An irreverent Wall Street Blog
What The Hell Does It Take For FINRA To Bar A Stockbroker?
November 29, 2016
After reading a recent Financial
Industry Regulatory Authority settlement, I find myself unable to reconcile the regulator's allegations against a respondent
registered representative with the regulator's fairly modest fine and relatively light suspension. When I say relatively light suspension, I readily acknowledge that it's for 14 months. All of which prompts me to wonder whether FINRA intentionally over-stated its case because the respondent threw in the
towel and went along with whatever the regulatory wanted. The other possibility is that there are mitigating
circumstances not set forth in the published settlement. I'll leave it to you, my readers, to parse through the implications and draw your inferences as you will. In the end, however, see if you can answer my question: What the hell does it take for FINRA to Bar a registered representative these
days?
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, John E.
Burns submitted a Letter of Acceptance, Waiver and Consent ("AWC"),
which FINRA accepted. In the Matter of John E. Burns,
Respondent (AWC 2014042270001, November 23,
2016).
The AWC asserts that Burns
entered the securities industry in March 2007 and by September 2011, was
registered with FINRA member firm UBS Financial Services, Inc., where he
remained until he joined Ameriprise Financial Services, Inc. in August 2014.
In
Discretion
The AWC alleges that during the
relevant time of December 2013 to August 2015, without having a written discretionary
authority, Burns executed 100 trades in nine customer accounts in violation of
FINRA Rule 2010. The AWC concedes regarding five of the nine cited customer
accounts:
Burns had some verbal authorization to exercise discretion generally, but exceeded that verbal authorization by executing trades in excess of the available funds in the account.
Unsuitable and
Unauthorized
Additionally, the AWC asserts that
in violation of FINRA Rules 2010 and 2111, Burns made over 50 unsuitable and
unauthorized investments during the relevant time in the account a retired
couple who were both over 65 years old. The AWC characterizes the nature of the
cited investments as follows:
These transactions involved repeated high-risk investments in small drug company stocks which were unsuitable for the customers' moderate risk tolerance and investment profile. The customers sustained losses in all but one of these investments in an aggregate amount exceeding $50,000.
Sanctions
In accordance with the terms of
the AWC, FINRA imposed upon Burns a $17,500 fine and a 14-month suspension from
associating with any FINRA member in any
capacity.
Bill Singer's
Comment
Let me begin this commentary
with a few barbs.
Some and
Generally
In setting forth its allegations
concerning Burns' unauthorized discretion, the AWC asserts
that:
With all due respect to FINRA Staff, your organization has long insisted upon a scrupulous compliance with the parameters of exercising discretion in a customer's account. Let me refer you to NASD Rule 2510: Discretionary Accounts, which notes in pertinent part:Burns had some verbal authorization to exercise discretion generally, but exceeded that verbal authorization by executing trades in excess of the available funds in the account.
Why are y'all using such colloquial and imprecise language in an AWC as "some verbal authorization to exercise discretion generally?" I mean, seriously, what does that allegation even mean? What is the difference, for example, between Burns having "no" verbal authorization, "some" verbal authorization, or "full" verbal authorization when NASD Rule 2510 explicitly requires a customer's "prior written authorization." Moreover, how does one even "exercise discretion generally?" Generally? Rule 2510 requires a written acceptance by the member of a customer's grant of authorization. Do you actually think that a firm is going to approve in writing the exercise of discretion "generally?"(b) Authorization and Acceptance of AccountNo member or registered representative shall exercise any discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer or manager, duly designated by the member, in accordance with Rule 3010.
T&P
Then there's the
whole issue of the AWC asserting that the so-called verbal authorization given
to Burns by the customers was exceeded when he executed "trades in excess
of the available funds in the account." I'm trying to be polite here, so
how about you re-read Rule 2510(d), where you will note this exception to the
prior-written-authorization scheme:
As such, under FINRA's rules, the only acceptable use of so-called "verbal authorization" would occur in regard to the time and price ("T&P") of a given order. T&P discretion is limited to the end of the business day on which it was granted by the customer. All of which prompts me, yet again, to ask why the AWC included that inappropriate assertion about Burns having "some verbal authorization to exercise discretion generally" and why you imply that his error in exercising said verbal discretion was when he executed trades in excess of available funds. The lack of funds is of no consequence in terms of Burns' use of verbal discretion. T&P has nothing to do with available funds. Even if there were sufficient funds, Burns still did not exercise T&P discretion, which is the only possible exemption pertinent to this fact pattern.This Rule shall not apply to:(1) discretion as to the price at which or the time when an order given by a customer for the purchase or sale of a definite amount of a specified security shall be executed, except that the authority to exercise time and price discretion will be considered to be in effect only until the end of the business day on which the customer granted such discretion, absent a specific, written contrary indication signed and dated by the customer . . .
