FINRA NAC Fines and Suspends Rep For Paying Commissions to an Unregistered Person

After being terminated, SM continued to meet with his former brokerage and advisory clients. Gerhardt E. Buenning ("Buenning"), the owner of Western Wealth and the LPL branch, who was also Makkai's supervisor beginning November 1, 2017, permitted SM to continue to use an office there. All of SM's former brokerage and advisory customers had insurance business with SM. According to Buenning, the "understanding" with SM was to let him continue to use an office to service the insurance business but that SM "could not go over any of their investment accounts."Buenning knew that Makkai's schedule did not allow him to join all of SM's meetings with former customers. But because Buenning did not work out of the Greenwood Village office, he acknowledge that he was not "totally" sure that SM did not discuss investment matters with former customers.

[M]akkai agreed to this arrangement. In a written statement to FINRA during the investigation, Makkai explained that he felt "uncomfortable" and "a bit uneasy" keeping all the revenue from activity in the accounts. As Makkai put it, if he held on to the money, he would have received the benefit of SM's many years servicing the customers. Makkai wrote that he believed that keeping the commissions would also give him an "unfair advantage" in the negotiations to buy SM's book of business. As a gesture of goodwill" Makkai agreed to pay SM all the revenue generated by his former customers while they continued to negotiate an ultimate sale price and other terms for the book of business. SM agreed that Makkai could pay himself $1,000 per month ($4,000 over four months) from the commissions and fees. 

Makkai and SM could not agree on terms for the sale of SM's book of business. In November 2017, LPL personnel told Makkai and SM that SM's business was worth between $520,000 and $696,000. In late February 2018, SM sent Makkai a draft agreement with a proposed purchase price of $780,000. The contract SM had drafted also contained a promissory note obligating Makkai to make periodic payments. Makkai objected to signing a promissory note. Makkai testified that because he had his own existing clients and had recently purchased the business of another former registered representative, he was "at capacity," and "couldn't do everything that [he] needed to do to service everybody the way that they needed to be." He was also concerned that he could not sustain the high management fees that SM had been charging some of his more important clients, which reduced the attractiveness of the business to Makkai. 

After deciding he no longer was interested in SM's business, Makkai backed out of the negotiations by the end of March 2018. By this time, Makkai had made seven commission payments to SM totaling $27,037. Makkai did not ask SM to return any of the commissions that he had paid him. 

During this same time period, in early 2018, Makkai completed LPL's annual compliance questionnaire. In it, he certified that he had read LPL's WSPs and, specifically, that he understood that he was prohibited from "paying or otherwise directing transaction based compensation to another person without prior LPL approval." At the hearing, Makkai explained that he did not believe he was violating the firm's proscription because he was paying SM for his business, and did not think of the payments as constituting payments of commissions.

conducted an examination of the Greenwood Village branch in April 2018. During the examination, it learned from a whistleblower that Makkai was sharing commissions with an unregistered person. LPL then initiated an investigation to review Makkai's business practices and email communication

SIDE BAR: FINRA Rule 2040: Payments to Unregistered Persons

(a) General

No member or associated person shall, directly or indirectly, pay any compensation, fees, concessions, discounts, commissions or other allowances to:

(1) any person that is not registered as a broker-dealer under Section 15(a) of the Exchange Act but, by reason of receipt of any such payments and the activities related thereto, is required to be so registered under applicable federal securities laws and SEA rules and regulations; or

(2) any appropriately registered associated person unless such payment complies with all applicable federal securities laws, FINRA rules and SEA rules and regulations.

(b) Retiring Representatives

(1) A member may pay continuing commissions to a retiring registered representative of the member, after he or she ceases to be associated with such member, that are derived from accounts held for continuing customers of the retiring registered representative regardless of whether customer funds or securities are added to the accounts during the period of retirement, provided that:

(A) a bona fide contract between the member and the retiring registered representative providing for the payments was entered into in good faith while the person was a registered representative of the member and such contract, among other things, prohibits the retiring registered representative from soliciting new business, opening new accounts, or servicing the accounts generating the continuing commission payments; and

(B) the arrangement complies with applicable federal securities laws, SEA rules and regulations.

