FINRA HEARING PANEL REJECTS “NO HARM, NO FOUL” DEFENSE

On July 7, 2022, FINRA’s Office of Hearing Officers issued its decision in Dep’t of Enforcement v. Burford, Discip. Proc. No. 2019064656601 (OHO July 7, 2022). Here, the Hearing Panel found that Burford caused no customer harm. There was no evidence that Burford gained monetarily from his actions. Burford was “polite, respectful, and cooperative” throughout the investigation and disciplinarily proceeding. Nonetheless, the Hearing Panel refused to deem these factors “mitigating” and whacked Burford with a 6-month suspension – double the suspension sought by Enforcement – and $10,000 fine. At its core, this is a case of registered representative alleged to have improperly taken instructions from a deceased customer’s widow. This case highlights the perils of efforts by a financial adviser to assist an individual when those efforts skirt the policies of a broker-dealer.

Background Facts

Burford was registered with Hilltop Securities Independent Network, Inc. In November 2019, Hilltop discharged Burford and filed a Form U5 alleging a “failure to follow firm policy regarding the death of a client.”

FINRA alleged that Burford failed to notify Hilltop that one of his customer’s (a first cousin of Burford’s wife) passed away in October 2016. The customer had a trading authorization agreement on file permitting Burford to accept trading instructions from the customer’s wife. After the customer’s death, Burford executed 9 trades at the instruction of the decedent’s widow and facilitated 8 ACH disbursements to the widow. The post-death trading activity and money movements came to light when the decedent’s daughter (the adult child from a prior marriage) challenged the customer’s will and petitioned the probate court to restrain the widow from any further disposition of the decedent’s property. Apparently, the widow did not file the will for probate until February 2019, more than 2 years after her husband’s passing. Under Texas law, the right to inherit under a will is not effective until the will is admitted to probate.

FINRA’s Enforcement Department filed a one-count Complaint in September 2021 alleging that Burford violated FINRA Rule 2010 (requiring registered representatives “to observe high standards of commercial honor and just and equitable principles of trade”) by engaging in unauthorized trading and withdrawals. Specifically, FINRA alleged that the trading authorization terminated upon the customer’s death and, in any event, the trading authorization never permitted money movements. According to FINRA, until the probate court admitted the will for probate and issued letters testamentary, no one had authority to direct transactions in the decedent’s brokerage account.

Burford defended the Complaint by alleging that (a) the widow was the named executor and primary beneficiary of the customer’s will; (b) the widow directed and authorized the transactions and money movements; and (c) the activity in question served the widow’s best interests.

The Hearing Panel’s Findings

The Hearing Panel found numerous “aggravating factors:”

• Burford effected the transactions over a lengthy period of time (3 years).
• The value of the transactions was “high” (more than $200,000).
• Burford “concealed” his actions from Hilltop by failing to timely submit the certificate of death and failing to inform Hilltop of the transactions effected after the customer’s death.

Importantly, the Hearing Panel rejected the “no harm, no foul” defense by finding that the harm was the “potential legal risk” to himself and Hilltop caused by the activity in question. Even though a “misguided attempt” to act in a customer’s best interest may be mitigating (Dep’t of Enforcement v. Noard, No. 2012034936101, 2017 FINRA Discip. LEXIS 15, at *29-30 (NAC May 12, 2017) (A respondent’s misguided attempt to act in a customer’s best interest may be mitigating)), the Hearing Panel found that the widow was not Burford’s customer and refused to treat any of Burford’s actions as mitigating. See Dep’t of Enforcement v. Correro, No. E102004083702, 2008 FINRA Discip. LEXIS 29, at *16 (NAC Aug. 12, 2008) (finding that a goal to benefit a customer is not a defense to a violation of NASD Rule 2110, the predecessor to FINRA Rule 2010); Dep’t of Enforcement v. Sears, No. C07050042, 2009 FINRA Discip. LEXIS 4, at *3-6, 11 (NAC July 23, 2009) (Rule 2010 violation found for unauthorized trading even though there was no evidence that respondent “acted in bad faith …. gained any commissions on the [ ] unauthorized trades, or was otherwise motivated by selfish interests.”).

This case serves as a stark reminder that efforts to appease a customer (or, here, a non-customer) may nonetheless be viewed by FINRA as a serious rule violation.

Herskovits PLLC has a nationwide practice representing individuals and broker-dealers in FINRA investigations and disciplinary proceedings. Feel free to call us for a consultation. (212) 897-5410.