FINRA Suitability Paperwork Undoes Westrock Advisors Branch Manager

Sometimes supervision of stockbrokers is about more than getting updated paperwork from customers.

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority (“FINRA”), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, David Alan Oppenheim submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter Of David Alan Oppenheim, Respondent (AWC 2011026346203, August 30, 2012).

Oppenheim was first registered with FINRA in 1992, and from 2002 until September 22, 2010, he was registered with Westrock Advisors, Inc., where he served as the firm’s New York City Branch Manager from January 2008.


During the relevant time between October 2009 and July 2010, Branch Manager Oppenheim was responsible for reviewing the daily trade blotter; and as a result of such review and/or from information that came to his attention, the AWC alleged that Oppenheim became aware of numerous instances of unsuitable recommendations being made to customers in light of the investment objective and/or risk tolerance recorded on the customer account form.

As with virtually all FINRA member firms, Westrock Advisors’ policies provided that if a broker sold a security that was inconsistent with a customer’s disclosed investment objective or risk tolerance, the customer’s account would be restricted to liquidating transactions unless the broker obtained an updated customer account form. During the relevant time, when Oppenheim learned of an unsuitable trade, the  AWC alleged that he instructed the broker of record to obtain an updated customer account form: In many instances, Oppenheim allegedly emailed the broker and specifically instructed him or her to obtain an updated form that reflected a change in the customer’s risk tolerance to aggressive or investment objective to speculation.

SIDE BAR: What the AWC appears to be implying is that Oppenheim sort of put a reverse spin on the normal thought process and conduct of a supervisor.

When confronted with evidence of numerous potentially unsuitable transactions,  a supervisor should primarily be concerned about the customer — such red flags would typically generate responses along a spectrum but, generally, the supervisor would consider killing the subject trades, contacting the customer to confirm their acceptance and understanding of the riskier trade, and seeking to obtain updated risk tolerance and investment objectives on the firm’s customer account forms.  The AWC implies that Oppenheim was more concerned with conforming the customer account form paperwork with the executed trades rather than inquiring as to why so many apparently unsuitable orders were being submitted for execution.

The AWC alleged that Oppenheim told the brokers that pursuant to firm policy, a customer’s account would be restricted to liquidating transactions if a broker failed to obtain a revised customer account form.  The apparent implication here is that Oppenheim sort of winked at his brokers and said that you need to amend the customer account forms to bring them in line with these riskier trades; otherwise, you know, the company’s policy is that I’ll have to freeze your accounts to liquidating-only.

The AWC implies that Oppenheim did not have a reasonable basis for believing that so many of the branch’s customers had exercised informed consent resulting in their authorization to engage in riskier, more speculative transactions.  The AWC sort of dribbles away at this point and we are somewhat left to infer that Westrock employees submitted false updates without the customers’ authorization or knowledge; or, the changed forms were extracted from somewhat unwitting customers. In a conclusory manner, the AWC alleges that as a result of Oppenheim’s instructions, the brokers submitted revised customer account forms that did not reflect the actual investment objectives or risk tolerances of the customers.

The AWC alleged that Oppenheim caused the creation of false customer account forms, in violation of FINRA Rule 2010, and also caused Westrock Advisors’ books and records to be inaccurate, in violation of NASD Rule 3110(a).  In accordance with the terms of the AWC, FINRA imposed upon Oppenheim a $5,000 fine and a 6-month suspension from associating with any FIRNA member in any principal capacity.

Bill Singer‘s Comment

Notwithstanding my opinion that this AWC could have spelled out the underlying assumptions, inferences, and implications more precisely, it still presented a credible case and one that explores a troubling nuance of many member firm’s compliance protocols.

If a supervisor deems a trade unsuitable, the most appropriate action would be to kill the trade; however, that is not always advisable.  Perhaps a customer gave an unsolicited order to his or her broker for the particular trade and that customer expressed a verbal willingness to accept more risk and also demonstrated an understanding of the more speculative nature of the transaction.  Under this circumstance, it makes sense to get updated paperwork and perhaps advise the broker to submit the revised customer forms in a more timely manner.

In Oppenheim, however, it was not an issue of a few isolated unsuitable trades but of many — and that was a clear red flag with flares. As if what??? — all of a sudden numerous branch customers just suddenly decided  to increase their risk preferences and appetite for speculation?

The AWC reminds branch managers that when confronted with widespread suitability issues, their first response should be to ask questions. Why did this customer place this riskier order?  Are other branch customers suddenly ordering the same stock, and, if so, why is there is office-wide push? Why didn’t the brokers secure updated customer account forms before submitting the riskier trades?  How come virtually all of the customers increased their risk profiles on their account forms?

Diligent managers would consider the facts presented in Oppenheimand contact numerous customers to try and figure out what the hell was going on. Further, such an office-wide red flag should prompt a manager to meet with the subject brokers and find out why there was not an effort to first secure executed, updated customer forms.  What is not acceptable is for a manager to merely urge subordinate brokers to get conforming customer form after the fact. If I have added up 2 and 2 and gotten 5, the solution is not to alter one of the 2′s to a 3.  In some sense, Branch Manager Oppenheim was confronted with a suitability issue that didn’t quite add up in terms of compliance concerns and his solution was to tell his brokers to enter a “plug” by conforming the customer forms.  That’s changing a 2 to a 3.

