by Howard Haykin

FINRA recently sanctioned two brokers in separate cases - each on charges of having violated Rule 5130 by participating in initial public offerings (“IPOs”) through outside brokerage accounts.

►     BROKER ONE - $7.5K Fine, 10-Day Suspension, $19.5K Disgorgement.   This Wall Street veteran (with 19 years’ experience) purchased and sold shares in 33 IPOs over a 4-year period - all transactions were conducted in a personal brokerage account at Berthel, Fisher & Company Financial Services by a registered rep who was BROKER ONE’s friend and former co-worker, and who had been entrusted entirely with handling the account. BROKER ONE fully disclosed the Berthel account to his firm, Sterne Agee Financial Services (k/n/a ‘SA Stone Wealth Management’).

►     BROKER TWO - $50K Fine, 6-Month Suspension, $267K Disgorgement.    This Wall Street veteran (with 26 years’ experience) purchased and sold shares in 239 IPOs over a 4.5-year period - all transactions were conducted in a personal brokerage account at Merrill Lynch, Pierce, Fenner & Smith. BROKER TWO fully disclosed the Merrill account to only one of firms - Best Direct Securities or M Holdings Securities. 

FINANCIALISH TAKE AWAYS.   The disparity in sanctions handed down by FINRA appears to be appropriate. It's quite apparent that BROKER TWO sought to flout the system, having averaged 53 IPOs a year and failing to disclose his Merrill brokerage account to one of his firms. Conversely, BROKER 1 came across as having been less devious or intentional, and his relatively light sanction seemed to have been based on 3 factors: (i) he fully disclosed his Berthel account; (ii) he averaged a moderate 8 IPOs a year over his 4-year period; and, (iii) his Berthel registered rep – a friend and former Sterne Agee co-worker – apparently had complete trading authority over his account.

That said, we're left with several open or unresolved concerns, namely:

►     A Broker’s Lapse in Judgment.    As a sophisticated investor, BROKER ONE knew, or should have known, that his Berthel registered rep was buying into IPOs - and nothing excuses his failure of judgment. Ultimately, he was responsible for any violative conduct in the account.

►     Discretionary Authority.    BROKER ONE essentially gave his friend discretionary authority over his Berthel account - which may or may not have violated Berthel's policies with regard to discretionary trading. Were Berthel's registered reps permitted to exercise discretionary authority in customer accounts? And, if so, had the registered rep provided advance notification to the firm of his (and BROKER ONE's) intentions?  Sadly, FINRA does not address these questions. 

►     Personal Brokerage Accounts of a 'Restricted Person' Associated with Another B/D.    Both Berthel, Fisher & Company Financial Services and Merrill Lynch, Pierce, Fenner & Smith carried the personal brokerage accounts of individuals who were associated with other broker-dealers. As such, these brokerage accounts should have coded as belonging to "restricted persons" and been prohibited from participating in IPOs. While we know for certain that the Berthel registered rep was aware that his friend and customer was a "restricted person," we cannot say the same thing for any registered rep at Merrill. 

The bottom line is that, had the accounts been coded as "Restricted," the violative conduct would likely not have occurred. It's unfortunate that FINRA, once again, took a pass on addressing these issues.

These cases were reported in FINRA Disciplinary Actions for April 2018.

For case details, go to ...  FINRA Disciplinary Actions Online, and refer to either Case #2014043594201 or Case #2017054294101.