January 12, 2022
In a recent regulatory settlement, FINRA charged an industry respondent with violating FINRA Rule 3220's limit of a $100 gift. You'd think that with such a hard dollar amount that the published regulatory settlement would have alleged the value of the cited gift. Making matters worse, the gift in question involved a defaulted bond. How much is a defaulted bond worth? According to the settlement: "still well beyond the gift limit allowed by FINRA Rule 3220." That's a ridiculous allegation to be found in a final, FINRA, regulatory, settlement document -- "well beyond?" Are you serious? What's next? Charging folks with "a lot" or "often?"
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, Phillip Jenns Myers submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Phillip Jenns Myers, Respondent (FINRA AWC 2020067759601)
The AWC asserts that Phillip Jenns Myers entered the industry in 1986 and that by 1989 he was registered with American Investors Group, Inc., which the AWC further characterizes as a FINRA member firm owned by Myers and for which he is its President. The AWC asserts that Myers ended his registration with American Investors Group in July 2020.
$100 Per Individual Per Year
Let's start with a brief consideration of the FINRA rule that will be summoned up in the Myers AWC:
FINRA Rule 3220: Influencing or Rewarding Employees of Others
(a) No member or person associated with a member shall, directly or indirectly, give or permit to be given anything of value, including gratuities, in excess of one hundred dollars per individual per year to any person, principal, proprietor, employee, agent or representative of another person where such payment or gratuity is in relation to the business of the employer of the recipient of the payment or gratuity. A gift of any kind is considered a gratuity.
(b) This Rule shall not apply to contracts of employment with or to compensation for services rendered by persons enumerated in paragraph (a) provided that there is in existence prior to the time of employment or before the services are rendered, a written agreement between the member and the person who is to be employed to perform such services. Such agreement shall include the nature of the proposed employment, the amount of the proposed compensation, and the written consent of such person's employer or principal.
(c) A separate record of all payments or gratuities in any amount known to the member, the employment agreement referred to in paragraph (b) and any employment compensation paid as a result thereof shall be retained by the member for the period specified by SEA Rule 17a-4.
The 2015 Gift of Defaulted Church Bonds
And now we return to the plight of Respondent Myers, who, according to the allegations in the AWC:
In July 2015, Myers provided a gift of church bonds with a face value of $100,000 to an
employee of the bank that served as trustee. While the bonds had a face value of
$100,000, they were in default at the time and the market value was likely much lower
although still well beyond the gift limit allowed by FINRA Rule 3220. Myers provided
the bonds as a gift in recognition of the services the employee had provided on an
American Investors' church bond project.
Apparently, FINRA takes this church bond stuff seriously. As asserted in the Myers AWC:
American Investors' primary business was originating and selling certain illiquid
investments, commonly known as "church bonds," on behalf of religious organizations.
The church bonds used a trustee to monitor compliance with provisions of the trust
indenture, collect and maintain records, collect payments and distribute payments of
interest and principal, and bring default proceedings, if necessary. A bank served as the
trustee on church bonds originated by American Investors.
In accordance with the terms of the AWC, FINRA found that Myers had violated FINRA Rules 3220 and 2010, and the self-regulatory-organization imposed upon him a two-month suspension from associating with any FINRA member in all capacities and a $5,000 "deferred" fine, which is only due and payable should Myers re-associate with a member firm or seek relief from some statutory disqualification.
SIDE BAR: FINRA's online BrokerCheck database as of January 12, 2022, discloses that Myers had 34 years of industry experience and has not been registered with any FINRA member firm since July 2020, which is 17 months ago.
Bill Singer's Comment
In an industry where there far too much cash is thrown around in furtherance of often dubious efforts to "motivate" folks to buy/recommend questionable investment products, I'm onboard with FINRA Rule 3220. What Wall Street likes to call a "gift" often looks a helluva a lot like a bribe. Notwithstanding, the Myers AWC raises some disconcerting regulatory issues.
My father's father came to this country around the turn of the 20th Century and purchased thousands of Russian bonds (in rubles) and German bonds (in marks) before the United States entered World War I. As family lore told the story, my grandfather thought that he would make a killing with these investments. The rubles and marks didn't come rolling in and the Czar and Kaiser didn't hang around to pay off their debts. All of which explains why I have a lovely framed collection of some breathtakingly pretty Russian and German bonds -- they are quite the works of art! Frankly, if the Czar or Kaiser ever come back and agree to repay their debt, I may cease writing this Blog. Until then, I'm not quitting my day jobs.
Speaking of repudiated and defaulted bonds, what are we to make of Meyers' gift of church bonds with "a face value of $100,000" and the invocation of Rule 3220? More to the point, what's the discount to face-value of such bonds that the Myers AWC notes "were in default at the time and the market valued was likely much lower"? Okay, sure, I'll ask the question: What's the "value" of a defaulted bond? Not the "possible" value. Not the "potential" value. But the actual value as independently appraised. And not an independent appraisal as of 2013 or 2014 or 2021 or 2022 but, you know, as of the relevant date of July 2015 when Myers gave a bank trustee the gift at issue. See if you can find that all-critical fact in the Myers AWC. I can't.
Seems to me that when FINRA goes to all the effort of drafting a rule that prohibits aggregate gifts within a year with a value "in excess of one hundred dollars," that the self-regulatory-organization takes on the obligation when charging a violation of Rule 3220, to allege the "value" of the gift at issue. The Myers AWC only tags Myers' gifted bond as having a value "still well beyond the gift limit allowed by FINRA Rule 3220." That's a ridiculous allegation to be found in a final, FINRA, regulatory, settlement document -- "well beyond?" Are you serious? What's next? Charging folks with "a lot" or "often?"
I fully appreciate that the Myers AWC discloses that Myers was represented by legal counsel when negotiating and executing his AWC. More in FINRA's favor, Myers opted to enter into the very settlement that I am now raising questions about -- frankly, if he had no problem signing off on the fine and suspension, it's not my place to second guess him, and I won't, and I'm not. My complaint is not whether he should have settled but what we ought to expect by way of FINRA's regulatory obligation to publish settlements that tick off the boxes as outlined in a given rule. Rule 3220 doesn't say anything about "well beyond" $100 or "just a tad over." The threshold of $100 is likely the single most important aspect of the rule. For godsakes, how could FINRA not feel compelled to either cite its independent valuation of the defaulted church bonds or insert such a dollar value into the AWC, and then require Myers to concur?
On behalf of all the future Respondents who will likely be impacted by the regulatory razzle dazzle of the Myers AWC, permit me to argue that there is no real value to a defaulted bond. There "could" be some value if the default is undone. Someone "might" be willing to buy someone's defaulted bond given a super-duper-cheap price -- one need only consider the recent gambit with Argentinian and Puerto Rican bonds. Whatever the myriad of possibilities if and when a default is undone, it's difficult to place an independent value on such a financial product absent a bid for the requisite size of the transaction being cited. If FINRA managed to locate bids for the defaulted church bonds, I would think that as a matter of fairness and integrity, the regulator would at least footnote such a reference point.