(2) The term "retiring registered representative," as used in this Rule shall mean an individual who retires from a member (including as a result of a total disability) and leaves the securities industry. In the case of death of the retiring registered representative, the retiring registered representative's beneficiary designated in the written contract or the retiring registered representative's estate if no beneficiary is so designated may be the beneficiary of the respective member's agreement with the deceased representative. . . .

Mr. Makkai agreed, in principle, to purchase the "book of business" of a terminated LPL Financial employee. However, at the time of the seller's termination, all of the seller's client relationships were transferred by LPL Financial to Mr. Makkai prior to a written agreement being signed by the parties. This created a drastic imbalance of negotiating power between the seller and Mr. Makkai. In an effort to address this imbalance, Mr. Makkai agreed to provide payments to the seller that were based on the revenue generated by the seller's "book of business". LPL Financial determined that these payments were "sharing of commissions and advisory fees with an unregistered person," whereas Mr. Makkai viewed them as part of the purchase of the seller's "book of business," which LPL Financial was aware of and helped support.

Under the circumstances of this case, and after considering Makkai's testimony and all the evidence before us, the Panel finds that LPL's termination of Makkai materially reduces the likelihood of further misconduct and mitigates the sanctions the Panel imposes. The Panel carefully considered Makkai's demeanor and his testimony concerning his decision to pay SM commissions. We find Makkai's explanations credible and mitigating-that he did not believe he was paying commissions per se but using his LPL compensation for the limited purpose of buying SM's business. We also credit Makkai's statements that he did not feel he was fairly entitled to keep the commissions so long as he and SM were still negotiating the terms of the contract.

Fun fact: Although the OHO Hearing Panel Decision anonymously names only "SM," inexplicably, the NAC Decision breaks the code and names the name:

LPL commenced a routine examination of one of its branch offices in late March 2018. During that examination, LPL received a call from a whistleblower who alleged that Makkai shared commissions with a representative, Scott Mason, whom LPL had earlier dismissed. . . .

at Page 2 of the NAC Decision

In this case, the evidence establishes that Makkai indirectly paid Mason more than $27,000 in securities transaction-based compensation, which comprised commissions LPL paid to Makkai for securities transactions effected for the accounts of Mason's former LPL brokerage customers. Makkai paid these sums to Mason during a four-month period-spanning late 2017 and early 2018-when Mason was not registered as a broker-dealer. By reason of his receipt of the commissions Makkai paid him, and the securities activities related thereto, Mason was required to be so registered under Section 15(a) of the Exchange Act. We therefore find that Makkai violated FINRA Rules 2040 and 2010 by paying securities transaction-based compensation to an unregistered person. Cf. Silver Leaf, 2020 FINRA Discip. Lexis 36, at *48 (finding FINRA member violated NASD Rule 2420 because it deposited securities transaction-based compensation into accounts owned by non-member entities, "and that is not allowed").

Finally, the commissions that Makkai shared with Mason were not, as required under FINRA Rule 2040(b), paid pursuant to a bona fide contract that was entered into while Mason was a registered representative of LPL. See FINRA Rule 2040(b)(1)(A). Although Makkai orally agreed to purchase Mason's business production around the time LPL dismissed Mason, Makkai and Mason continued to negotiate the terms of a formal purchase and sale agreement after Mason's dismissal. In this respect, Makkai viewed his oral agreement with Mason as an expression of his intention to buy Mason's book of business, but as he testified, "there wasn't a contract in place," and, indeed, Makkai subsequently changed his mind and walked away from the intended purchase without consequences. 

Moreover, even were we to find, which we do not, that Makkai's oral agreement to purchase Mason's book of business constituted a bona fide contract for purposes of FINRA Rule 2040(b), the commission payments that Makkai made to Mason were not, as Makkai now claims, made pursuant to this agreement.32 Makkai agreed to pay Mason the commissions generated by the accounts of Mason's former LPL brokerage customers sometime after he orally agreed to purchase Mason's book of business. Makkai voluntarily made these payments as a "gesture of goodwill," not pursuant to a binding agreement, and he intended them to stop once he and Mason executed a formal purchase and sale agreement for Mason's business production. Makkai and Mason thus never agreed that the commissions Makkai paid Mason would be treated as part of the purchase price that Makkai would pay Mason for acquiring his book of business. Consistent with this intention, when the sale was not consummated, Makkai never asked Mason to return any of the commissions Makkai had paid him.