Bar
None?
As noted in my preamble to
today's BrokeAndBroker.com Blog, I'm puzzled as to the
apparent disconnect between the serious allegations and assertions in the AWC
and the absence of a Bar. A 14-month suspension ain't nothing to sneeze at --
I'll give you that; on the other hand, FINRA's published settlement makes a
compelling argument for a Bar given the extensive period during which some
fairly serious misconduct occurred. Before you agree or disagree, consider some
facts that are part of Burns' public record(and, as such, available to FINRA)
but did not make their way into the
AWC:
BrokerCheck:
Employment
Separation
According to online FINRA
BrokerCheck records as of November 29, 2016, under the
heading of "Employment Separation After Allegations" Burns was:
"Discharged" on August 5, 2014, by UBS Financial Services Inc. based upon allegations that:
Burn's BrokerCheck response to the allegations was:MR. BURNS'S EMPLOYMENT WAS TERMINATED AFTER HE ACKNOWLEDGED DURING A FIRM REVIEW THAT, AFTER THE FIRM HAD DENIED HIS APPLICATION TO INCLUDE A PARTICULAR COMPANY IN THE FIRM'S CLIENT REFERRAL FEE PROGRAM, HE PAID CLIENT REFERRAL FEES DIRECTLY TO THAT COMPANY OUTSIDE OF THE FIRM'S PAYMENT STRUCTURE.
ALTHOUGH UBS CLAIMS THAT MR. BURNS WAS TERMINATED FOR PAYING REFERRAL FEES TO A COMPANY OUTSIDE OF THE FIRM'S PAYMENT STRUCTURE, IN TRUTH, MR. BURNS BELIEVES UBS TERMINATED HIM ONLY BECAUSE IT DISCOVERED HE WAS LEAVING THE COMPANY TO WORK FOR A COMPETITOR AND WANTED TO GAIN AN UNFAIR ADVANTAGE IN CONVINCING HIS CLIENTS TO STAY AT UBS. IN FACT, ONLY HOURS AFTER DISCOVERING THAT MR. BURNS WAS NEGOTIATING WITH MERRILL LYNCH, THE UBS MANAGER TERMINATED MR. BURNS' EMPLOYMENT IMMEDIATELY AND WITHOUT NOTICE. MR. BURNS HAS FILED AN ARBITRATION AGAINST UBS ALLEGING, AMONG OTHER THINGS, THAT HE WAS IMPROPERLY TERMINATED AND DEFAMED.
"Permitted to Resign" on September 21, 2015, by Ameriprise Financial Services, Inc. based upon allegations that:
The registered representative was suspended and permitted to resign on September 21, 2015 for company policy violations including: unauthorized trading; unauthorized use of discretion; soliciting equities not meeting firm rating requirements; and inaccurate client file documentation.
BrokerCheck: Customer
Dispute -
Settled
As of November 29, 2016, under
the BrokerCheck heading "Customer Dispute - Settled" are
three items:
1. On August 27, 2014, UBS reported receipt of a customer complaint seeking $9,724.28 in damages, which the firm settled on February 3, 2015, for $7,500, to which Burn's reportedly contributed no portion. UBS reported the allegations as follows:
TIME FRAME: NOVEMBER 14, 2013 TO AUGUST 27, 2014, 2014 August 18, 2014 [sic] THE CLIENT'S ATTORNEY ALLEGES HER FINANCIAL ADVISOR PLACED HER IN UNSUITABLE PRODUCTS. THE CLIENT'S ATTORNEY FURTHER ALLEGES THE FINANCIAL ADVISOR FAILED TO ASCERTAIN THE CLIENT'S INVESTMENT OBJECTIVES AND RISK TOLERANCE. THE CLIENT'S ATTORNEY FINALLY ALLEGES THAT ALL TRADES WERE UNAUTHORIZED. THE ALLEGED DAMAGES ARE $9,724.38
Burn's BrokerCheck response to the allegations was:
MR. BURNS VEHEMENTLY DENIES THESE ALLEGATIONS. HE SPENT HOURS OF HIS TIME MEETING WITH AND ASSISTING THIS CUSTOMER,M FULLY DETERMINING HER INVESTMENT OBJECTIVES, RISK TOLERANCE, AND OVERALL FINANCIAL PROFILE. ALL TRANSACTIONS WERE EXECUTED WITH THE CUSTOMER'S EXPLICIT AUTHORIZATION AFTER DETAILED DISCUSSIONS. HER COMPLAINT IS THE RESULT OF UNREALIZED, SHORT-TERM LOSSES AND NOTHING MORE.
