FINRA Sanctions Rep for Commissions Earned Under Joint Production Agreement

February 3, 2022

In yet another industry regulatory settlement, FINRA seems in a haste to collect a fine and, well, hey, let's just rush through the statement of facts so as to justify our sanctions and move on. All of which looks more like a speed trap on the Wall Street highway than fair regulation. Now, to be fair to FINRA, the stockbroker entered into the settlement and is apparently happy to do the time and pay the fine. All of which leaves it to me to act as the industry gadfly and grouse about something that no one else will bother to note.

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 Alva Foster submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Thomas Alva Foster was first registered in 1996, and by June 1, 2009, he was registered with FINRA member firm Morgan Stanley. In the Matter of Thomas Alva Foster, Respondent (FINRA AWC 2021071276801)

Joint Production Agreement

The AWC alleges that in June 2012, Respondent Foster entered into a joint production agreement with a retired representative whereby "he agreed to service certain customer accounts, including executing trades for those accounts, under a joint representative code (also known as a joint production number) . . ." Said Agreement provided for the apportioning of the percentages of commissions between the two parties but the precise terms are not set forth in the AWC.

150 Trades from 2013 to 2017

In pertinent part, the AWC alleges that:

From September 2013 through May 2017, Foster placed a total of 150 trades in accounts that were covered by the agreement using his own personal representative code. Specifically, although the firm's system correctly prepopulated the trades with the applicable joint representative code, Foster changed the code for the 150 trades to his personal representative code. Foster did so because he mistakenly believed that his agreement with the retired representative did not apply to new assets added to accounts subject to the agreement, and thus, he mistakenly believed he was authorized to enter the 150 trades using his personal representative code. The firm's trade confirmations for the 150 trades inaccurately reflected Foster's personal representative code.  

Just to slow-walk that a bit -- during the roughly four years cited from 2013 to 2017, when Foster entered trades in order to receive production credit, Morgan Stanley's trading interface apparently prepopulated the ticket with the joint representative code. The AWC alleges that Foster over-rode the default joint code for 150 trades to reflect his "personal representative code."  All of which sounds dickish -- except, if you read the AWC's recitation carefully, Foster's conduct does not come off venal or intentionally fraudulent.

Mistaken Belief

As the AWC explains,  Foster "mistakenly believed that his agreement with the retired representative did not apply to new assets added to accounts subject to the agreement, and thus, he mistakenly believed he was authorized to enter the 150 trades using his personal representative code." Or, as someone zealously advocating on Foster's behalf might argue, Foster thought that when he altered the default joint production code to his sole production code that he was not violating the joint production agreement because he did not believe that it covered "new assets" involving accounts covered under the agreement. Regardless of Foster's good-faith belief, FINRA alleges that his misunderstanding caused Morgan Stanley to maintain inaccurate trade confirmations in violation of FINRA Rules 4511 and 2010. As to the 150 trades at issue, the AWC alleges that Foster realized higher commissions than he was entitled to receive.

2021 Discharge

Online FINRA BrokerCheck disclosures as of February 3, 2022, disclose that "MSSB" "discharged" Foster on April 16, 2021, based upon allegations that:

Allegations that the representative submitted transactions under production numbers that were inconsistent with agreement with another representative resulting in a shortfall of revenue credited to the other representative. No client impact. 

Mind you, that above disclosure is the ONLY such item on Foster's BrokerCheck record after some 25 years in the industry!

FINRA Sanctions

In accordance with the terms of the AWC, FIRNA imposed upon Foster a $2,500 fine and one-month suspension from associating with any FINRA member in all capacities.

Bill Singer's Comment

How much in so-called excess commissions did Foster realize during his alleged four-year spree of over-riding the default joint production number?  Oddly -- infuriatingly -- the AWC doesn't allege that important dollar amount. In lieu of stating a critical aspect of its case, FINRA offers us this:

In May 2021, Foster reimbursed the firm $21,831, which was the approximate amount of additional commissions that he received as a result of his changing the representative code on the 150 trades.  

Yes, I understand that Foster reimbursed Morgan Stanley in the amount of $21,831 but it would be nice if the AWC specified the exact amount of "additional" commissions that FINRA had independently calculated. And let me be VERY clear as to my point here, Foster would have been entitled to earn some commissions on the 150 trades via his portion of the joint production agreement. As such, if there were, say, $42,000 in commissions generated by the 150 trades and the split was 50/50, Foster would have been entitled to $21,000 and the retired rep $21,000. What is unclear is if the $21,831 reimbursement paid by Foster to Morgan Stanley was the gross fee earned by the two reps covered under the joint agreement or, in the alternative, just Foster's portion of the gross fee, or, in the alternative, just the "excess" taken by Foster above-and-beyond what he was allegedly entitled to under the joint agreement. Also not stated in the AWC is whether Morgan Stanley's net commission was somehow altered by Foster's conduct. Frankly, it doesn't appear that the employer sustained any diminution in its net commission as a result of Foster's interpretation of how he should enter the production code for the 150 trades.

I mean for godsakes, Foster spent some 25 years in the biz and over the span of four years, FINRA is banging him up for 150 trades for which he seems to have allegedly been overpaid $21,831? Keep in mind that the 150 trades were not unauthorized. There is not even a passing reference to any customer complaint. Notably, there isn't even a suggestion that the retired rep had complained to Morgan Stanley and/or Foster. For all we know, the retired rep may have agreed with Foster's interpretation of "new" assets not being covered under the joint agreement -- or, if he had complained, the two reps cordially worked things out between them. By the way, did Morgan Stanley and/or Foster compensate the retired representative from the reimbursement paid to the firm by Foster? Again, an odd bit of fact to not disclose in this regulatory settlement.

Ultimately, this settlement makes no sense to me -- or, to be more accurate, I don't quite understand how the public interest is served by fining and suspend an industry veteran with an otherwise unblemished record because IN GOOD FAITH he believed that new assets from old accounts fell outside the joint production deal. And don't start arguing with me on that one point because that's how the AWC presents the case. There is not a whit of an allegation that Foster KNOWINGLY or INTENTIONALLY altered the joint number to his personal one as part of an effort to defraud his joint producer colleague and/or Morgan Stanley. In fact the AWC concedes that he acted because "he mistakenly believed" that his conduct was fully compliant with the terms of the agreement.