The (Possible) Benefit Of Self-Reporting And Internal Discipline

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Historically, one of the surest ways to get yourself permanently barred from the industry is to forge a customer’s signature on something.  According to the pertinent Sanction Guideline, at a minimum, a forgery, that is, a true forgery – a signature that is neither authorized nor subsequently ratified by the customer – should result in suspension of two months to two years, but, where the forgery is “in furtherance of another violation, result[s] in customer harm or [is] accompanied by significant aggravating factors,” “a bar is standard.”  And that doesn’t count the fine of $5K – $155K.

FINRA recently issued an AWC that involved what I just called “true” forgery, however, that suggests, at least under certain circumstances, that unhappy outcome might be avoidable.

The facts of this case are pretty concise:

  • Timothy Joseph has been in the securities industry as a Series 6 for almost 20 years, with one firm – First Command Brokerage Services, Inc. – and with no disciplinary history.
  • In August 2019, Mr. Joseph met with a customer regarding opening two accounts with the firm’s investment advisor affiliate.
  • After meeting with the customer again in September 2019, Mr. Joseph electronically affixed her signature to the account opening documents, causing assets to be transferred from her firm account to the new advisory accounts.
  • When the customer learned that the advisory accounts were opened, she immediately complained that she had not signed anything to open those accounts, digitally or otherwise, and instructed Mr. Joseph to reverse the transactions.
  • Joseph reported his customer’s complaint to First Command (resulting in a disclosure on his Form U-4), which reversed the transactions.
  • In that same month, Mr. Joseph also electronically affixed the signatures of:
    • two other customers to advisory account opening documents,
    • one customer to four IRA distribution forms, and
    • five other customers to ACH authorization agreements.
  • Although none of these other customers initially authorized Mr. Joseph to electronically affix their signatures, they all subsequently approved the transactions.
  • When First Command learned of Mr. Joseph’s conduct, the Firm disciplined him by, “among other things”:
    • fining him $10,000
    • assigning him additional (but undescribed) training.
  • FINRA fined Mr. Joseph nothing, but merely suspended him for 45 business days.
  • FINRA learned about this when First Command reported the incident in a Rule 4530 filing.

Let’s, as they say, unpack this.

First, as I said, at least with regard to the first customer, the one who complained, this was a true forgery.  Not an “accommodation forgery,” which was highlighted in FINRA’s 2019 Exam Findings Report and defined as “where registered representatives and associated persons asked customers to sign blank, partial or incomplete documents.”  Also not a “falsification of records,” which is what FINRA sometimes charges in cases of accommodation forgery.  No, this was true forgery.

Moreover, in light of the fact that the customer not only complained of the forgery but instructed that the transactions at issue – the establishment of advisory accounts and the transfer of assets to those accounts from her brokerage account – be reversed, it seems pretty logical to conclude that the transactions were not authorized.  In other words, Mr. Joseph’s forgeries were “in furtherance of another violation,” i.e., the unauthorized trades.

Based on the Sanction Guideline, therefore, as well as about a million prior FINRA settlements for forgery (and unauthorized trading), Mr. Joseph ought to have been barred.  Yet, he wasn’t; he only got suspended for about two months.  On top of that, he was not made to pay a fine in addition to the $10K he paid his BD.  All in all, this was a pretty tepid response by FINRA.  Why?

I can mostly speculate, of course, since there’s not much to work from in the AWC itself, except when it comes to the fine.  In the AWC, FINRA states that it “considered that First Command fined Joseph $10,000,” so we know that this is why Mr. Joseph didn’t have to pay anything additional.  The odd part is how infrequently this happens.  The General Principles Applicable to All Sanction Determinations that serve as a preface to all the specific Sanction Guidelines include this admonition:  “Where appropriate, Adjudicators should consider . . . previous corrective action imposed by a firm on an individual respondent based on the same conduct.”  It goes on to provide that a “firm-imposed fine or suspension is most comparable to FINRA-imposed sanctions when FINRA’s sanctions would have also included a fine or suspension, and Adjudicators should consider according some mitigative weight where these firm-imposed sanctions have already been fully satisfied by a respondent.”

Note the many waffle words and phrases FINRA tosses about here.  “Should consider,” not “shall consider” or “must consider” or some other mandatory, not precatory, language. “Where appropriate,” without bothering to tell us when it would, and wouldn’t, be appropriate.  “Some mitigative weight.”  Does that mean a dollar-for-dollar reduction?  A 50-cents-on-the-dollar reduction?  No reduction?  I get that the Sanction Guidelines are just that, guidelines that can be followed or ignored, but it is troubling that the deliberate flexibility that the Sanction Guidelines provide to FINRA make it extremely difficult to be able to predict how a case will be charged and how it will be resolved.  There is no reason that internal sanctions meted out by BDs should ever be disregarded by FINRA, but often they are.  And while I am happy that Mr. Joseph avoided paying two fines, I am just not sure why he got so lucky.

But that’s small potatoes to the big issue here: why was he not barred?  The facts here – one instance of true forgery coupled with eight more instances of accommodation forgery – strongly suggest that this was egregious misconduct, mandating a bar.  Or, if not a bar, something more than the short suspension he received.  It is frustrating that more facts are not supplied, because I guarantee you that the first time I attempt to use this AWC as persuasive precedent that some client of mine ought not to be barred for forging a customer’s name, FINRA will tell me that, oh, there were “unique circumstances” in Mr. Joseph’s case, so we should just ignore it.

The other thing worth discussing is the fact that in addition to reporting the customer complaint on Mr. Joseph’s Form U-4, First Command also filed a 4530 report about this.  That rule requires a BD to report within 30 days when “an associated person of the member . . . is the subject of any written customer complaint involving allegations of . . . forgery,” and also when “an associated person of the member is the subject of any disciplinary action taken by the member involving . . . the imposition of fines in excess of $2,500,” both of which appear to have happened here.[1]  So, First Command had no choice but to make its 4530 report.

But it did, it appears to have done so in a timely manner, and (whether or not you agree it was adequate) it took prompt action to address Mr. Joseph’s misconduct.  I am hardly saying that this was anywhere near the sort of above-and-beyond self-reporting behavior that garners credit from FINRA, but you can’t argue with the outcome.  No supervisory nick against the firm or Mr. Joseph’s direct supervisor, and Mr. Joseph escaped with not much more than a wrist slap for behavior that has cost countless others their careers.  Yes, two and two doesn’t always equal four, but I think here the results had to have been dictated, at least in part, by the fact that First Command took quick, demonstrable steps in response to a pretty big red flag and presented FINRA with a done-deal.  Something everyone should think about doing when presented with similar circumstances.

[1] Pursuant to 4530(e), a 4530 report is not required in addition to a U-4 amendment disclosing a customer complaint, but it is required to disclose the internal discipline that a firm takes.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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