While exceptions are often the everyday rule at branch offices all over Wall Street, that doesn’t alter the validity of the points raised in this AWC.  Suitability issues are not merely the stuff of small firms with overwhelmed managers; to the contrary, the issue of suitability and up-to-date paperwork bedevils every brokerage firm. Managers and compliance officers at Merrill LynchMorgan Stanley Smith Barney, JP Morgan, Wells Fargo, UBS, and other major firms must divine the very same tea leaves as their counterparts at indie/regional firms.

The Current FINRA Suitability Rule:

FINRA Rule 2111: Suitability

(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
(b) A member or associated person fulfills the customer-specific suitability obligation for an institutional account, as defined in Rule 4512(c), if (1) the member or associated person has a reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a security or securities and (2) the institutional customer affirmatively indicates that it is exercising independent judgment in evaluating the member’s or associated person’s recommendations. Where an institutional customer has delegated decisionmaking authority to an agent, such as an investment adviser or a bank trust department, these factors shall be applied to the agent.
• • • Supplementary Material: ————–
.01 General Principles. Implicit in all member and associated person relationships with customers and others is the fundamental responsibility for fair dealing. Sales efforts must therefore be undertaken only on a basis that can be judged as being within the ethical standards of FINRA’s rules, with particular emphasis on the requirement to deal fairly with the public. The suitability rule is fundamental to fair dealing and is intended to promote ethical sales practices and high standards of professional conduct.
.02 Disclaimers. A member or associated person cannot disclaim any responsibilities under the suitability rule.
.03 Recommended Strategies. The phrase “investment strategy involving a security or securities” used in this Rule is to be interpreted broadly and would include, among other things, an explicit recommendation to hold a security or securities. However, the following communications are excluded from the coverage of Rule 2111 as long as they do not include (standing alone or in combination with other communications) a recommendation of a particular security or securities:
(a) General financial and investment information, including (i) basic investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return, and tax deferred investment, (ii) historic differences in the return of asset classes (e.g., equities, bonds, or cash) based on standard market indices, (iii) effects of inflation, (iv) estimates of future retirement income needs, and (v) assessment of a customer’s investment profile;
(b) Descriptive information about an employer-sponsored retirement or benefit plan, participation in the plan, the benefits of plan participation, and the investment options available under the plan;
(c) Asset allocation models that are (i) based on generally accepted investment theory, (ii) accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor’s assessment of the asset allocation model or any report generated by such model, and (iii) in compliance with NASD IM-2210-6 (Requirements for the Use of Investment Analysis Tools) if the asset allocation model is an “investment analysis tool” covered by NASD IM-2210-6; and
(d) Interactive investment materials that incorporate the above.
.04 Customer’s Investment Profile. A member or associated person shall make a recommendation covered by this Rule only if, among other things, the member or associated person has sufficient information about the customer to have a reasonable basis to believe that the recommendation is suitable for that customer. The factors delineated in Rule 2111(a) regarding a customer’s investment profile generally are relevant to a determination regarding whether a recommendation is suitable for a particular customer, although the level of importance of each factor may vary depending on the facts and circumstances of the particular case. A member or associated person shall use reasonable diligence to obtain and analyze all of the factors delineated in Rule 2111(a) unless the member or associated person has a reasonable basis to believe, documented with specificity, that one or more of the factors are not relevant components of a customer’s investment profile in light of the facts and circumstances of the particular case.
.05 Components of Suitability Obligations. Rule 2111 is composed of three main obligations: reasonable-basis suitability, customer-specific suitability, and quantitative suitability.
(a) The reasonable-basis obligation requires a member or associated person to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors. In general, what constitutes reasonable diligence will vary depending on, among other things, the complexity of and risks associated with the security or investment strategy and the member’s or associated person’s familiarity with the security or investment strategy. A member’s or associated person’s reasonable diligence must provide the member or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy. The lack of such an understanding when recommending a security or strategy violates the suitability rule.
(b) The customer-specific obligation requires that a member or associated person have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile, as delineated in Rule 2111(a).
(c) Quantitative suitability requires a member or associated person who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile, as delineated in Rule 2111(a). No single test defines excessive activity, but factors such as the turnover rate, the cost-equity ratio, and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member or associated person has violated the quantitative suitability obligation.
.06 Customer’s Financial Ability. Rule 2111 prohibits a member or associated person from recommending a transaction or investment strategy involving a security or securities or the continuing purchase of a security or securities or use of an investment strategy involving a security or securities unless the member or associated person has a reasonable basis to believe that the customer has the financial ability to meet such a commitment.
.07 Institutional Investor Exemption. Rule 2111(b) provides an exemption to customer-specific suitability regarding institutional investors if the conditions delineated in that paragraph are satisfied. With respect to having to indicate affirmatively that it is exercising independent judgment in evaluating the member’s or associated person’s recommendations, an institutional customer may indicate that it is exercising independent judgment on a trade-by-trade basis, on an asset-class-by-asset-class basis, or in terms of all potential transactions for its account.

– By Bill Singer


Posted by Steven Maimes, The Trust Advisor



More Posts From This Author...

, , ,