[G]iven the record that confronts us, we conclude that Makkai must have known that his conduct represented an extreme departure from the standards of ordinary care that presented an obvious risk that his payments to Mason were improper, and that he thus, at a minimum, acted recklessly. 

Second, unlike the Hearing Panel, we do not find it mitigating that LPL dismissed Makkai for the same misconduct in which we find he engaged here. To receive mitigation for a member's prior termination of the respondent based on the same misconduct, the respondent has the burden to show that the member's termination of the respondent has materially reduced the likelihood of future misconduct by the respondent. In this respect, we have found prior termination by a member mitigating when a respondent has expressed true remorse and made credible assurances against future misconduct. . . .

We find the record here falls short of evidence showing that Makkai has expressed true remorse for his actions and provided credible assurances that he will not engage in similar misconduct in the future. See Doherty, 2020 FINRA Discip. LEXIS 29, at *17-18 ("Doherty has not demonstrated, and the record does not show, that BGC's termination of him has materially reduced the likelihood that he will engage in future misconduct."). Our independent review of the record shows that Makkai has taken no responsibility for his misconduct. He instead has repeatedly blamed LPL and his supervisor for not informing him that he could not pay Mason securities transaction-based compensation while Makkai and Mason negotiated a formal purchase and sale agreement for Mason's book of business. In his view, his dismissal by LPL was unwarranted and LPL should be held responsible for not preventing his acts of misconduct. We reject these blame-shifting arguments. See Abbondante, 58 S.E.C. at 1114. We conclude that Makkai's attempts to blame others for his misconduct calls into question whether he appreciates the seriousness of his misconduct and his responsibility to comply with high standards of commercial honor. See Edward S. Brokaw, Exchange Act Release No. 70883, 2013 SEC LEXIS 3583, at *44-45 (Nov. 15, 2013). 

We therefore conclude that a fine and period of suspension greater than those imposed by the Hearing Panel are appropriate in this case. While the record does not show that any customers were harmed because of Makkai's FINRA rule violations, we do not believe that the sanctions the Hearing Panel imposed capture the seriousness of Makkai's misconduct. The Exchange Act's registration requirements work to regulate the conduct of persons who receive securities transaction-based compensation and to protect against the types of abusive sales practices that can occur in an unregulated environment. They help to ensure that individuals, like Mason, who possess a "salesman's stake" in securities transactions operate according to the standards of conduct that govern the activities of broker-dealers and their associated persons for the purpose of protecting customers. By violating FINRA Rule 2040, Makkai deprived customers of these important protections and exposed them to the potential for abusive sales practices. The potential for abuse was apparent and of particular concern here because Makkai shared commissions with a person he knew LPL had dismissed for customer-related misconduct. In light of this, we depart from the Hearing Panel's decision and find it aggravating in this case that Makkai paid Mason a significant amount of securities transaction-based compensation on several occasions over an extended period of several months.

Dochtor D. Kennedy, Esq. https://advisorlawllc.com/executives/#doc; and 

Joshua Miller, Esq. https://advisorlawllc.com/executives/#joshua 

For the Complainant: John R. Baraniak, Jr., Esq., and Michael P. Manning, Esq., Department of Enforcement, Financial Industry Regulatory Authority.

For the Respondent: Dochtor D. Kennedy, Esq., and Joshua Miller, Esq.  

Office of Hearing Officers

Under Section 15A(b)(8) of the Securities Exchange Act of 1934, FINRA must provide a fair and impartial procedure for the disciplining of members, and persons associated with members, and the enforcement of FINRA's rules. Towards this end, FINRA formed the Office of Hearing Officers (OHO), which is an office of impartial adjudicators. OHO serves as FINRA's "courthouse" for disciplinary and expedited proceedings. . . .

