The Stockbroker, Her Cancer Patient Friend and Customer, And The Estate Complaint

August 10, 2016

A stockbroker and a client start out as customers but then develop a friendship. The customer is diagnosed with cancer. The stockbroker organizes a support group for her client and friend. It all starts off as a lovely, heartwarming story. It doesn't quite end well. What occurred in the middle is subject to interpretation. Was this a case of the best of intentions being misinterpreted and misunderstood? Was this a case of someone trying to take advantage? Frankly, it's not an easy set of facts to confront or interpret. What is clear, however, is that there were policies, rules, and regulations that, if followed, may have avoided a lot of grief.

Case In Point

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, Janet K. Redman submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Janet K. Redman, Respondent (AWC 2015046639201, August 1, 2016).

Redman was first registered in 2008 with FINRA member firm Merrill Lynch Pierce, Fenner and Smith, Inc., and in February 2013, she registered with Wells Fargo Advisors Financial Network, LLC. The AWC asserts that Redman had no prior relevant disciplinary history.

Customer GK

The AWC asserts that in December 2010, Redman began servicing the account of a Merrill Lynch customer, who is identified only as "GK." The AWC explains that:

[R]edman subsequently developed a personal friendship with GK and, when GK was diagnosed with cancer in the fall of 2011, Redman organized a support group to manage GK's medical treatment appointments and daily tasks.

The AWC asserts that in February 2012, GK added Redman as a beneficiary to her personal bank accounts via "payable on death" designations. In April 2012, GK also named Redman as:

her health-care directive power of attorney,
an executrix of her will, and
a beneficiary of her residual estate.

Merrill Lynch Compliance Policies

The AWC asserts that during the term of Redman's employment with Merrill Lynch, that the firm prohibited its registered representatives from:

acting in any fiduciary position, including being named executor of a will or holding a power of attorney, for the benefit of any person other than a family member. Those firm procedures also prohibited a registered representative from being named a beneficiary or accepting a gift under a client's will or trust, and required prior approval of any financial involvement between the representative and a client that was not part of the representative's normal duties.

Although Redman purportedly discussed her disclosure obligations with an unregistered co-worker, she did not seek guidance from anyone in either a supervisory or compliance role at Merrill Lynch. Moreover, Redman had signed written acknowledgments of the three appointed roles cited above but never disclose those appointments to Merrill Lynch.

In March 2012, Redman responded ''NO" to questions in a Merrill Lynch questionnaire asking whether she:

was aware that she had been named as a beneficiary, executor, or trustee of any client's estate, will or trust; and
shared in any accounts with any non-familial clients.

Joining Wells Fargo

In February 2013, Redman left Merrill Lynch and joined Wells Fargo. The AWC alleges that GK transferred her Merrill Lynch accounts to Wells Fargo. At the time of these transfers, Wells Fargo's supervisor policies generally mirrored the prohibitions against registered reps acceptiong beneficiary/fiduciary roles, and against acception gifts from a client's will/trust without prior approval. Notwithstanding the supervisory policies and procedures, the AWC asserts that Redman did not disclose her appointed roles to Wells Fargo and never sought guidance from anyone at the new firm concerning the relevant issues.

In November 2014 and July 2015, Redman responded with a "NO" to questions on Wells Fargo compliance questionnaires asking if she:

was a beneficiary on the will of any non-familial client;
had received any gift of over $200 from a customer or any funds from the will or trust of a non-familial client;
acted in a fiduciary capacity on the account of any non-familial client; and
failed to disclose anything in response to a request to disclose all current fiduciary responsibilities and relationships with clients.

Death of GK

Upon GK's death in January 2015, the AWC alleges that Redman became entitled to the $93,872.66 balance of GK's personal bank accounts as the "payable on death" beneficiary. The AWC asserts that Redman "failed to disclose her receipt of these funds to her employer firm.'

Estate Complaint

In September 2015, after receiving a complaint from GK's estate, Wells Fargo directed Redman to return GK's funds. Redman complied with her employer's request and renounced her status as a residuary beneficiary.

SIDE BAR: Under the heading of "Customer Dispute Closed-No Action / Withdrawn / Dismissed / Denied" on Redman's online FINRA BrokerCheck records as of August 10, 2016, Wells Fargo indicated its receipt on July 20, 2015, of a customer complaint alleging:

EXECUTRIX/BENEFICIARY OF ACCOUNT ALLEGES FUNDS WERE MOVED TO OUTSIDE BANK ACCOUNT WHERE FA WAS TRUSTEE ON ACCOUNT FOR THE DECEASED; EXECUTRIX ALSO ALLEGES FA SUBSEQUENTLY TRANSFERRED BANK ACCOUNT FUNDS TO HER OWN ACCOUNT (12/01/2014 - 03/31/2015).

