An irreverent Wall Street Blog
Stockbrokers, Spouses, Marriage, and Away Accounts
January 26, 2017
Who is a spouse these days? What constitutes a marriage? Are Wall Street regulators proscribing conduct by married couples in similar fashion to that of other domestic relationships? Should a brokerage firm have the right to insist that employees not maintain away accounts? Talk to enough folks on Wall Street and you will get answers all along the spectrum. Presented today is a thought-piece: one that will hopefully provoke conversation. FINRA seems to be regulating properly. The stockbroker respondent seems to have evaded the rules. Still . . . there's something a bit discomforting about the wording of the rule and its application. All of which should engender discussion and debate.
Case In Point
Sanctions
FINRA deemed Testaverde's failure to disclose his Wife's Away Account and the Testaverde Away Account activity; his trading in restricted securities to constitute violations of NASD Rule 3050(c) and FINRA Rule 2010; and his disclosure misrepresentations to constitute violations of FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Testaverde a $25,000 fine and a six-month suspension from association with any FINRA member in any and all capacities
In accordance with the terms of the AWC, FINRA imposed upon Testaverde a $25,000 fine and a six-month suspension from association with any FINRA member in any and all capacities
NASD CONDUCT RULE 3050. Transactions for or by Associated Persons(a) Determine Adverse InterestA member ("executing member") who knowingly executes a transaction for the purchase or sale of a security for the account of a person associated with another member ("employer member"), or for any account over which such associated person has discretionary authority, shall use reasonable diligence to determine that the execution of such transaction will not adversely affect the interests of the employer member.(b) Obligations of Executing MemberWhere an executing member knows that a person associated with an employer member has or will have a financial interest in, or discretionary authority over, any existing or proposed account carried by the executing member, the executing member shall:
(1) notify the employer member in writing, prior to the execution of a transaction for such account, of the executing member's intention to open or maintain such an account;(2) upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to such account; and(3) notify the person associated with the employer member of the executing member's intention to provide the notice and information required by subparagraphs (1) and (2).
(c) Obligations of Associated Persons Concerning an Account with a MemberA person associated with a member, prior to opening an account or placing an initial order for the purchase or sale of securities with another member, shall notify both the employer member and the executing member, in writing, of his or her association with the other member; provided, however, that if the account was established prior to the association of the person with the employer member, the associated person shall notify both members in writing promptly after becoming so associated.(d) Obligations of Associated Persons Concerning an Account with a Notice-Registered Broker/Dealer, Investment Adviser, Bank, or Other Financial InstitutionA person associated with a member who opens a securities account or places an order for the purchase or sale of securities with a broker/dealer that is registered pursuant to Section 15(b)(11) of the Act ("notice-registered broker/dealer"), a domestic or foreign investment adviser, bank, or other financial institution, except a member, shall:
(1) notify his or her employer member in writing, prior to the execution of any initial transactions, of the intention to open the account or place the order; and(2) upon written request by the employer member, request in writing and assure that the notice-registered broker/dealer, investment adviser, bank, or other financial institution provides the employer member with duplicate copies of confirmations, statements, or other information concerning the account or order;
provided, however, that if an account subject to this paragraph (d) was established prior to a person's association with a member, the person shall comply with this paragraph promptly after becoming so associated.(e) Paragraphs (c) and (d) shall apply only to an account or order in which an associated person has a financial interest or with respect to which such person has discretionary authority.(f) Exemption for Transactions in Investment Company Shares and Unit Investment TrustsThe provisions of this Rule shall not be applicable to transactions in unit investment trusts and variable contracts or redeemable securities of companies registered under the Investment Company Act of 1940, as amended, or to accounts which are limited to transactions in such securities.