2. On November 9, 2015, UBS reported receipt of a FINRA Arbitration Complaint (15-02982) seeking $100,000 in damages, which the firm settled on March 11, 2016, for $45,000, to which Burn's reportedly contributed no portion. UBS reported the allegations as follows:
Time frame:2013-2014Claimant alleges unsuitability and misrepresentation involving the recommendation of equity investments and fees charged in connection with his account.
3. On March 1, 2016, Ameriprise Financial Services, Inc. reported receipt of a customer complaint seeking $88,406.2 in damages, which the firm settled on March 30, 2016, for $43,865.3, to which Burn's reportedly contributed no portion. Ameriprise reported the allegations as follows:
BrokerCheck: Customer Dispute - Closed-No Action/Withdrawn/Dismissed/DeniedThe client's attorney alleged the advisor made fraudulent representations inducing the transfer of the client's investments to Ameriprise Financial, falsified account agreements, and engaged in transactions that were contrary to the client's authorizations.
As of November 29,
2016, under the BrokerCheck heading "Customer Dispute - Closed-No Action/Withdrawn/Dismissed/Denied,"
on July 17, 2015, UBS reported receipt of a customer complaint, which it
denied, seeking damages estimated in excess of $5,000 based upon these
allegations:
TIME FRAME: SEPTEMBER 15, 2011 TO OCTOBER 7, 2014THE CLIENTS ALLEGE THEIR FINANCIAL ADVISOR RECOMMENDED AN UNSUITABLE SECURITY BASED ON THEIR AGE, FINANCIAL SITUATION, INVESTMENT OBJECTIVE AND INVESTMENT EXPERIENCE. THE CLIENTS FURTHER ALLEGE THEIR FINANCIAL ADVISOR MADE UNAUTHORIZED TRADES. THE CLIENTS ALSO ALLEGE THEIR FINANCIAL ADVISOR MISREPRESENTED AND FAILED TO DISCLOSE MATERIAL FACTS CONCERNING AN INVESTMENT. THE ALLEGED DAMAGES ARE ESTIMATED TO BE IN EXCESS OF $5,000
Burns BrokerCheck response to the allegations was
MR. BURNS VEHEMENTLY DENIES THESE ALLEGATIONS. HE SPENT HOURS OF HIS TIME OVER A 6 YEAR PERIOD MEETING WITH AND ASSISTING THIS CUSTOMER, FULLY DETERMINING THEIR INVESTMENT OBJECTIVES, RISK TOLERANCE, AND OVERALL FINANCIAL PROFILE. ALL TRANSACTIONS WERE EXECUTED WITH THE CUSTOMER'SS EXPLICIT AUTHORIZATION AFTER DETAILED DISCUSSIONS. THEIR COMPLAINT IS WITHOUT MERIT AND THE RESULT OF THE CLIENT SEEKING COMPENSATION FOR A SINGLE SECURITY OVER A 6 YEAR RELATIONSHIP BETWEEN MR. BURNS AND THE CLIENT.
BrokerCheck: Customer Dispute - Pending
As of November 29, 2016, under the BrokerCheck heading "Customer Dispute - Pending" we find the following two items:
1. On December 8, 2015, UBS reported receipt of a customer complaint seeking $115,000 in damages based upon allegations that:
Time Frame: September 3, 2013 to August 6, 2014
The clients attorney alleges suitability, unauthorized trades and breach of fiduciary duty.
2. On October 19, 2016, UBS reported receipt of a FINRA Arbitration Complaint (16-03038) seeking $500,000 in damages based upon allegations that:
Time frame: 2011-8/2014Claimant alleges the unsuitable recommendation to loan a third party money and recommendation of an unsuitable investment.
CPA