Not Fade Away Tops FINRA Regulatory Chart
December 1, 2017
Palermo first became registered in 2006 and by October 2014, he was registered with FINRA member firm Chelsea Financial Services. Under the heading "Relevant Disciplinary Heading" the AWC asserts that:
On September 28, 2002, prior to Palermo's association with a FINRA-member firm, Palermo was found liable for insider trading after a jury trial in United States District Court for the Southern District of New York. He was ordered to disgorge $42,568.75 in ill-gotten gains.
FINRA Market Reg Investigation
The AWC that FINRA's Department of Market Regulation's Market Manipulation Investigations/Trading Analysis Section had reviewed trading activity from the relevant period of October 22, 2014 through February 11, 2015, in an individual brokerage account in Palermo's name at a FINRA-member firm other than Chelsea (the "Away BD" and the "Away Account").
The Away Account
Palermo allegedly signed the Away Account's application form when he opened that account in January 2013, and that, in part, the form stated:
I understand that I am responsible for all acts and omissions relating to the use of [BD's] services, including all orders entered through the [BD] Service using my User ID and Passwords. I agree that it is my responsibility to maintain the confidentiality of my User ID and Passwords . . .
AS if?
The AWC
further alleges that in January 2013, Palermo and an unregistered person
identified in the settlement document only as "AS" had entered into a verbal
agreement pursuant to which Palermo:
- opened the Away Account in his name,
- funded the Away Account with $50,000, and
- provided his BD account login credentials and password to AS, who then conducted the activity in the Away Account account.
The AWC further alleges that Palermo and AS agreed to evenly share any profits above the initial $50,000 deposit that resulted from AS's trading. Palermo allegedly did not disclose to the Away BD, AS's trading role or his share of any profits. The AWC alleges that the Away Account was "actively traded" by AS, who entered 100% of the trades during the 25-month period from January 2013 through February 2015.
Palermo Keeps Tabs
On a weekly basis, Palermo allegedly accessed the online "Balance" page for the Away Account to review its profitability. On a monthly basis, Palermo allegedly transferred funds from the Away Account to one of his personal checking accounts; and, thereafter, wrote checks from a business-checking account controlled by him to AS for his share of the profits (the AWC alleges that Palermo wrote 29 such checks). As set forth in the Palermo AWC:
AS's activity in Palermo's BD account generated an average monthly profit of about $45,000, and the monthly account statements showed that the account lost money in just one of the 24 months during which the account was active. AS's method of trading involved executing hundreds of transactions in dozens of stocks on a daily basis in Palermo's BD account, and the activity involved large amounts of risk that on a monthly basis was as much as 2,100 times as great as the balance in the account. This type of activity was not the usual way in which Palermo traded in his personal brokerage accounts.
Landlord
Finally, the AWC asserts that while registered with Chelsea, Palermo acted as a landlord for two residential properties he owned, and that he was primarily responsible for dealing with the tenants and collecting rents. Deeming his landlord activities to constitute an outside business activity ("OBA"), the AWC alleges that Palermo did not provide written notice to Chelsea prior to engaging in this outside business activity during the time he was an associated person of the firm. Furthermore, in October 2014, Palermo completed a compliance questionnaire in which he disclosed some outside business activities to the firm, but did not include his activity as a landlord.
VISIT the BrokeAndBroker.com Blog "OBA" Cases Archive
PDF Copy of Bill
Singer, Esq.'s OBA Rule Analysis
Form U5
The AWC asserts that Chelsea filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") for Palermo on December 8, 2015 that indicated that Palermo had voluntarily terminated his association while he was under internal review by the firm for failing to disclose an outside securities account.
Sanctions
FINRA deemed Palermo's:
- misrepresentations and omissions concerning the Away Account to constitute violations of FINRA Rule 2010;
- undisclosed away accounts to constitue violations of NASD Rule 3050(c) and FINRA Rule 2010; and
- activities as a landlord to constitute an undisclosed OBA in violation of FINRA Rules 3270 and 2010.
In
accordance with the terms of the AWC, FINRA imposed upon Palermo a $50,000 fine
and a 12--month suspension from association with any FINRA member in all
capacities.
Bill Singer's Comment
Compliments to FINRA on an AWC replete with content and context. Great job!
The Old NASD Rule
NASD CONDUCT RULE 3050. Transactions for or by Associated Persons
(a) Determine Adverse Interest
A 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 Member
Where 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 Member
A 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 Institution
A 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 Trusts
The 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.
The New FINRA Rule (April 3, 2017)
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.