FINRA's New Away Accounts
Rule
Much of what you learned about away
accounts' regulation and compliance may soon be out-dated, so make sure to familiarize yourself with
"Accounts
At Other BrokerDealers and Financial Institutions SEC Approves Consolidated FINRA
Rule 3210 (Accounts At Other Broker-Dealers and Financial
Institutions) Effective
Date: April 3, 2017". Consider the language of the pending:
FINRA Rule 3210. Accounts At Other Broker-Dealers and Financial Institutions(a) No person associated with a member ("employer member") shall, without the prior written consent of the member, open or otherwise establish at a member other than the employer member ("executing member"), or at any other financial institution, any account in which securities transactions can be effected and in which the associated person has a beneficial interest.(b) Any associated person, prior to opening or otherwise establishing an account subject to this Rule, shall notify in writing the executing member, or other financial institution, of his or her association with the employer member.(c) An executing member shall, upon written request by an employer member, transmit duplicate copies of confirmations and statements, or the transactional data contained therein, with respect to an account subject to this Rule.***Supplementary Material***.01 Account Opened Prior to Association With Employer Member. If the account was opened or otherwise established prior to the person's association with the employer member, the associated person, within 30 calendar days of becoming so associated, shall obtain the written consent of the employer member to maintain the account and shall notify in writing the executing member or other financial institution of his or her association with the employer member..02 Related and Other Persons. For purposes of this Rule, the associated person shall be presumed to have a beneficial interest in, and to have established, any account that is held by: (a) the spouse of the associated person; (b) a child of the associated person or of the associated person's spouse, provided that the child resides in the same household as or is financially dependent upon the associated person; (c) any other related individual over whose account the associated person has control; or (d) any other individual over whose account the associated person has control and to whose financial support the associated person materially contributes.For purposes of paragraphs (a) and (b) of this Supplementary Material .02, an associated person need not be presumed to have a beneficial interest in, or to have established, an account if the associated person demonstrates, to the reasonable satisfaction of the employer member, that the associated person derives no economic benefit from, and exercises no control over, the account..03 Transactions and Accounts Not Subject To This Rule. The requirements of this Rule shall not apply to transactions in unit investment trusts, municipal fund securities as defined under MSRB Rule D-12, qualified tuition programs pursuant to Section 529 of the Internal Revenue Code and variable contracts or redeemable securities of companies registered under the Investment Company Act, as amended, or to accounts that are limited to transactions in such securities, or to Monthly Investment Plan type accounts..04 Accounts At a Financial Institution Other Than a Member. With respect to an account subject to this Rule at a financial institution other than a member, the employer member shall consider the extent to which it will be able to obtain, upon written request, duplicate copies of confirmations and statements, or the transactional data contained therein, directly from the non-member financial institution in determining whether to provide its written consent to an associated person to open or maintain such account..05 Other Financial Institution. For purposes of this Rule, the terms "other financial institution" and "financial institution other than a member" include, but are not limited to, any broker-dealer that is registered pursuant to Section 15(b)(11) of the Exchange Act, domestic or foreign non-member broker-dealer, investment adviser, bank, insurance company, trust company, credit union and investment company.
Bill Singer's Comment
FINRA Rule 3210(a) prohibits an associated person
from opening or otherwise establishing an away account "in which the
associated person has a beneficial interest." If we consult Rule 3210 Supplementary Material .03, we are informed that there is a
"presumption" of beneficial interest and a "presumption"
that the associated person "established" an Away Account where the account title is in a
spouse's name or that of various other categories of persons. Such beneficial-interest presumptions are rebuttable upon a
showing of proof "to the reasonable satisfaction of the employer" of
the absence of economic benefit to and the lack of control by the associated
person. If your head is spinning with the concepts of deeming, presumption,
rebutting, opening, and establishing, you're not alone.
If we read Supplementary Material
.02(a) and (b) together, we infer that a "spouse" need not be living in the
"same household as or is financially dependent upon the associated
person," whereas a child is subject to those household and dependency requirements. Let's think about that and also, let's consider this:
A stockbroker husband is separated and not living under the same roof with his wife. He moved out of the marital abode during difficult times in the marriage. Both spouses anticipate divorce but have agreed to await the outcome of their trial separation. Unbeknownst to her husband, the wife opened a brokerage account at a firm other than where her "spouse" is registered and she trades in securities, some of which are restricted from trading by her husband's member firm. The couple are still legally married and will likely file a Joint Return for the ongoing, current tax year. The wife's away account is in her individual name and she has not authorized her husband to have any power over any aspect of the account. She has not yet revised her Will, which leaves her entire estate to her husband.
