Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.
November 2010
Ethelbert Pacis Gazmen
AWC/2009018322101/November 2010
Gazmen recommended that his member firmís customer use part of her available funds to purchase a variable universal life insurance (VUL) policy through him, and recommended that the customer open an account at another firm. Gazmen assisted the customer in opening a margin account with the other firm and was given trading authority over the account for which he made all of the investment decisions and entered the trades directly, but was not compensated in any way for managing the account. Gazmen was not licensed to recommend the sale of individual securities to a customer or to engage in the purchase or sale of individual securities on a customerís behalf, he did so in handling the customerís account at the other firm. Gazmen failed to give notice to his firm of his proposed role in handling the customerís account, as the firm and FINRA rules required.
Ethelbert Pacis Gazmen : Fined $10,000; Suspended 30 days
Tags:  Variable Insurance    Unregistered Person    Discretion     |    In: Cases of Note : FINRA
September 2010
Michael Aaron Brady
AWC/2010022037401/September 2010
Brady converted a total of $194,424.81 from customers who entrusted him with money to invest and, instead, misappropriated the funds for his own personal use. One customer gave Brady over $90,000 to invest in an Individual Retirement Account (IRA) and in a Section 529 college tuition plan account but Brady used the money for personal purposes. In one instance, Brady created a fictitious account statement that falsely showed that the customerís account increased from about $37,000 to over $48,000 in one year; but, in fact, Brady never invested the customerís money and had converted over $56,000 of the customerís money to his personal use. In another instance, a customer surrendered a variable annuity and paid the proceeds to Brady to re-invest in another variable annuity; Brady did not do so and misappropriated the funds, which exceeded $41,000.
Michael Aaron Brady : Barred
June 2010
Ronald Douglas Rogers
AWC/2008014061001/June 2010
Rogers made an unsuitable recommendation to customers to each purchase $1,000,000 variable life insurance policies, using $30,000 that they had intended to use as a down payment for a home.  Rogersí recommendation to the customers was unsuitable in light of their young age and lack of a need for $1,000,000 in life insurance coverage. Rogers received commissions totaling $6,841.22.
Ronald Douglas Rogers : Fined $15,000 (includes commissions disgorgement); Suspended 1 month
Tags:  Life Insurance    Variable Insurance     |    In: Cases of Note : FINRA
Bill Singer's Comment

Without indicating the age of the clients in the monthly squib report (FINRA merely provides us with the conclusory "young" age characterization in the monthly report -- clearly, since the age is a critical component of this case, FINRA should have published the ages in the monthly abstract), the regulator charges that purchasing a $1 million life insurance policy was a violation because 1. the funding came from $30,000 to be used to make a down payment on a home; and 2. the customers were "too young" to own such a policy; and 3. they had a lack of need for a $1 million life insurance policy.

While all of the reasons for brining the charges may well prove correct, I don't buy the case solely based upon the fact pattern in the online monthly disciplinary report. 

  • First off, did any one determine whether the customers were "too young" to be putting $30,000 into a home -- and what about the value of the purchased home, was that also "suitable" for this young couple? 
  • How does one determine whether a young couple with at least $30,000 in assets has or does not have a need for a $1 million life insurance policy?
  • Did FINRA determine that the couple had no need for any life insurance or a need for only up-to $500,000? 
  • Assuming that one of the customers was the sole breadwinner for the family (that is merely conjecture for the sake of making a point), if he/she dies next week, would the other party (and are there any children?) be better off with a $1 million life insurance policy or ownership of a home with only $30,000 paid-in equity?

Again, there are probably significant facts that justify FINRA's position but the regulator needs to detail those in its monthly report if the case and its sanctions are to be meaningful as a regulatory tool to educate the industry and investing public.

UPDATE: I obtained a copy of the AWC and discovered the following additional facts not disclosed in the monthly squib report. At the time of the sale, the couple were 25 and 26 years of age and were not then married. As of April 2007, the intended house purchase was to be made in 2009 or 2010 with the $30,000 as a deposit.  Rogers recommended that the couple each purchsae a $1 million variable life insurance policy. Rogers total commissions on both purchases was $6,841.22. FINRA apparently concluded that given the couples' age that the recommendation was unsuitable because they had earmarked the $30,000 for a future house purchase and the variable life policies exposed them to market risk and did not provide the couple with "liquidity" for the invested sums. FINRA also noted that if the couple decided to cash out their policies to puchase a home in 2009/2010, that there would be a surrender charge.  Moreover, FINRA seems to have concluded that a young couple in their 20s "given their particular financial situation " (not explained by FINRA) "did not have a financial need to each have a$1,000,000 in insurance coverage. " The couple subsequently married in November 2007. 

Enforcement Actions