March 29, 2023
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.
2016 to 2020: 586 Errant Codes
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.
SIDE BAR: During the roughly 42 months in the 2016 - 2020 span, Prince placed 586 trades, or, about 14 trades per month using what seems to be his individual production code. In undertaking to credit the 586 trades to this apparently individual code, Prince manually overrode the pre-populated Joint Code. The individual code apparently provided a higher commission percentage to Prince than the Joint Code; and the trades so allocated excluded the retired rep from the commission stream.
- Note that the AWC paragraph cited above does not allege that Prince knew that he was wrongfully redirecting joint trades into a non-joint number.
- As such, the AWC does not rule out the possibility that Prince redirected the trades from the Joint Number because he sincerely thought he had earned the commissions outside of the arrangement with the retired rep.
- Further, it does not appear that Prince redirected all trades that would have been eligible for the joint code.
- Finally, since the underlying agreement between Prince and the retired rep was entered into in July 2016 and the first allegedly errant trade was in August 2016, that strongly suggests a misunderstanding by Prince from day one.
The AWC offers an important concession in favor of Prince:
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.
$17,000 in Restitution to Retired Rep
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.
SIDE BAR: Putting things in perspective the 586 trades at issue purportedly should have earned the retired rep $17,000, or $29 per trade. Over the 42 months span, that's about $405 a month or $4,860 per year. Is $405 a month enough to persuade you that FINRA needed to get into such a lather as to investigate Prince, threaten to file a Complaint against him, pursue settlement negotiations, and conclude this affair with a fine and suspension? Was that the best use of FINRA's investigative and legal staff?
So It Is Written. So It Shall Be.
By falsifying the representative code on the 586 trades, Prince violated FINRA Rule 2010. In addition, Prince violated FINRA Rules 4511 and 2010 by causing Morgan Stanley to maintain inaccurate trade confirmations.
Bill Singer's Comment
And now we come to the problem that I have with this AWC. First, the AWC alleges that "Prince mistakenly believed that the retired representative had previously agreed that he could change the representative codes . . ." Thereafter, the AWC makes the quantum leap to the allegation that Prince had falsified the changed code? As I read FINRA's own allegations and assertions in the AWC, a fairer charge would have been that Prince "unintentionally" falsified or "inadvertently" falsified -- and I don't even think that such diluted charges are warranted based upon FINRA's fact pattern.
If FINRA's entire case is predicated on the regulator's finding that Prince mistakenly, unintentionally, inadvertently mis-allocated trades from a joint to an individual production code, then shame on FINRA and my apologies to Prince.
If FINRA's case is not based upon such a shameful bit of heavy-handed regulation, then the AWC should have offered some explanation as to how the regulator transitioned from conceding that Prince had "mistakenly believed" his override of the joint code was acceptable to an allegation that he had been "falsifying the representative code on the 586 trades." FINRA alleges that it would have been prudent for Prince to confirm his belief with the retired rep; but that musing by FINRA does not alter the fact that at the times when Prince entered the cited trades, he was not intending to wrongfully deprive the other rep of commissions.
I'm not going to question why Prince settled FINRA's charges because I don't know what I don't know, and the AWC may not be disclosing allegations/assertions that were left out of the final, published document via settlement discussions. More to the point, if Prince is happy with the terms of the AWC, then it's not my place to second guess him or his lawyer. For all I know, the AWC is a significant victory (of sorts) for Prince. Regardless, I don't like the Prince AWC because it comes off as punitive. Just as FINRA chastised Prince for not confirming his belief, I would chastise FINRA for not explaining why a mere mistaken belief requires a sanction of both a fine and a suspension. Just how does a three-month suspension address the issue of a mistaken belief -- and, seriously -- THREE months for what?
Ultimately, Prince's conduct may be mistaken but FINRA's seems shameful.
Securities Industry Commentator: A legal, regulatory, and compliance feed curated by veteran Wall Street lawyer Bill Singer https://www.rrbdlaw.com/6958/securities-industry-commentator/
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