On December 8, 2015, Wells Fargo deemed the above customer complaint ""Closed/No Action" and there is no indication of any settlement.

FINRA Sanctions

FINRA deemed Redman's conduct above as having "bypassed her employer firms' supervisory systems and procedures and prevented them from adequately supervising her conduct and her relationship with the customer. Redman thereby violated FINRA Rule 2010."

In accordance with the terms of the AWC, FINRA imposed upon Redman a $7,500 fine and a 45-day suspension from associating with any FINRA member in any capacity.

Bill Singer's Comment

Although not included in Redman's AWC, sometimes, FINRA includes a provision under "III. OTHER MATTERS" that generally sets forth this admonition:

[Respondent] may attach a Corrective Action Statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct. [Respondent] understands that it may not deny the charges or make and statement that is inconsistent with the AWC in this Statement. This Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff

As more fully explained in a 1998 NASD (FINRA's predecessor) document: "Regulatory Short Takes ":

NASD Clarifies Policy On Corrective Action And Mitigation Statements

Respondents in a settled disciplinary action may submit a Corrective Action Statement and/or a Mitigation Statement to NASD Regulation. This article clarifies the NASD policies regarding such Statements.

A Letter of Acceptance, Waiver and Consent (AWC) permits a respondent in an NASD Regulation disciplinary action to settle the matter prior to the filing of a formal complaint. A Corrective Action Statement may be attached to the AWC, which is filed with the SEC and available to the public, provided such statement is: (1) limited to demonstrable steps taken to correct a problem associated with the disciplinary action; (2) generally no longer than 2-3 pages; and (3) contains the following legend:

This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by NASD Regulation, Inc., nor does it reflect the views of NASD Regulation, Inc., or its staff.

Separately, respondents may submit a Mitigation Statement for consideration by NASD Regulation and the National Adjudicatory Council. Generally, such Statements are used to describe mitigating circumstances surrounding the violation for the decision maker to consider in its review of the terms of a settlement. Unlike Corrective Action Statements, Mitigation Statements are not attached to the AWC or public order.

Respondents may also settle a matter after the complaint is filed by submitting an Offer of Settlement. While both Corrective Action and Mitigation Statements may be submitted to NASD Regulation in connection with Offers of Settlements, these Statements are not attached to the final Order Accepting the Offer of Settlement, which is filed with the SEC and available to the public.NASD Regulation will not accept Corrective Action or Mitigation Statements that deny the allegations or are inconsistent with the findings in the settlement. . .

FINRA AWCs permit the attachment of a Corrective Action Statement to demonstrate the steps taken by a respondent to prevent future misconduct subject to the understanding that such an attachment may not deny the charges or make any statement that is inconsistent with the AWC. Further the Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.

I am no fan of Corrective Action Statements and rarely, if ever, advocate their use. Given that the premise of an AWC is a settlement made without admitting or denying the findings, I don't understand why anyone would voluntarily submit a statement that typically make admissions of facts and findings; promises to correct situations that have not necessarily been acknowledged or admitted to; and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statement, then ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal. If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it.

Some think that a Corrective Action Statement gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. As with any post-game analysis, it's just not going to change the score. Moreover, if during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in your statement, or, it is alleged that you failed to implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission. Notwithstanding my opinion, Redman apparently determined that it was advisable to submit this Corrective Action Statement:

CORRECTIVE ACTION STATEMENT

This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.

Because of events that have occurred and actions that I have taken since the events at issue, it is highly unlikely that I will be involved in anything even remotely similar to this situation in the future. I am committed to redoubling my efforts to comply fully and to the best of my ability with all regulatory and firm requirements. As FINRA noted in the AWC, I consulted with a co-worker, who was not a member of the firm's legal or compliance team, concerning whether I could be a beneficiary of a client's estate. To the extent that any similar situation might arise in the future, I will consult with the legal or compliance personnel of any firm with which I am associated. In addition, in my current position, I provide fee-based investment advisory services, and I am not an associated person of a broker-dealer firm. As such, and although I am fully aware of the fiduciary duties that I owe to my clients in my current position, the particular situation cited in the AWC will not recur.

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The Stockbroker, Her Cancer Patient Friend and Customer, And The Estate Complaint

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