The Initiation of Disciplinary and Expedited Proceedings

When the Department of Enforcement chooses to initiate a formal disciplinary action, it files a complaint with OHO and serves the complaint on the respondent. If the respondent files an answer to the complaint, OHO arranges a three-person hearing panel to hear the case. The panel is chaired by a Hearing Officer, an independent adjudicator who is an employee of OHO. The Chief Hearing Officer appoints two industry panelists, drawn from a pool of current and former securities industry members of FINRA's District and Regional Committees, current and former industry members of its Market Regulation Committee, former industry members of FINRA's National Adjudicatory Council (NAC), former FINRA Governors, and current and former members of FINRA's Board advisory committees.

Michael J. Dixon

Hearing Officer

For the Hearing Panel

FINRA Code of Procedure Rule 9331. Appointment of Subcommittee or Extended Proceeding Committee

(a) Appointment by National Adjudicatory Council

Following the filing of a notice of appeal pursuant to Rule 9311 or a notice of review pursuant to Rule 9312, the National Adjudicatory Council or the Review Subcommittee shall appoint a Subcommittee or an Extended Proceeding Committee to participate, subject to Rule 9345, in a disciplinary proceeding appealed or called for review.

(1) Subcommittee

Except as provided in subparagraph (2), for each disciplinary proceeding appealed or called for review, the National Adjudicatory Council or the Review Subcommittee shall appoint a Subcommittee to participate, subject to Rule 9345, in the appeal or review. A Subcommittee shall be composed of two or more persons who shall be current or former members of the National Adjudicatory Council or former Directors or Governors. . . .

FINRA Code of Procedure Rule 9348. Powers of the National Adjudicatory Council on Review

In any appeal or review proceeding pursuant to the Rule 9300 Series, the National Adjudicatory Council may affirm, dismiss, modify, or reverse with respect to each finding, or remand the disciplinary proceeding with instructions. The National Adjudicatory Council may affirm, modify, reverse, increase, or reduce any sanction (including the terms of any permanent cease and desist order), or impose any other fitting sanction.

For the Complainant: John R. Baraniak, Esq., Jennifer L. Crawford, Esq., Michael Manning, Esq., Department of Enforcement, Financial Industry Regulatory Authority 

For the Respondent: Dochtor Kennedy, Esq., Joseph P. Miller, Esq.

Jennifer Piorko Mitchell,

Vice President and Deputy Corporate Secretary

NAC Committee Members

Kevin Connaughton

Bentley University

Onnig H. Dombalagian

Tulane University Law School

W. Dennis Ferguson

Capital Investment Group, Inc.

Robert Keenan

St. Bernard Financial Services, Inc.

Christopher Lewis

Edward Jones

Honorable Doris Ling-Cohan

Retired

Veronica Root Martinez

Notre Dame Law School

Sarah McCafferty

Retired

Nancy Morris

Retired

Stephanie Mumford

T. Rowe Price Investment Services, Inc.

John O'Connell

Goldman Sachs

Lori A. Richards

Retired

Debra Roth

Morgan Stanley & Co.

Michelle Denise Thomas

WBB Securities, LLC

Heather Traeger

Teacher Retirement System of Texas

[W]e find the record here falls short of evidence showing that Makkai has expressed true remorse for his actions and provided credible assurances that he will not engage in similar misconduct in the future. . . . We conclude that Makkai's attempts to blame others for his misconduct calls into question whether he appreciates the seriousness of his misconduct and his responsibility to comply with high standards of commercial honor. . . .

"Regulatory Events": Edward Jones: 76

From May 2017 to March 2021, Edward Jones failed to timely or completely produce certain phone records responsive to FINRA document requests in ten separate FINRA investigations. In certain responses during this period, the firm also inaccurately represented to FINRA that phone records older than 18 months were not available, even though that was not the case. The firm also failed to promptly alert FINRA once it learned of its production failures. By reason of the foregoing, Edward Jones violated FINRA Rules 8210 and 2010.

