An irreverent Wall Street Blog
Double Standard? FINRA Fines and Suspends Wells Fargo Employee For 382 Unauthorized Trades
September 28, 2018
In a recent FINRA regulatory settlement, we come across a Wells Fargo registered person who allegedly engaged in nearly 400 unauthorized discretionary trades over a three-year period. FINRA resolved the case with a fine and suspension. Frankly, the sanctions seem measured and deserved. Be that as it may, the self-regulatory-organization's resort to yet another fine-and-suspend settlement with yet another of the industry's human being employees prompts BrokeAndBroker.com Blog publisher Bill Singer to ask why that "and" doesn't get applied with equal fervor to the industry's large member firms. How is it -- who came up with the half-assed regulatory approach -- that the too-big-to-fail are also too-big-to-be-suspended? Why is any form of suspension for large FINRA member firms such a sacrosanct no-go for Wall Street's broker-dealer regulators but not for those who regulate banks?
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, Timothy J. Scherwa submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Timothy J. Scherwa, Respondent (AWC 2017056095001, September 24, 2018).
In 1996, Scherwa first became registered and in 2014, he was registered with FINRA member firm Wells Fargo Clearing Services,
LLC. The AWC asserts that "Scherwa has no relevant disciplinary history in the securities industry."
(In)Discretion
The AWC asserts that during the relevant period between May 15, 2014, and May 15, 2017, Scherwa allegedly executed 382 trades in twelve non-discretionary customer accounts, without written authorization from the customers, and without prior written acceptance of the accounts as discretionary from Wells Fargo.
SIDE BAR: NASD Conduct Rule 2510: Discretionary Accounts
(a) Excessive TransactionsNo member shall effect with or for any customer's account in respect to which such member or his agent or employee is vested with any discretionary power any transactions of purchase or sale which are excessive in size or frequency in view of the financial resources and character of such account.(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.(c) Approval and Review of TransactionsThe 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.(d) ExceptionsThis 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. This limitation shall not apply to time and price discretion exercised in an institutional account, as defined in Rule 3110(c)(4), pursuant to valid Good-Till-Cancelled instructions issued on a "not-held" basis. Any exercise of time and price discretion must be reflected on the order ticket;(2) bulk exchanges at net asset value of money market mutual funds ("funds") utilizing negative response letters provided:
(A) The bulk exchange is limited to situations involving mergers and acquisitions of funds, changes of clearing members and exchanges of funds used in sweep accounts;(B) The negative response letter contains a tabular comparison of the nature and amount of the fees charged by each fund;(C) The negative response letter contains a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased; and(D) The negative response feature will not be activated until at least 30 days after the date on which the letter was mailed.
The AWC asserts that during the relevant period:
Wells Fargo maintained policies and procedures that prohibited representatives from exercising discretionary power in placing an order for the purchase or sale of securities for a client, except in designated approved accounts where the client provided prior written approval to do so.
ACQ
Also, the AWC alleges that on April 2, 2015, March 28 2016, and March 8, 2017, Scherwa submitted his annual compliance questionnaire ("ACQ") to Wells Fargo, and answered "NO" in response to:
Do you have accounts for which you exercise discretion over trading activity?
The AWC asserts that Scherwa's attestations of the three annual ACQs were false because, at the time he completed each, he was improperly exercising discretionary trading authority in twelve customer accounts. By virtue of the foregoing, Scherwa violated FINRA Rule 2010.
Online FINRA BrokerCheck records as of September 27, 2018, disclose that Wells Fargo "discharged" Scherwa on October 16, 2017, based upon allegations that:
Use of discretion in non-discretionary accounts.
FINRA deemed Scherwa's unauthorized discretionary trading to constitute violations of NASD Rule 2510(b) and FINRA Rule 2010; and his false ACQ attestations to constitute violations of FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Scherwa a $7,500 fine and a two-month suspension from association with any FINRA member in any capacity.
Bill Singer's Comment
In years past, FINRA may well have imposed a Bar against Scherwa or a far more extensive suspension. I'm not saying this 2018 iteration of a two-month suspension is a good thing . . . I'm not saying it's a bad thing. I'm simply noting that FINRA may well be starting to respond to criticisms from me and other industry pundits about the fairness of sanctions imposed on registered men and women in contradistinction to its large member firms. I'm also inferring (rightly or wrongly) that since the AWC makes a point of stating that the cited trades were made without the customers' written authorization that the relatively modest sanctions may be indicative that in many/most/all of the cited trades, the customers acknowledged that there had been prior discussions about the transactions and they had given oral authorization for the trades. Again, to be very clear, that's just me trying to make sense out of the absence of a Bar imposed by FINRA. Oh, and one more point, there is no allegation in the AWC of any customer complaints arising from the cited trades.
Which leads me, yet again, to muse as to how it is that FINRA routinely suspends its member firms' associated men and women, yet FINRA's big boys, it's large member firms, simply get fined, and then shift the cost of their misconduct into the pockets of their public shareholders. Consider, the ongoing saga of former JP Morgan employee Johnny Burris:
- Johnny E. Burris, Plaintiff, v. J.P. Morgan Chase & Co., and J.P. Morgan Securities, LLC (Complaint; 18-CV-03012) http://www.brokeandbroker.com/PDF/BurrisComplaintAZ.pdf
- Wall Street Whistleblower Johnny Burris Speaks Truth To Power (BrokeAndBroker.com Blog, June 30, 2017) http://www.brokeandbroker.com/3516/burris-whistleblower/
Consider Wells Fargo's recent history of alleged unauthorized account openings, wrongful mortgage foreclosures, auto-insurance and home-loan lending abuses, fraudulently originating and selling mortgage loans, and , well, there's only so much space and so much yet to list but let's stop here. Funny thing about how regulators take the too-big-to-fail firms like Wells Fargo out to the woodshed. It's almost always a cash transaction, as in billions of dollars in fines, restitution, disgorgement, and interest. Notably absent from regulatory sanctions against larger broker-dealers is any form of suspension as is routinely imposed upon the industry's men and women employees. Of course, with a public company like Wells Fargo, the moolah for sanctions and settlements doesn't quite come out of the pockets of the folks who came up with all the clever ways to screw us over and it doesn't quite come out of the wallets of the folks who earned the huge salaries and bonuses based upon all the fraud. No, the cost of screwing the public is borne by . . . by . . . the public, as in the public shareholders of these very publicly traded companies.
Just thinkin' out loud here, but, why doesn't FINRA suspend Wells Fargo from doing business for two-months -- you know, like it did to Scherwa? Or, here's another thought, how about docking the member firm any profits for two months or curtailing its ability to open new offices. Yeah, go ahead, tell me that's a dumb-ass idea. I'm a big boy. I can take it. On the other hand, while you're mouthing off about how stupid I am for suggesting that FINRA impose fines and suspensions on its large member firms, why don't you take your know-it-all attitude and read:
Historic Federal Reserve Restrictions On Wells Fargo (BrokeAndBroker.com Blog, February 5, 2018) http://www.brokeandbroker.com/3808/federal-reserve-wells-fargo/ Just by way of a brief trip down Memory Lane, recall this:Responding to widespread consumer abuses and compliance breakdowns by Wells Fargo, Federal Reserve restricts Wells' growth until firm improves governance and controls. Concurrent with Fed action, Wells to replace three directors by April, one by year end(Board of Governors of the Federal Reserve System Press Release, February 02, 2018)https://www.federalreserve.gov/newsevents/pressreleases/
enforcement20180202a.htm