FINRA Honor and Principle

FINRA Honor and Principle

Why is the regulator always Gone Fishin' when it comes to employee rights?

Since 1995, Steven W. Sauer in Dublin, Calif., was registered as an investment company and variable contracts products representative and as a general securities representative with Financial Industry Regulatory Authority (FINRA) member firm American Investors Company (AIC). Sauer's deal with AIC included a 90/10 split for all investment advisory fees. The firm's policy required that customer fee payment checks be made payable to AIC, and the member firm would process the payment and then forward to Sauer his 90 percent share.

Splitting With the Split

From June 2001 through January 2008, Sauer received 13 fee-payment checks from four customers totaling $51,500, all made payable directly to him, contrary to AIC's policy. Sauer deposited the checks into his personal and business checking accounts, but did not inform AIC of the payments until May 2008, when he confessed to improperly withholding the firm's 10 percent share. In July 2008, Sauer wrote AIC a check for $5,150.

Things ended badly for Sauer afterward. In response to a subsequent FINRA investigation, Sauer settled charges of violating NASD Rule 2110, without admitting or denying FINRA's findings but accepting and consenting to them. Sauer was barred in all capacities. See In the Matter of Steven William Sauer, March 2010, at page 21 ( There was no finding in the report that AIC had improperly withheld compensation from Sauer while he worked there.

Honor and Principles

FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade, states, “A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.” That's what's called a catchall provision — rubbery, elastic language that vacuums up virtually anything that a regulator doesn't necessarily like but may be having a problem charging under a more specific rule.

Registered reps often complain that their former employers have wrongfully withheld profits, compensation, commissions, remunerations and/or benefits. Funny thing, though; after some three decades on Wall Street's regulatory scene, I'm having a hard time remembering the last regulatory case that NASD/FINRA ever brought against a member firm for not paying its employees in a timely manner. How is that? I mean, seriously, does FINRA ever hear about one of its member firms doing something dishonorable or unprincipled when it comes to its registered representatives? Am I the only industry lawyer who has heard repeated complaints about brokers being short-changed, underpaid, jammed up, and otherwise screwed by their employers?

Bait and Switch

The tale is often told about a given FINRA member firm that hired a registered person and then a week or so after the ACATed accounts are transferred and the new employee has burned all the bridges to the former firm, the new employer suddenly announces a number of arbitrary changes to the promised compensation package. You know, the old “We just can't find a way to fully pay for your sales assistant,” and the ever-popular, “We have to increase the dollar thresholds on the pay-out grid that we gave you, and, oh, gee, we're also reducing some of the percentages.”

Any of that sound familiar? Doesn't strike me as a particularly honorable or principled practice.

How about that old chestnut where you were hired by Firm X and offered a $200,000 forgivable loan over five years, but after two years Firm X was bought by Firm Y and a year later Firm Y merged into Firm Z. Almost immediately, Firm Z starts running things into the ground. Then it hits the news: Firm Y settles a multi-million dollar class action alleging widespread fraud, and the feds announce the start of a criminal investigation.

Firm X was a classy place to work, but the successor firms were the dregs. Your clients are leaving in droves and when you cold call, the minute anyone hears where you're working, they hang up. You quit before things get much worse and want to retain the $80,000 balance of the forgivable loan you think you're owed. Firm Z disagrees and is now suing you. What do you think would happen if you filed a regulatory complaint with FINRA alleging that Firm Z is not acting according to high standards of commercial honor or just and equitable principles of trade?

Hey, don't think too long. The diligent cops at FINRA have more important things to do. There is honor and there are principles when it comes to FINRA member firms, but it's a tad different when registered reps are involved.

Writer's BIO:

Bill Singer
is the publisher of and

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