Whether realistic or merely imagined, the mere perception of bias or favoritism within any regulatory sphere is corrosive. In a recent regulatory settlement, FINRA, Wall Street's most important self-regulatory-organization, responds to the alleged misconduct of one its largest member firms, Edward D. Jones & Co., with tepid sanctions, among which is the laughable imposition of a Censure, which has virtually no impact and amounts to whipping someone with a wet noodle. Yes, FINRA also imposed a $1.1 million fine on the firm; except, that's about the cost of a day's worth of toilet paper for Edward Jones. In the end, this comes off less as effective regulation and more as a folded $10 bill in someone's palm that is then pressed, somewhat surreptitiously, into the receiving palm of someone else. All of which renders FINRA's approach to regulation as an act akin to tipping someone who gets you a better table at a busy restaurant. 

The Securities and Exchange Commission today announced charges against 15 broker-dealers and one affiliated investment adviser for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications. The firms admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, agreed to pay combined penalties of more than $1.1 billion, and have begun implementing improvements to their compliance policies and procedures to settle these matters.

READ: the Goldman Sachs SEC Order
https://www.sec.gov/litigation/admin/2022/34-95922.pdf, which in part alleges:

6. During the time period that Respondent failed to maintain and preserve off-channel communications its employees sent and received related to the broker-dealer's business, Goldman Sachs received and responded to Commission subpoenas for documents and records requests in numerous Commission investigations. As a result, Goldman Sachs's recordkeeping failures likely impacted the Commission's ability to carry out its regulatory functions and investigate violations of the federal securities laws across these investigations. 

• "Sexism On Wall Street: The Cowardly Silence Of FINRA's Board Of Governors" (BrokeAndBroker.com Blog / November 28, 2022)
  https://www.brokeandbroker.com/6770/finra-racism-sexism/

By way of preamble, this blog is about Goldman, Sachs & Co. and the Financial Industry Regulatory Authority's ("FINRA") Board of Governors. This is about a multinational investment bank and financial services company. This is about Wall Street's largest self-regulatory-organization. This is about a sexual discrimination Class Action filed in 2010 against Goldman Sachs. This is about a growing chorus of troubling, disturbing, unsettling allegations by female professionals against Goldman. This is about the appointment of the Goldman Sachs General Counsel to the FINRA Board of Governors. This is about the cowardly silence of FINRA's Board.

During the relevant period, Morgan Stanley's system that provided customers with rights of reinstatement benefits on eligible transactions was not reasonably designed in three respects. First, the system evaluated eligibility for rights of reinstatement benefits from the date of the sale's settlement as opposed to execution. Therefore, certain customers whose trades executed within the settlement window, i.e., a purchase before the sale settlement, did not receive rights of reinstatement benefits to which they were entitled. Second, the system contained an account-coding error that incorrectly excluded four qualified plan account types from receiving rights of reinstatement benefits. Third, between approximately October 2017 through December 2020, the outside vendor that the firm engaged to identify and provide CDSC-waivers on eligible transactions failed to process the rebates it identified for customers. 

As a result of its supervisory deficiencies, Morgan Stanley did not provide over 2,000 accounts with rights of reinstatement benefits to which they were entitled, and customers paid $802,483.47 in excess sales charges and fees. 

Therefore, Morgan Stanley violated FINRA Rules 3110 and 2010. 

Current Board Members

. . .

Industry Governors

Mortimer J. Buckley

Vanguard

James T. Crowley

Pershing Advisor Solutions LLC

Peggy Ho

Commonwealth Financial Network

Wendy Lanton

Herold & Lantern Investments, Inc.

Linde Murphy

M.E. Allison & Co., Inc.

James D. Nagengast

Securities America, Inc.

Penny Pennington

Edward Jones

Paige W. Pierce

Bley Investment Group, Inc.

Kathryn Ruemmler

Goldman Sachs & Co., LLC

Timothy C. Scheve

Janney Montgomery Scott LLC

• Finra
• OHO
• NAC Rule 2040
• Commissions
• Unregistered Person
• Star Chamber
• BrokeAndBroker
• Bill Singer