Post Mortem Auto-Pilot Trading Sends Stockbroker's Career Into Head-On Regulatory Crash
May 21, 2018Regardless of the business that you're in, if you have clients, they can and do die. Sometimes you are prepared for a customer's demise because they have been in failing health. Sometimes it's an unexpected accident or medical event. When a customer dies, businesses servicing such deceased parties typically have many policies and procedures that kick in -- some designed to protect the business and others to protect the interest of the deceased. Despite the best of plans and intentions, the protocols in place to address a customer's death don't always stand up to the demands of the customer's heirs (purported or otherwise) or the best-intentions of those with whom the deceased had business dealings. In a recent FINRA regulatory settlement, we come across the post-mortem conduct of a stockbroker who didn't yet know that his customer had died.
Case In PointFor 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, Kelly Marvin Barnett submitted a Letter of Acceptance,
Waiver and Consent ("AWC"), which FINRA accepted. In the
Matter of Kelly Marvin Barnett, Respondent (AWC 2015048320901 May 11,
2018).
The AWC asserts that Barnett was first registered in 2000, and from August 27, 2012, to November 19, 2015, was registered with FINRA member firm MetLife Securities Inc., (n/k/a "MSI Financial Services, Inc."), and on January 12, 2016, Barnett registered with another FINRA member firm where he remained until his voluntary termination on April 13, 2018. The AWC asserts that "Barnett has no prior disciplinary history."
Deceased Customer
The AWC alleges that on May 25, 2015, one of Barnett's customers, who is identified in only as "JN"died of a heart attack.
Prior to May 25, 2015, JN had granted Barnett oral discretion to place trades in her account; however, MetLife had never accepted the account as a discretionary account.
Post-Mortem Trades
On May 27, 2015, Barnett entered buy orders and one sell order for ETFs in JN's account. At the time of said orders. Barnett was unaware of JN's death.
On May 29, 2015, Barnett purchased a UIT and sold an ETF in JN's account. At the time of said orders, Barnett was still unaware of JN's death.
Discretionary Trading
The AWC asserts that between January 1, 2014, and November 19, 2015, Barnett exercised discretion in four additional customer accounts pursuant to a purported oral trading strategy but without a written authorization and without his firm's acceptance of discretionary accounts. When Barnett could not reach the customers, he allegedly executed the planned trading strategy without speaking to the customers first. In total, Barnett executed 25 discretionary trades in the accounts of the four customers.
SIDE BAR: In pertinent part, FINRA Rule 2510:Discretionary Accounts states:(b) Authorization and Acceptance of Account
No 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.
(c) Approval and Review of Transactions
The member or the person duly designated shall approve promptly in writing each discretionary order entered and shall review all discretionary accounts at frequent intervals in order to detect and prevent transactions which are excessive in size or frequency in view of the financial resources and character of the account. . . .
Revisionist History
Although Barnett maintained in his customer files handwritten notes documenting client conversations regarding orders and recommendations, in what appears to have been a back-dated entry, the AWC asserts that Barnett created two handwritten documents falsely stating that he had spoken to JN on the dates of the trades and that the customer had approved the transactions.
Going Blank
Finally, the AWC alleges that from January 1, 2013 through November 19, 2015, Barnett allegedly used blank signed forms to effect UIT exchanges without having each client sign a completed switch disclosure form. Each form detailed the UIT that was being sold, the UIT that was being purchased, provided the reasons for the switch, and detailed the charges associated with the switch.
Discharge
Online FINRA BrokerCheck records as of May 21, 2018, disclose that MetLife discharged him on November 19, 2015, based upon allegations that:
In response to the firm's disclosure, Barnett submitted this statement:The Registered Representative did not follow firm policy with respect to customer signatures on account documents and discretionary trading.
BY THE WAY OF EXPLANATION, I HAD A FEW CLIENTS PRE-SIGN FORMS AS A MATTER OF CONVENIENCE TO ELIMINATE BACK AND FORTH MAILINGS. FIRM POLICY DICTATED THAT CLIENTS ARE NOT ALLOWED TO SIGN FORMS IN ADVANCE AND THAT CLIENTS MUST DICTATE ALL ASPECTS OF A TRADE WHEN THE ACCOUNT IN MARKED NON-DISCRETIONARY
FINRA Sanctions
FINRA deemed Barnett's:
- exercise of discretion as constituting a violation of NASD Conduct Rule 2510(b) and FINRA Rule 2010;
- falsification of the cited JN contact notes as constitution a violation of FINRA Rule 2010; and
- use of blank, signed UIT exchange forms to falsely evidence acknowledgement of disclosures as conduct causing his firm's books and records to be inaccurate in violation of FINRA Rules 4511 and 2010.
In accordance with the terms of the AWC, FINRA imposed upon Barnett a $15,000 fine and a six-month suspension from association with any FINRA member in any and all capacities
Bill Singer's Comment
Frankly, Barnett should consider himself lucky that he got off with only a six-month suspension. I'm struggling with FINRA's suspension when I factor in the falsification of the conversations with the deceased JN. FINRA's case against Barnett is pretty much a matter of over zealous customer service in furtherance of a previously discussed trading strategy. On the other hand, Barnett fabricated descriptions of non-existent customer communications and then fobbed it off on his firm as authentic. It's that latter misconduct that troubles me and paints the six-month-suspension as very benign. Then again, there may well be other facts that were not presented in the AWC that could justify the relatively modest suspension. We don't know what we don't know.
Finally, given that MetLife discharged Bennett in November 2015 and enunciated its reasons for termination -- and Bennett contemporaneously submitted a statement conceding the pre-signed documents issue -- what the hell took FINRA 2 1/2 years to investigate and sanction? Was the self-regulator trying to confirm the ongoing death of JN and its investigation stalled when the deceased client failed to return a signed affirmation of her death?
If it takes FINRA 2 1/2 years to investigate an admitted violation and, thereafter, resolve the investigation via a settlement rather than a contested hearing, what are the time-frames for those more troubling and contentious matters?