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To Err Is Human, To Forgive Is Not FINRA's Concern
May 4, 2022
In "An Essay on Criticism," Alexander Pope famously wrote that "To err is human, to forgive divine." Erring is something that we all do with regularity accompanied by regret and followed by more errors. As the poet said, to err is human, and an indelible aspect of our humanity is our unending ability to make mistakes. As to the forgiveness of our errors, alas, that is left to Divine Providence; and, frankly, when it comes to our financial markets, it's more about the Dark Side. In a recent FINRA regulatory settlement, we are presented with full-blown humanity and very little divinity.
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, Richard Matthew Brendza submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.
In the Matter of Richard Matthew Brendza, Respondent (FINRA AWC 2018058614301)
https://www.finra.org/sites/default/files/fda_documents/2018058614301
https://www.finra.org/sites/default/files/fda_documents/2018058614301
%20Richard%20Matthew%20Brendza%20CRD%201703194%20AWC%20va.pdf
The AWC asserts that Richard Matthew Brendza was first registered in 1992 and by 2009, he was registered with Morgan Stanley. In part, the AWC alleges that:
In approximately October 2012, Brendza entered into an agreement through which 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) that he shared with a representative who was planning on retiring in several years (Representative 1) and an active representative who was part of Brendza's team and who is an immediate family member of Brendza (Representative 2). The agreement set forth what percentages of the commissions each representative would earn on trades placed using the applicable joint representative code. In February 2014, the parties amended the agreement in writing to provide Brendza and Representative 2 with higher percentages of commissions earned for trades placed using the joint representative code than what was set forth the original agreement.From March 2015 through February 2018, Brendza placed 380 trades in accounts that were covered by the amended agreement using a representative code other than the one he should have used pursuant to the amended agreement.2 Specifically, although the firm's system correctly prepopulated the trades with the applicable joint representative code, Brendza changed the code for the trades to a different joint representative code that he shared only with Representative 2. As a result of Brendza's actions, Brendza and Representative 2 received higher commissions from the 380 trades than what they were entitled to receive pursuant to the amended agreement with Representative 1.Brendza did not ask Representative 1 whether he could change the code on the 380 trades at issue and did not otherwise indicate to him that he was doing so. Brendza mistakenly believed that Representative 1 had agreed that he could change the representative code so that Brendza and Representative 2 would receive even higher percentages of commissions than what was set forth in the amended agreement. In fact, Representative 1 had not agreed that Brendza could change the representative code. The firm's trade confirmations for the 380 trades inaccurately reflected the representative code that Brendza shared with Representative 2 alone.In September 2018, Morgan Stanley paid restitution to Representative 1. Brendza, together with Representative 2, reimbursed the firm a total of approximately $275,000, which Is the approximate amount of additional commissions that they received from the 1,147 trades as a result of Brendza and Representative 2 falsifying the representative code on the trades.= = =Footnote 2: Representative 2 separately placed 762 trades in accounts that were covered by the amended agreement using a representative code other than the one he should have used pursuant to the amended agreement.
FINRA Sanctions
In accordance with the terms of the AWC, FINRA found that by falsifying the representative code on the 380 trades, Brendza violated FINRA Rule 2010; and, further, by causing Morgan Stanley to maintain inaccurate trade confirmations, he violated FlNRA Rules 4511 and 2010. FINRA imposed upon Brendza a $5,000 fine and a six-month suspension from associating with any FINRA member in all capacities.
I opted to resort to the rather lengthy citation from the Brendza AWC in an abundance of caution to ensure that I was not accused of spinning or misstating the facts. You know, I didn't want to make an error, if I could help it.
In a nutshell, a decade ago in 2012, Brendza entered into the joint production arrangement among himself, Representative 1 (who was planning on retiring "in several years"), and Representative 2 (a family member) -- said joint production agreement was modified in writing in 2014. During the roughly three years from March 2015 through February 2018, the AWC alleges that Brendza place 380 trades using joint production code he shared only with Representative 2. The AWC alleges that, in fact, the 380 trades should have been booked under the joint production number shared among Brendza, Representative 1, and Representative 2. Also noted in the AWC is that Representative 2 placed 762 trades via the wrong joint production code. Thereafter, in September 2018, about four years ago, Morgan Stanley paid Representative 1 the commissions that he was purportedly short-changed on and, in return, Brendza and Representative 2 reimbursed Morgan Stanley $275,000.
Truly I do not understand this FINRA regulatory action. Pointedly, the AWC unequivocally states in language of FINRA's choice that:
Again, that above-quoted sentence was not my wording but that of FINRA. Accordingly, the self-regulator is asserting that the full weight of FINRA Rule 2010 should be invoked and brought down upon Brendza's shoulders because . . . because . . . he mistakenly believed that the code changes at issue had been used subject to the consent of Representative 1. Further, FINRA resorted to regulatory sanctions despite the fact that Representative 1 was fully reimbursed -- ultimately out of the pockets of Brendza and Representative 2. Finally, the alleged misconduct occurred during 2015 through 2018, which, is about four to seven years ago.Brendza mistakenly believed that Representative 1 had agreed that he could change the representative code so that Brendza and Representative 2 would receive even higher percentages of commissions than what was set forth in the amended agreement.
For those of you unfamiliar with the exact wording of FINRA Rule 2010, let me share it with you:
As BrokeAndBroker.com readers know, I have long criticized FINRA's facile usage of Rule 2010: As in when the regulator doesn't like something and, geez, it's not actually a violation that, well, you know, fits into any specific Rule on our books, but, okay, we do have that catch-all Rule 2010, and, hey, why not stretch Rule 2010 to cover this alleged misconduct? In the case of Respondent Brendza, stretch away indeed!FINRA Rule 2010: Standards of Commercial Honor and Principles of TradeA member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
If at the end of a long regulatory day, the very best that FINRA can allege is that a human being "mistakenly believed" something, and that "something" served as the launching pad for a series of discomforting incidents, I'm not quite sure why such a set of circumstances doesn't merely warrant a reprimand or caution rather than a full-blown regulatory settlement replete with a six-month suspension and four-figure fine.
How the hell could a mistaken belief rise to the level of conduct that fails to observe high standards of commercial honor?
How the hell could a mistaken belief rise to the level of conduct that fails to observe high standards of equitable principles of trade?
How the hell does any human being avoid a mistaken belief?