December 20, 2021
After a stockbroker/advisor resigns or is terminated, a former employer often resorts to "self help" when it comes unpaid items purportedly owed by the ex-employee to the firm -- with the most common "quick fix" being to "dock" the former rep's trailing commissions/fees. The legal term for such a balancing-of-the-books is "indemnification." Of course once we start throwing around legal terms, disputes are going to arise as to whether a former employer has "rightfully" indemnified itself against an actual loss/cost. Read today's featured FINRA arbitration for an example of how self-help and legalese can come into conflict.
Case in Point
In a FINRA Arbitration Statement of Claim filed in August 2021, associated person Claimant Taliaferro asserted breaches of contract of the implied covenant of good faith and fair dealing; and unjust enrichment. Claimant sought $50,000 in damages. In the Matter of the Arbitration Between Robin Lee Taliaferro, Claimant, v. Sutter Securities Incorporated and Sutter Capital Partners, LLC, Respondents (FINRA Arbitration Award 21-02218)
Respondents generally denied the allegations and asserted affirmative defenses.
The Independent Registered Representative Agreement
At the heart of this intra-industry dispute between Taliaferro and Sutter appears to be an Independent Registered Representative Agreement (the "Agreement), which, in part, provides for various indemnification payments in the event that certain unpaid liabilities, damages, or claims have arisen following a rep's departure from the firm. As fully asserted by the sole FINRA Arbitrator in the FINRA Arbitration Award "FINDINGS" section:
There can be no quibble that under Section 8(a)(i) and (v), and 8(b) of the Independent
Registered Representative Agreement ("Agreement"), costs and expenses from a "liability" or
"damage" or "claim", including the legal fees - that Respondents incur in responding to the
pending FINRA investigation stem "from [Claimant's] activities" and that Claimant must
indemnify Respondents for such costs on demand, presumably subject to verification.
The question is whether the costs-against-commission offsets allowed under Section 6(c) also
apply to claims for indemnification under Section 8. The answer is "No".
Under Section 6, "[a]ny amounts due to [Respondents] for [Claimant's] costs and expenses . . .
shall be due at [Respondents'] option, either (i) on the statement date or (ii) deducted by
[Respondents] [without time limit] - from the amount due Claimant 'hereunder'". "Hereunder"
what? It does not say "Agreement", so "hereunder" appears to refer only to Section 6(c) which
narrowly and consistently limits Respondents' offset rights to Claimant's own business expenses
described therein, incurred in his work as an independent contractor, not those expenses
Respondents incur defending third party claims resulting from Claimant's activities. The latter
are Section 8 indemnification claims.
This interpretation is supported by Schedule A, which is referred to only in Section 6 - not
section 8 - and lists the same type of operational costs and expenses incurred by Respondents
described in Section 6 itself. It appears undisputed that the only Section 6(c) expenses for which
Claimant was responsible after he left are ticket charges, administrative fees, and FINRA and
SIPC fees totaling $1,591.00.
Nor does Section 6 expressly allow Respondents to withhold Claimant's compensation against
Section 8 indemnification claims - like the pending FINRA investigation. Likewise, Section 8
could have included an offset against compensation feature like that in Section 6, but it does
not. Nor does the Section 6 offset feature cross reference Section 8 or vice versa. There is no
provision for offset anywhere else in the Agreement. Such an explicit provision would not be
unreasonable, but it does not exist, and the Arbitrator cannot engraft such a provision on the
Accordingly, while the question is somewhat close, there is insufficient support in the Agreement
to allow Section 6 offsets for Section 8 indemnity claims. The $50,000.00 shall be released to
Claimant without further delay.
Accordingly, the sole FINRA Arbitrator found Respondent Sutter Securities liable to and ordered the firm to pay to Claimant Taliaferro $50,000 in compensatory damages and $600 in filing fees.
Bill Singer's Comment
Online FINRA BrokerCheck records disclose as of December 20, 2021, that Taliaferro has "47 Years of Experience / 14 Firms." That's a lot of experience. That's a lot of firms. That's a lot of years in the biz. Not unexpectedly, after nearly a half a century on Wall Street, Taliaferro has racked up a few disclosures:
- one "Final Regulatory Event" (a 1989 State of Connecticut fine for $750 while at PaineWebber)
- a July 2021 "Pending Investigation" purportedly by FINRA, which is characterized as "A 8210 investigation was opened as a result of a SEC exam at his previous firm."
