[ by Melanie Gretchen and Howard Haykin ]

Manager Seemingly Was Color Blind to Red Flags.

A producing branch manager for Morgan Keegan's Tyler, TX, office was charged by FINRA with numerous incidences of failure to supervise one of the 6 Registered Reps in his office.  According to FINRA, this particular RR repeatedly violated FINRA rules and appeared to act without regard for the well-being of his customers. 

Respondent's Professional Background. Keith Leon Bobo, Jr. entered the securities industry in 1986 and had served as a Registered Rep for 4 FINRA-regulated firms prior to joining Morgan Keegan & Company, Inc. in December 2004.  Bobo holds Series 3, 7, 8, 63, and 66 licenses,  From early on, Bobo has served as the Branch Manager in Morgan Keegan's Tyler, TX, branch office;  he also is a producing manager, servicing his own customer accounts.

FINRA Findings and Allegations.  Between February 2009 and April 2010, Bobo failed to supervise adequately an "uncontrollable" RR who exercised improper discretion, recommended unsuitable transactions, and mismarked order tickets in customer accounts related to transactions in Direxion ETFs.

Throughout the relevant period, Morgan Keegan's WSPs required that a branch office manager review customer accounts monthly to consider, among other things: 

• whether the transaction activity is consistent with the information reflected on the new account form;
• increased  activity, particularly short-term trading;
• general quality of securities;
• concentration in one security;
• inappropriate number of cancel, rebills, or corrections; and
• margin calls met by liquidation.

Bobo supervisory duties for his 6 RRs and 3 operational staff in the Tyler branch, include the following:

• When approving a new account form, he's expected to review a customer's age, investment objectives and financial status, among other information, to ensure that the assigned RR has obtained the customer's investment profile factors required to make recommendations.
• He's expected to conduct daily reviews of Protegent, the Firm's electronic daily trade blotter -
  • Protegent lists the previous day's executed trades, along with the customer account's investment objectives.
  • It flags possible front-running and trading ahead.
  • It monitors for large or unusual trades - i.e., those with exceptionally high $-amounts or share volume.

Specific Instances of Supervisory Failures. Protegent, which Bobo reviewed, showed that the particular RR's customers had relatively conservative investment objectives and risk tolerance levels.

However, Bobo overlooked:

• the frequency, volume of trading of ETFs in customer accounts
• RR's use of discretion in a significant number of trades in customers' accounts without their written authorization to effect the trades
• Customers' conservative investment objectives and risk profiles
• Customers' limited annual income.
• RR's customers ranged in age from 40 to 91.

What the RR got away with:

• exercising improper discretion
• recommending unsuitable transactions
• mismarking order tickets
• potentially trading ahead of, or against, customer orders

Example of RR's Behavior: During 2009, Protegent flagged the RR's personal account some 40 times for trading ahead or against his customers.  Bobo questioned the RR about these trades, and for most of
these trades the RR responded that he erroneously marked the order "solicited" - however, the order ticket should have been marked "unsolicited" because the customer suggested the transaction.

• Yet, for these transactions, Morgan Keegan permitted the RR to retain the transaction price and corrected the order ticket to reflect "unsolicited." 
• For certain other trades, the RR agreed that the order was "solicited" but claimed to have forgotten that he had made a trade earlier in the day for his own account before soliciting a trade for a customer. Whereupon, the Firm corrected the price and gave the customer the better price.
• Bobo approved each of the order corrections that changed the ticket from "solicited" to "unsolicited" and he approved all of the price corrections that gave the customers the more favorable prices. 
• Bobo accepted the RR's assertions that the customers initiated discussions about trading Direxion ETFs based on the RR's statement that:  (i) the customers had previously traded Direxion ETFs;  (ii) the customers had called him to effect the trades, and, (iii) the customers were familiar with the product.
• Bobo accepted Broker X's explanations and did not attempt to contact any of the Customers - FINRA made the judgment that Bobo had failed to exercise reasonable supervision of the RR to determine whether he, in fact, had been trading in Direxion ahead of or against the Customers' orders.
• Of course, had Bobo contacted any of the customers, he would have been able to determine that several hundred unsolicited trades in the accounts were not reasonable, and that the RR had not spoken to each customer to obtain appropriate trade instructions prior to effecting each trade.

Apparent Violations and FINRA Sanctions. Bobo was charged by FINRA with violating NASD Rule 3010(a) and FINRA Rule 2010 by failing to supervise adequately an RR who exercised improper discretion, recommended unsuitable transactions, and mismarked order tickets in customer accounts related to transactions in Direxion ETFs. 

Bobo settled the charges, agreeing to a $10K fine and a 30-day suspension in any prinicipal or supervisory capacity.  However, he was permitted to continue servicing his own customers.

For further details, go to [FINRA Case #2010021688102] and [Disciplinary and Other FINRA Actions, October 2012].