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Don't Speak: The New Motto of Wall Street Compliance and Regulation
October 15, 2018
You wouldn't think that Wall Street would want to cultivate an in-house compliance protocol of "Don't Ask, Don't Tell," but a recent FINRA arbitration suggests that such a shift in tone is underway. Wall Street's entire regulatory scheme is predicated upon DISCLOSURE. That's not a stretch. Critics of regulation argue that it's sort of okay to do anything as long as you disclose it. As a libertarian, I find it hard to argue that point -- but to a limit. Any regulatory regime based on disclosure must insist that said disclosure be made in full, in intelligible terms, and subject to reasonable updates when conditions change. A recent FINRA arbitration asks us to consider what happens when a brokerage firm sorta twists a stockbroker's arm and suggests that, hey, maybe if a customer don't ask ya about sumthin' there's no big deal about not volunteerin' nuthin. Know what I'm sayin'? No one likes a big mouth. Ya don't gotta speak if they don't ask ya, right?
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in June 2018, associated person Claimant Leach sought the expungement of allegedly inaccurate disclosures on his Central Registration Depository record ("CRD") concerning a a customer complaint (Occurrence 1562175) and a settled customer arbitration (FINRA Arbitration 09-05128 / Occurrence 1477576. In the Matter of the FINRA Arbitration Between Jeffrey H. Leach, Claimant, vs. Morgan Stanley Smith Barney, Respondent (FINRA Arbitration 18-02213, October 11, 2018).
Respondent Morgan Stanley Smith Barner did not take a position on Claimant's expungement request and stated that as long as Claimant Leach satisfies FINRA Rule 2080, the firm had no opposition to the petition; however, the firm requested that all forum fees be assessed against Claimant.
Notices to Customers
Claimant Leach served his Petition for Expungement upon the underlying customers, together with notice of the date and time of the hearing and their right to participate therein.
In response to the notice of Claimant Leach's expungement, the customer in connection with Occurrence 1562175 submitted a written objection stating, among other things, that he:
was not informed of the departure of the registered representative that was supposed to be making investment decisions in his account using a computer program the representative developed until a year after the representative's departure.
The customers in connection with Occurrence 1477576 did not file a response.
Side Bar: The settlement in Occurrence 1477576 was not conditioned on the underlying customer not opposing the request for expungement and Claimant Leach did not contribute to the settlement amount.
Expungement Recommendation
The sole FINRA Arbitrator recommended expungement of all references to both occurrences following a FINRA Rule 2080 finding that the claim, allegation, or information is factually impossible or clearly erroneous; and false. The Arbitrator offered this rationale:
Occurrence No. 1562175This complaint asserted that the underlying customer opened the accounts at Respondent because he wanted a specific person there (not Claimant) to manage his accounts. The underlying customer was not told that the person had left the firm until he inquired, well after the departure. These facts were undisputed. Claimant testified that Respondent directed him not to volunteer this information. The Arbitrator is recommending expungement as there was no evidence presented that the failure to volunteer this information was a sales practice violation, but notes that this directive by Respondent was not the most transparent manner in which Respondent could have proceeded.Occurrence No. 1477576This complaint set forth in the Statement of Claim was, at its base, a suitability claim. However, documentary evidence established that the underlying customers were not as conservative as suggested in their Statement of Claim. The evidence also showed that one of the underlying customers was somewhat sophisticated as an investor, that both underlying customers had access to sophisticated advice, and that both were aware of what was in their accounts and how the accounts were performing. The evidence shows that the investments were suitable and there was no evidence to show otherwise.
Charges/Fees
The following charges and fees were assessed:
Claimant Leach: $1,575.00 Initial Claim Filing Fee and $900 hearing session fees
Respondent Morgan Stanley Smith Barney: $1,900 Member Surcharge and $ 3,750.00 Member Process Fee
Bill Singer's Comment
It is jarring to read this observation by the sole FINRA Arbitrator:
This complaint asserted that the underlying customer opened the accounts at Respondent because he wanted a specific person there (not Claimant) to manage his accounts. The underlying customer was not told that the person had left the firm until he inquired, well after the departure. These facts were undisputed. Claimant testified that Respondent directed him not to volunteer this information. The Arbitrator is recommending expungement as there was no evidence presented that the failure to volunteer this information was a sales practice violation, but notes that this directive by Respondent was not the most transparent manner in which Respondent could have proceeded.
Let's walk through that assertion slowly and try to understand it's import. A public customer opened an account with Morgan Stanley Smith Barney because "he wanted a specific person there (not Claimant) to manage his accounts." To put that in perspective, let's imagine the following hypothetical scenario:
A customer was enamored with the intelligence and manner of FINRA member firm XYZ's Stockbroker Reggie Repp, who was using a computer program to make investment decisions in the customer's accounts. When Repp left XYZ to join Morgan Stanley Smith Barney, the customer debated transferring his accounts from XYZ because he had enjoyed a profitable relationship at that firm. Ultimately, the customer relayed his concerns to Repp, who assured the client that he, and only he, would manage the transferred accounts. In response to that assurance and continuity of management, the customer moved his accounts. At some point in time, for whatever reasons, Repp left Morgan Stanley Smith Barney and the customer's accounts were assigned to Stockbroker Rhea Plaisimont, who was "directed" by Morgan Stanley Smith Barney "not to volunteer" to the customer that Repp had left the firm and was no longer managing the accounts.
How did the sole FINRA Arbitrator characterize Respondent Morgan Stanley's conduct? Oh yeah, I remember: this directive by Respondent was not the most transparent manner in which Respondent could have proceeded. Not the most transparent manner! Ya think?
I'm sort of wondering out loud here as to why the Arbitrator didn't refer the transparency issue to FINRA's regulatory arm. Hopefully, the zealous regulators at FINRA will investigate how often Morgan Stanley plays the old Wall Street shell game in an effort to hide the fact that the servicing stockbroker is no longer employed. Come to think of it, while FINRA investigators are looking into that issue, I have the perfect background music for them: