The FINRA Gestalt
December 14, 2017The word "gestalt" means something made of many parts but whose wholeness is more than or different from the mere sum of those parts. When it comes to the self regulation of Wall Street, the Financial Industry Regulatory Authority seems to have a penchant for gestalt. FINRA loves to knit together a number of seemingly harmless acts into a patchwork quilt that takes on the appearance of something more ominous. The parts add up to a violation even if each part, taken on its own, may not. Sometimes there is a compelling gestalt and FINRA's right. Other times, it's nonsense like that canvass in the modern art gallery that's been painted white and someone tells you it depicts man's inhumanity to man presented against a landscape of moral ambiguity . . . and it's yours for $3.5 million (will that be cash or check?).
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, Kenneth S. Tyrrell submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Kenneth S. Tyrrell, Respondent (AWC 2016051259501, December 8, 2017).
The AWC asserts that Tyrrell entered the industry in 1994 and by November 2008, he was registered with FINRA member firm UBS Financial Services, Inc., where he remained until August 2016.
PST
The AWC asserts that in March 2009, Tyrell became the financial advisor to a customer, who is characterized as a "high net worth individual." The AWC further alleges that starting in May 2011:
[T]yrrell participated in eleven private securities transactions totaling more than $13 million with this customer without providing prior written notice to UBS. The transactions involved the customer's investment in private equity and debt securities in companies in a variety of industries as part of the customer's overall financial plan. Although Tyrrell was not compensated for these transactions, he participated in them by, among other things, referring investments to the customer; conducting due diligence and relaying his views on the transactions at the customer's request; helping the customer establish certain holding companies to make the investments; and facilitating transfers of funds from the customer's UBS accounts to the companies.
The AWC asserts that Tyrell's above "participation" violated FINRA Rule 3280, (and former NASD Rule 3040) because the respondent failed to provide prior written notice to UBS of his alleged private securities transactions ("PSTs").
OBA
The AWC further alleges that Tyrrell engaged in five outside business activities ("OBAs") with the "high net worth individual" without providing prior written notice to UBS.
Three of cited OBAs "involved Tyrrell, at the customer's request, serving as an officer of the holding companies the customer used to make his outside investments."
The fourth cited OBA was "a company Tyrrell co-founded in which the customer invested."
The fifth cited OBA was a:
concierge services company owned by Tyrrell's spouse with which Tyrrell was also involved. The concierge services company was formed in June 2013 in part to provide personal services to Tyrrell's customer. Tyrrell's involvement included finding staff to provide services to the customer; determining the salaries of the company's staff, including his spouse; and wiring funds to the company from his customer's UBS accounts. Between June 2013 and June 2016, Tyrrell caused approximately $498,000 to be transferred from the customer's UBS accounts to the concierge services company to pay for goods and services on the customer's behalf. In June 2016, the customer raised questions about the concierge services company. Thereafter, Tyrrell performed an audit of the concierge company's expenditures and returned approximately $130,000 to the customer's UBS accounts, consisting of the balance of the customer's unspent funds held in the concierge service company's bank account, and repayment of certain operating expenses which the concierge services company had charged to the customer.
FINRA deemed Tyrrell's failure to provide prior written notice to UBS about the cited OBAs to constitute violations of FINRA Rule 3270 and Rule 2010.
Compliance Responses
The AWC further alleges that in violation of FINRA Rule 2010, between at least May 2011 and July 2015, Tyrrell periodically affirmed his understanding of, and compliance with, these the firm's various compliance policies and provided multiple compliance questionnaire responses to UBS in which he certified that he had disclosed all of his PSTs and OBAs, when, in fact, he had not disclosed his participation in the eleven PSTs and five OBAs described above.
Discharge
Online FINRA BrokerCheck records as of December 14, 2017, disclose that UBS "Discharged" Tyrrell on August 8, 2016, based upon allegations that:
Financial Advisor was discharged because he had undisclosed outside activities and investments, failed to disclose conflict of interest involving his wife's business that serviced a client of the firm, and engaged in selling away, all in violation of firm policy.
No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.(a) Applicability
(b) Written NoticePrior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role . . .. . .
(e) DefinitionsFor purposes of this Rule, the following terms shall have the stated meanings:(1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 3210, transactions among immediate family members (as defined in FINRA Rule 5130), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded. . .
Let's parse through the jumble of allegations in this AWC paragraph and see how FINRA shoehorned it all into an allegation against Respondent Tyrrell:
[T]yrrell participated in eleven private securities transactions totaling more than $13 million with this customer without providing prior written notice to UBS. The transactions involved the customer's investment in private equity and debt securities in companies in a variety of industries as part of the customer's overall financial plan. Although Tyrrell was not compensated for these transactions, he participated in them by, among other things, referring investments to the customer; conducting due diligence and relaying his views on the transactions at the customer's request; helping the customer establish certain holding companies to make the investments; and facilitating transfers of funds from the customer's UBS accounts to the companies.
No Compensation and Customer's Plan
The first detail that caught my attention was the AWC's concession that "Tyrrell was not compensated" for the customer's equity and debt investments. Further, the high net worth customer's investments were part of his "overall financial plan." As such, Tyrrell seems to have been providing the cited customer with uncompensated customer service or various professional courtesies. Not sure I see why FINRA views such activity as rising to a "participation" in a PST.
Participation
The AWC attempts to make the case that Tyrrell's PST participation consisted of "among other things":
- referring investments to the customer: In using the term "referring," FINRA apparently declined to characterize the conduct as "soliciting," so we need to keep that in proper perspective. How does the mere "referral" of an investment under such limited circumstances involve a "participation" in a PST?
- conducting due diligence: Why would Tyrrell's mere investigation of any potential investment rise to the level of his "participation" in a PST? After all, "due diligence" is activity that occurs before the final decision to invest is made.
- relaying his views on the transactions at the customer's request: I mean, seriously? A customer asks a stockbroker about his or her "views" on a contemplated transaction and the stockbroker's "relaying" of said views rises to the level of participating in the eventual transaction? If we follow that logic, then you asking me about my interest in seeing a movie coupled with my response means that we both saw the movie.
- helping the customer establish certain holding companies to make the investments: What exactly distinguishes "helping to establish" from "establishing?" Is FINRA asserting that providing someone with a lawyer's name and address for the purpose of forming a corporation rises to the level of participating in a PST? If you forgot to bring your reading glasses and I read a proposed contract to you as a courtesy, is that "helping" you establish a holding company?
- facilitating transfers of funds from the customer's UBS accounts to the companies: Last I heard, a stockbroker is supposed to facilitate his customers' requests to transfer funds into and out of their brokerage accounts. How the hell does this rise to the level of participating in a PST?