by Howard Haykin

A veteran broker at Ameriprise Financial Services agreed to a $12.5K fine and a 40-day suspension to settle FINRA charges that, among other things, he settled a customer complaint without notifying his member firm.

FINRA FINDINGS.    The broker (“RR”) executed $320,000 in securities purchases for long-time customers (husband and wife) over the course of 4 days in July 2013. The customer had instructed the RR to spread the purchases across 6 accounts belonging to himself and his wife. However, the RR mistakenly had the purchases executed in only one of the customer’s accounts, which did not have a sufficient balance to cover the purchases. As a result, the securities were purchased on margin and the account began incurring margin interest upon settlement of the transactions.

     [Here’s where things got interesting.] The customer apparently discovered the margin balance and interest in January 2014 - 6 months after the July transactions - at which point he demanded of the RR that the firm reimburse him the interest. Yet, rather than report the customer’s complaint to the firm, the RR wrote 4 checks to the customer from his personal account, totaling $12,845.86, in reimbursement for the margin interest charges. The RR did not disclose either the complaint or the payments he made to the customer until after the customer complained directly to the Firm in June 2014 – 5 months after his initial complaint in January.

FINANCIALISH TAKE AWAYS.    There's no disputing the fact that the broker violated FINRA Rule 2010 when he settled the customer complaint without his firm’s knowledge. And he violated Ameriprise’s pols and procedures, which prohibited its registered reps from engaging in settlements and refunding clients without the firm’s knowledge. 

So, why would this broker enter into an under-the-table settlement with his customer - given his wealth of experience (20 years), his credentials (Series 8 Supervisor license) and his willingness to provide full restitution to the customer? 

Possible Motive #1.   The broker feared he would lose his valued customer relationship. That concern was based on the possibility that Ameriprise, for some reason, might choose not to compensation the customer for margin interest caused by the broker's transactional errors. From FINRA's case details, we can conclude that the customer was a sophisticated investor with sizeable account balances, based on the following: (i) his family’s 6 accounts had a collective value of $4 million; (ii) at least one of the accounts traded on margin; and, (iii) upon his request, the customer received each month from the broker a manually-prepared summary of his account values, to supplement the monthly account statements received from Ameriprise. 

Possible Motive #2.     The broker feared he would lose his valued customer relationship over misleading communications that he had been sending to his customers. Those communications, which the broker sent from January 2013 through February 2014, contained summarized valuations of the customer's 6 accounts - to supplement the monthly account statements mailed out by Ameriprise. At some point, the account values on the manually-prepared summaries (created on Excel spreadsheets) became overstated by as much as $570,000 due to inadvertent errors made by the broker or his assistant. It was perhaps in January (when he discovered the erroneous margin balance and interest) or in February that the customer detected that the broker's monthly valuations grossly exceeded the actual value of his accounts. The customer may have threatened to pull his accounts from Ameriprise - a threat that the broker feared he could not share with his firm.

Notwithstanding the above Possible Motive scenarios, the broker's true motive remains a mystery, which theoretically could have been disclosed and resolved with his member firm.

Perhaps in the future, FINRA might agree to put some additional "meat on the bone” of its cases, so as to relieve its readers of the burden of having to guess about the actual facts and circumstances.

This case was reported in FINRA Disciplinary Actions for December 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2014042223301.