Let's attempt to apply FINRA Rule 3210 to the separated spouses situation. Under Rule 3210 Supplementary Material .02 Related and Other Persons:
For purposes of this Rule, the associated person shall be presumed to have a beneficial interest in, and to have established, any account that is held by: (a) the spouse of the associated person . . .
For purposes of paragraphs (a) and (b) of this Supplementary Material .02, an associated person need not be presumed to have a beneficial interest in, or to have established, an account if the associated person demonstrates, to the reasonable satisfaction of the employer member, that the associated person derives no economic benefit from, and exercises no control over, the account.
Within the context of the separated spouses, does the husband stockbroker derive any "economic benefit" from the wife's away account? Among the various nuanced considerations is whether there may be tax deductions, income, dividends, interest reflected on the joint return. What if the husband is fully supporting his separated wife? What if the wife is an accomplished day-trader and uses her profits to defer any financial contribution from the husband?
Further, keep in mind that Rule 3210 requires that the associated person husband demonstrate to the "reasonable satisfaction" of the FINRA member firm that he does not derive any economic benefit from the wife's account. There's a lot of latitude in the parameters of so-called "reasonable satisfaction." Many firms may simply opt to say "NO," as an expedient option to avoiding future FINRA second-guessing.
Next. let's consider what I view as a very pregnant "and" in Rule 3210, which requires that the associated person must demonstrate to the employer that he has no economic benefit in his wife's away account and he does not exercise any control over said account. As a lawyer, I place tremendous emphasis on precision of statutory language. I will insist upon my interpretation that the "and" here means that there is NO presumption of beneficial interest by the husband in the wife's away account unless he both:
- derives an economic benefit; AND
- exercises control over the account.
Finally, let's
mull over what happens if you are living with someone but not
"married" to that person. If an associated person was in a relationship but did not view that domestic arrangement as rising to the level of a "marriage" or imbuing the partner with the attributes of a "spouse," such circumstances would seem to fall under Supplementary
Material .o2(d), which only comes into play when you have control over an "other individual's" away account and you materially
contribute financial support to that partner. Another one of those powerful conjunctions at play here too.
There are some interesting legal questions about whether the courts would sustain FINRA's disparate regulation of a "spouse" in contradistinction to an "other person." Such
disparate standards could prove troublesome when a regulatory sanction hinges upon a determination that a respondent is "married" (same or different sex
partner) or has a "spouse" in some civil union or domestic partnership
relationship. One could argue that FINRA's regulatory scheme imposes a marriage or spousal penalty, and is an uncomfortable and unwarranted intrusion into the bedroom. Once you compare the context of FINRA's regulatory scheme to a heterosexual marriage versus other forms of domestic partnerships/relationships (running the gamut from non-heterosexual marriage to domestic unions to cohabitation and beyond), certain unsettling questions and answers arise. Before you're too quick to pooh-pooh some of the definitional issues raised, consider this explanation currently found on the website for the United States Embassy / Senegal:
U.S. immigration law defines a spouse as a person of the opposite sex who is a husband or a wife. The word "marriage" means only a legal union, either civil or religious, between one man and one woman as husband and wife. Even though polygamy is legal in Senegal, U.S. immigration law recognizes only the first marriage in a polygamous relationship; therefore, only the first wife can qualify as a spouse for immigration purposes. Therefore, a second or third wife would not be eligible for derivative status or other immigration benefits as the wife of the principal applicant.
All of the above thought pieces aside, the abuse that occurs in away accounts is well
documented. Consequently, Wall Street's regulators clearly have an issue in
search of rational regulation. The question is whether or not the proposed new
rule will prove effective in addressing the competing regulatory and social
concerns. Only time will
tell.
READ: "BREAKING NEWS: Supreme Court Rules On Gay Marriage (BrokeAndBroker.com Blog, June 26, 2015)