An irreverent Wall Street Blog
FINRA Bars Top Producer For Charging Commissions Instead Of Fees
August 3, 2015
The war continues between those advocating the registered
investment advisor model and those proponents of the broker-dealer model. One
battleground brings into play the dynamics of charging customers a
transaction-based commission versus an assets-based fee. On another
battlefield, we witness volleys over whether industry professionals should be
handling customer accounts according to the dictates of the
Suitability Rule versus the Fiduciary
Rule. In a recent FINRA regulatory settlement, we see one registered
representative waive the white flag in the face of the regulator's frontal
assault on his position to conduct a largely commission-only business when it
seems that a fee structure would have been fairer to many of his customers.
Case In
Point
The Buck
Group
The AWC asserts that from
October 1981 until April 2015, Buck conducted business with 15 to 20 other
registered and unregistered persons as "The Buck Group," whose customers
consisted of over 3,000 customer accounts (about 800
households) with $1.3 billion in assets under management. Starting as
late as 2009, The Buck Group allegedly generated from $6 to $10 million in
annual revenues, of which about 85% was derived from Buck's personal
production. The AWC asserts that some 80% of Buck's production was
commission-based activity (in contradistinction to fee-based).
Passing The Suitability
Buck
The AWC asserts that beginning
no later than 2009, Buck had failed to fully assess the suitability of offering
his customers' a fee-based structure. The AWC asserts that when Buck opted
to service his customers on a commission basis,
he knew that in some instances the alternative fee-based
structure would have been less expensive for customers. Further, the AWC
alleges that Buck misled customers about the potential advantages of a fee
structure. During the relevant times, the AWC asserts that the applicable fees
were about 1 to 1 1/2 % of the account
value.
The Buck Stops
Here
According to online FINRA
BrokerCheck records as of August 3, 2015, Merril Lynch
"Discharged" Brown on March 4, 2015, based
upon:
ALLEGATIONS INCLUDING FAILING TO DISCUSS SERVICE LEVEL AND PRICING ALTERNATIVES WITH A CUSTOMER, PROVIDING INACCURATE INFORMATION TO FIRM MANAGEMENT DURING ACCOUNT REVIEWS REGARDING THIS ISSUE, MISMARKING BOND CROSS TRADE ORDER TICKETS AS UNSOLICITED, AND PROVIDING INFORMATION TO A CLIENT DURING AN ACTIVE ACCOUNT REVIEW THAT DID NOT CORRESPOND TO THE FIRM'S RECORDS
FINRA asserted that Buck engaged
in unethical business practices, unauthorized trading, and unauthorized
discretion. Pointedly, FINRA deemed that Buck had
willfully committed fraud in violation of
Section 10(b) of the Securities Exchange Act of 1934 (Rule 10b-5 thereunder) and violated FINRA Rules 2010 and
2020.
In accordance with the terms of
the AWC, FINRA imposed upon Buck a Bar from association with
any member in any capacity. The AWC includes the following
provision:
I also understand that this settlement includes a finding that I willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and that under Article III, Section 4 of FINRA's By-Laws, this makes me subject to a statutory disqualification with respect to association with a member.
Bill Singer's
Comment
So lemme see if I sort of get
the gist of one aspect of this AWC. FINRA asserts that way back in 2009, some
six years ago, Buck should have known that charging commissions rather than a
fee was unfair to his customers. And in presenting the scope of the
respondent's transgressions, FINRA explains that the Buck Group -- a
long-standing production team, if you will --- had over $1 Billion in assets
spread over 3,000 accounts. That impressive group was bringing in between $6
and $10 million per year to Merrill
Lynch.
Umm . . . you know . . . just
out of curiosity, during all those years when those big Buck bucks were rolling
in to Merrill, did the firm ever do its own due diligence and chastise its
mega-producer about both commissions and suitability? I would have liked to know that background in
weighing FINRA's ire with Buck. I mean,
c'mon now, if this commission-based business warrants the ultimate sanction
upon Buck's head, how is it that there's nary a word in this AWC about his
employer's oversight (or possible lack
thereof).
To disclose my own personal bias
as is well-documented in my commentaries over the years, I am an unabashed
advocate of the Fiduciary Rule and often prefer fee-based
compensation. Moreover, I have often called for the right for registered
representatives to propose to their customers a profit-sharing compensation
subject to an equitable offset for losses incurred in the account. In my
opinion, the brokerage commission system is not only unfair to many customers
but it also forces many men and women stockbrokers to pursue careers as shills
pressing their customers to engage in more frequent activity rather than
investment professionals working with their customers to maintain assets and
enhance return.
What FINRA fails to acknowledge
in these types of regulatory cases is that folks such as Buck are captive to an
industry model that FINRA too often serves to perpetuate. Regardless of what the big guns at FINRA and
that self-regulatory organization's supporters may proclaim, I continue to view
the organization as little more than a glorified trade organization that
largely seeks to preserve the interests of its larger member firms. In the Buck
settlement, I sympathize with his customers given my antipathy for the
commission model.
What exactly did FINRA imagine
would happen if this big producer waltzed into Merrill's headquarters and
announced that he was moving all his business into a fee-only model? You think
he would have been welcomed with open arms and kisses on both cheeks? Do you
recall how in December 2008, Merrill
somehow found just shy of $4 billion o pay lavish bonuses (using a chunk of
TARP funds) on the eve of the broker-dealer's acquisition by Bank of America? Should I remind
you that 2009 marked the full onset of the Great
Recession?