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By Erwin J. Shustak, Partner and Andrew Steiger, Law Clerk of Shustak Reynolds & Partners, P.C. posted on Monday, September 28, 2020.

Erwin J. Shustak

Erwin J. Shustak

Managing Partner

LocationSan Diego, California
New York, New York
Phone: (619) 696-9500 (Ext. 109)
(800) 496-5900 (Ext. 109)
Email[email protected]

It can be difficult to know whether a broker’s mistake constitutes a private securities trading violation.  Some rules are clear-cut; others are not.

While employed as a Morgan Stanley Wealth Management broker, Christopher Reid executed approximately 200 equity and options trades for a new client his employer previously had rejected as a potential firm client.  After being rejected by Morgan Stanley, that client opened a self-directed brokerage account with another FINRA member brokerage in June 2018.  The name of the brokerage firm where these trades took place was not disclosed in the Letter of Acceptance, Waiver and Consent (“Consent Letter”), which is a document commonly created through settlement of the FINRA disciplinary process.  The letter did state that Reid participated in the client’s self-directed account “by advising the owner of the account on trading strategy and by directly placing trades in the account” through the outside firm’s website.  Reid received no compensation for his participation.  The account, however, lost 90% of its $100,000 value in less than three months so Reid obviously was neither a great advisor nor investor.

Morgan Stanley was investigating Reid when he resigned from the firm in September 2018.  FINRA, in turn, began investigating Reid after receiving Morgan Stanley’s U-5 separation form which indicated Reid was under investigation when he resigned.  (That tricky item 7 box which triggers an automatic FINRA investigation, even for voluntary resignations).  It is very common and routine that anytime a broker is terminated, or permitted to resign from a FINRA firm, FINRA investigates why the broker was let go or permitted to resign.  Following his investigation, FINRA charged Reid with unauthorized trading activity.  Reid received a four-month suspension and a $5,000 fine.

FINRA’s disciplinary decision focused on two rules.  Rule 3280 prohibits unauthorized private securities transactions.  Reid clearly violated this rule by participating in these transactions without first providing written notice to his employer, Morgan Stanley.  Rule 2010 requires brokers observe “high standards of commercial honor and just and equitable principles of trade.”  This rule is nebulous, far-reaching, and serves as a catch-all for the sort of bad faith or unethical conduct that is not contemplated by FINRA’s other rules.  FINRA did not explicitly say how Reid violated Rule 2010, and the Consent Letter provides few details.  Reid may have run afoul of the catch-all rule because his active participation resulted in such extreme losses for the account, thus creating a presumption of bad faith. 

In any event, Reid could have understood his ethical obligations better by consulting with a securities attorney.

We greatly appreciate Andrew Steiger's contribution to our firm!  Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.  We routinely represent broker-dealers and financial advisors in arbitrations, financial advisor transitions, broker protocol disputes and related matters.  Please direct any questions to our managing partner, Erwin J. Shustak, Esq. and contact us today for a confidential, complimentary consultation.

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