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Bond Parking For Net Capital Benefit Disqualifies Brokerage Executive
July 30, 2015
Wall Street is the financial capital of
legerdemain, which is a fancy term for "sleight of hand." I mean,
c'mon, what lawyer isn't going to use a fancy-schmanzy ten-dollar word instead
of a penny-ante one? Whether it's high-stakes trading or cooking the books,
many brokerage firms are master prestidigitators (okay, I'm tossing in that
expensive word for free!). When it comes
to moving assets, hiding trades, and otherwise altering books and records, many
industry firms seem to feel that they're hustling on a street corner. Every so
often, however, the marks in the crowd turn out to be savvy regulators who spot
the Ace of Spades or figure out where the pea is actually hidden. Here is one
such bit of detective work by FINRA.
Case In
Point
During the times relevant to
this matter, Respondent Bunevich was registered wih FINRA member firm
Fieldstone Services Corp. The AWC asserts that Bunevich had no prior relevant
disciplinary history.
SIDE BAR: Online FINRA BrokerCheck records as of July 30, 2015, disclose that Bunevich was first registered in 1987.
FINRA Net Capital
Investigation
The AWC asserts that the Fixed
Income Investigations Team of FINRA's Department of Market Regulation had
conducted a review of Fieldstone Services and certain of the firm's registered
representatives concerning the firm's Net Capital requirements for July 1,
2009, through December 31, 2009. In
connection with that New Capital investigation, the AWC asserts that Bunevich
was one of three Fieldstone executives (the "Executives") who were
responsible for the Net Capital requirements of the trading activity of the Executives
and their employees."
CIT
Position
During the review period,
FINRA's Staff apparently determined that Fieldstone had established a
substantial position in CIT high-risk internote bonds but the firm failed to
maintain sufficient Net Capital for the purchase and attendant haircut for the
position. As a consequence, the AWC asserts that the firm carried an overnight
position on August 3, 2009, of $3,002,468.32 in the CIT bonds.
Spreading the
Risk
The AWC asserts that around
August 5, 2009, the Executives agreed to move the CIT bond position into their
personal accounts as a means of avoiding further Net Capital deficiencies; and,
on August 7, 2009, 2,676 CIT bonds were transferred to the three personal
accounts of the Executives through 56 transactions that evenly allocated the
position.
Not Bona Fide
Pricing
The AWC asserts that the
execution prices for the 56 trades were not bona fide because the prices for
the transfers were the same at which the firm had originally purchased the
bonds and did not reflect the current market price. The transfer of
the CIT position from Fieldstone to the personal accounts of the Executives
purportedly eliminated the firm's Net Capital deficiency. The AWC asserts that
each of the three Executives had agreed to hold their allocation of the
transferred bonds for "a period of time before re-selling the securities back"
to the firm.
Notably, the AWC concedes that
Respondent Bunevich was not the executing Executive, was not informed by that
individual of the prices used to post the trades, and was not informed of
"other trade details," at the time of the transactions.
Parking
The AWC alleges that the
transfers constituted a violation of SEC Rule 15c3-1 because it constituted
"Parking" rather than a bona fide transaction; and, therefore, constituted
further violation of FINRA Rule 2010. Pointedly,
the AWC alleged that Bunevich "willfully caused a violation of SEC Rule
15c3-1."
Sanctions
In accordance with the terms of
the AWC, FINRA imposed upon Bunevich a $47,500 fine and a six-month suspension
in all capacities. Further set forth in the AWC is this provision:
Respondent understands that this settlement includes a finding that Respondent willfully violated SEC Rule 15c3-1 of the Securities Exchange Act of 1934 and that under Article III, Section 4 of FINRA's By-Laws, this makes Respondent subject to a statutory disqualification with respect to association with a member.
Bill Singer's Comment
Compliments to FINRA on a strong
AWC replete with substantive facts and a sound rationale.
If I have one quibble, it would
be to more fully explain why Bunevich became statutorily disqualified based
upon the allegation that she had willfully caused a
violation of Rule 15c3-1.
Yes -- I know that's what is
asserted in the AWC but it comes off as a bit conclusory and somewhat
contradictory. Clearly, parking the CIT
position was a serious violation. What I am struggling with is the AWC's
concession as to Bunevich's somewhat limited role in the execution, pricing,
and mechanics of the transfer of the position from the firm to the Executives'
personal accounts. If, in fact, she was
unaware of the mechanics of the transfers, then that might have resulted in
exculpation or mitigation. My guess is that FINRA was troubled by Bunevich
complicity in the overall undertaking to park the bonds, even if she was
unaware of the actual steps along that path. To that extent, I concur with the
self-regulatory organization but would suggest that a bit more explanation
would have better supported the disqualifying characterization of
"willfulness." Notwithstanding that one reservation, this was an
excellent AWC.