- three "Customer Dispute-Award/Judgment" from 1984 to 1993.
- six "Customer Dispute - Settled" with nothing more recent than 1995
- one "Employment Separation After Allegations" by Painewebbrer in 1994
Frankly, as a body of work over some five decades, Taliaferro's BrokerCheck record presents a fairly common history of dings obtained by many reps. Moreover, nothing has happened in the 21st Century beyond whatever is involved with FINRA's July 2021 investigation. More to the point, Taliaferro's background was what it was when he was registered with Sutter Securities in January 2020 and with Sutter Capital Partners in January 2021 as disclosed on BrokerCheck.
The sole FINRA Arbitrator says that there "can be no quibble" about Section 8(a)(i) and 8(b), which apparently provide that an independent rep indemnify Sutter for costs arising from "a "liability" or "damage" or "claim" . . ." Next, the Arbitrator wonders whether "costs-against-commission offsets allowed under Section 6(c) also apply to claims for indemnification under Section 8. . . ." That thought piece comes off as akin to putting a cart before the horse because it's the first that Sections 6 and/or 8 are mentioned in the Award, which by the time you're reading the "FINDINGS" makes the exercise in contractual construction a tad awkward.
Having brought us to the point of confusion, the Arbitrator then explains that Section 6 has an "offset feature" but it does not "cross reference Section 8 or vice versa." Given that ambiguity, the Arbitrator declines to rewrite the Agreement and notes that he "cannot engraft such a provision on the parties' Agreement." I would have preferred that the Award presents the full text of Sections 6 and 8, so that I might follow along while playing the FINRA Arbitration home version. Making matters worse, the third-to-last paragraph of the Award suddenly introduces a reference to "Schedule A, which is referred to only in Section 6 -- not section 8 -- and lists the same type of operational costs and expenses. . ." Unfortunately, the Arbitrator places the reader in the uncomfortable position of having to take the adjudicator's word for lack of clarity in the drafting -- which, okay, that's what his role as a trier-in-fact is, so I'm not all that unhappy, but, regardless, this was a fascinating issue and I feel abandoned during the road trip.
In the first paragraph under "FINDINGS," the Arbitrator asks us to accept that Section 8 required Claimant Taliaferro to indemnify Sutter for costs/expenses incurred "in responding to the pending FINRA investigation . . ." Okay, fine, I'll accept the Arbitrator's finding on that point but maybe, just maybe, there could be some further coloring as to what "pending" FINRA investigation is referenced? The Arbitrator found that Section 6 provided for indemnification to Sutter of costs/expenses from Taliaferro calculated from an amount due Taliaferro "hereunder." The FINRA Arbitrator then found that the term "hereunder" was adrift in Section 6 and had not been connected to Section 8, or something like that. Truly, I don't quite understand the dots that the Arbitrator connected or the image that he envisioned from connected those dots. I sense that the Arbitrator got it right but it's more of a feeling rather than a conviction because I don't understand the explanations. It may well be that the Agreement is so poorly drafted that the Arbitrator experienced the same confusion that I am now experiencing -- and if that's the case, well, okay, confusion breeds confusion.
So, as best I understand the Arbitrator's findings (and I'm not quite sure that I do), there was a $50,000 offset taken by Sutter by way of indemnification. Okay, I'll believe that but, oddly, the only actual reference to this $50,000 in the Award is that: "$50,000 shall be released to Claimant without further delay." Movin' along here, Sutter apparently believed that the $50,000 was a proper indemnification payment obtained in the roundabout fashion of the firm offsetting Taliaferro's commissions/fees. As the Arbitrator saw it, Sutter could have deducted the $50,000 from Taliaferro's commissions pursuant to Section 6 to the extent that the offset involved Taliaferro's business expenses in contradistinction to "expenses Respondents incur defending third party claims resulting from Claimant's activities. . . ." How did the Arbitrator reached that conclusion? Apparently by considering Schedule A "which is referred to only in Section 6 -- not section 8." Oh my, who's on first? Schedule A? No, Section 6. Who's on second? I dunno, Section 8. Why? Because.