with a direction from management.
In accordance with the terms of the AWC, FINRA found that Murphy had violated FINRA Rule 2010, and the self-regulatory-organization imposed a $5,000 fine and a four-month suspension from association with any FINRA member in all capacities.
Bill Singer's Comment
In 2014 a Merrill Lynch client asked Murphy (then a registered representative) to help transfer cash from her "self-directed Individual Retirement Account ("IRA") at Merrill Lynch." Take note of the fact that Murphy was working in Merrill's "self-directed brokerage business." That caught my eye. With self-directed business, customers tend to generate their own investing ideas and place their own orders. It's about as low-maintenance as Wall Street gets. The self-directed client sought to transfer her cash to "a third-party fund manager for the purpose of making a qualified investment in a private real estate fund outside of her account." In order to facilitate the client's requested transfer of funds away from Merrill, Murphy signed the subscription agreement as an "authorized signatory" of Merrill in its capacity as custodian of the client's IRA.
Was Merrill Lynch the custodian of the client's IRA? Apparently "yes."
Was Murphy a registered representative of Merrill Lynch at a time when the firm was a custodian of the client's IRA? Apparently "yes."
Was Murphy an authorized Merrill Lynch signatory? Apparently "no."
What exactly constituted an "authorized" Merrill Lynch signatory in 2014? That information is oddly missing in the AWC.
Moving ahead about three years to 2017, Murphy is now a "financial advisor in-training for the Firm's full-service brokerage business." This time around, the same third-party Fund Manager involved in the cited 2014 transfer asks Murphy "to help additional investors use cash held in self-directed IRAs at Merrill Lynch to make qualified investments in private real estate funds outside of their Firm accounts." Again, I take particular note of the fact that the IRAs at issue are of the self-directed variety. Regardless of how you weigh that point, Murphy did himself no good by signing off on seven agreements after his employer had warned him on October 19, 2017 "to cease any involvement with the third-party fund manager."
The AWC asserts that Merrill Lynch had policies that "prohibited employees, such as Murphy, from executing documents on the Firm's behalf." Really? No Merrill Lynch employee can ever execute any document on the firm's behalf? Truly, that sounds absurd.
Further, exactly what does the AWC mean by asserting that Merrill Lynch's purported proscription covered "employees such as Murphy?" Such as Murphy? Is such vague language appropriate in a document setting out a regulatory settlement?
I'd love to see the actual language in Merril Lynch's written supervisory procedures regarding the protocol whereby a Merrill rep/advisor is authorized to sign a subscription agreement when Merrill is a custodian of the client's IRA. Again, you'd sort of think that the AWC would have referenced that policy given the misconduct at issue. After all, if Merrill employees do not actually sign off on various documents, then just exactly how the hell does Merrill physically affix a signature to any document? Merrill can only "sign" via a human being unless everything is being done digitally these days.
In the end, I don't disagree with Merrill's or FINRA's concerns about the conduct at issue. As the AWC aptly notes, "Murphy's conduct created confusion over Merrill Lynch's role in the investments and whether the transfers from the clients' IRAs to the private funds would be treated as qualified distributions." Spot on!
In accepting the danger of Murphy's alleged misconduct, however, we must also mitigate his actions by acknowledging that he "did not receive any compensation from the third-party fund manager for his actions," and, as such, he may simply have engaged in what he thought was customer service (albeit misguided).
The cynic in me wonders whether all of Merrill Lynch's agitation about Murphy's unauthorized signature was prompted by the transfer of customer funds away from Merrill to an unaffiliated third-party. I'm wondering whether Merrill would have made such a stink if the transfers at issue occurred in-house or to an affiliated third-party.
Four months in the penalty box for the misconduct at issue seems a bit extreme; however, I don't know what I don't know, I don't know the mechanics by which this AWC was negotiated, and, whether more serious allegations were removed. Ultimately, if Murphy signed off on this AWC and was happy with the sanctions, it's not my place to second guess him -- all the more so since he was represented by legal counsel.