I make mistakes. You make mistakes. We all make mistakes. It's part of what makes us human. In a recent regulatory settlement, FINRA concedes that a rep "mistakenly believed" he could enter certain customers' trades under his individual rep number rather than a joint number. Notwithstanding the unintentional and inadvertent nature of the rep's mistaken conduct, FINRA still charged him with "falsifying the representative code," and then imposed both a fine and a suspension.
FINRA AWC Settlement: Fine and Suspension
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, Jeffrey L. Prince submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.
In the Matter of Jeffrey L. Prince, Respondent (FINRA AWC 2020068820401)
The AWC asserts that Jeffrey L. Prince was first registered in 1994; and from 2009 through November 2020, he was registered with Morgan Stanley. In accordance with the terms of the AWC, FINRA imposed upon Prince a $5,000 fine and a three-month suspension from associating with any FINRA member in all capacities.
2016 Joint Rep Code
As to what FINRA alleged that Prince had done warranting a fine and suspension, let's slowly walk through the pertinent paragraphs in the AWC (my comments are in the various "Side Bars"):
In July 2016, Prince 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 joint production number) that he shared with a retired representative. The agreement set forth what percentages of the commissions Prince and the retired representative earned on trades placed using the joint representative code.SIDE BAR: Nearly seven years ago, Prince entered into a joint rep number with a retired rep that split their respective commissions pursuant to an Agreement.
From August 2016 through February 2020, Prince placed 586 trades in accounts that were covered by the agreement using a representative code other than the one he should have used. Specifically, although Morgan Stanley's system correctly prepopulated the trades with the joint representative code Prince shared with the retired representative pursuant to the joint production agreement, Prince entered the transactions under a different representative code that he shared with the retired representative. As a result, Morgan Stanley's trade confirmations for the trades reflected an inaccurate representative code, and Prince received a higher percentage of commissions than what he was entitled to receive pursuant to the joint production agreement.
Prince mistakenly believed that the retired representative had previously agreed that he could change the representative codes so that Prince would receive higher percentages of commissions than what was set forth in the agreement. However, Prince did not do anything to confirm his understanding, such as asking the retired representative whether he could change the representative codes on the 586 trades at issue or speaking with Morgan Stanley.SIDE BAR: Notably, this paragraph concedes that the redirected trades were the byproduct of a mistaken belief by Prince that the retired rep was on board with the non-allocation of the trades at issue to the Joint Number. The AWC then alleges that Prince did nothing to confirm his understanding. That sort of puzzles me. If you are convinced as to your understanding about X, you would not necessarily think that there would be a reason to "confirm" what you believe about X is correct. For example, I believe in the Law of Gravity. As such, when I awake every morning, I believe that the Law of Gravity is still in existence; and, as such, I don't confirm my understanding by throwing a slipper on the floor before getting out of bed, just to ensure that the slipper doesn't float up to the ceiling. As to Prince, let's keep in mind that for some 42 months via 14 redirected trades each month, Morgan Stanley and the retired rep confirmed his "belief" that his overrides of the joint production code were appropriate because no one contemporaneously questioned his conduct.
In December 2020, Morgan Stanley paid restitution of approximately $17,000 to the retired representative, which is the approximate amount of additional commissions that should have been credited to the retired representative if Prince had not changed the representative code on the 586 trades.
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