I had been a registered Rep with ONESCO since 2002. During those years I have managed various client accounts that included both retail and authorized discretionary, IRA’s, SEP, Simple IRA, Roth IRA, TOD, and NQ type accounts of all ages and risk objectives. Overall, my management style has been moderate to conservative in nature. My usual account design is to set up a balanced portfolio of lower risk income products that includes bonds, mutual fund bond portfolios, cash, REITs, annuities, and some speculative stocks. Most stock positions were international “dividend” staple blue chips that were consistent with income objectives. Once accounts were implemented, there would be very little need to trade their accounts very often, except for cash distribution requests, or income stream needs. On occasion, a market condition adjustment might require a small position change.
I know of several times when some clients were charged a fee for “not being traded enough.” Due to the low-risk approach and limited number of trades on those accounts, my assessment was that the “Pershing LLC” retail accounts served many of those clients more efficiently with less fees than would be charged for a “fee” based advisory account overall. Unless the client was an aggressive speculative trader with a growth objective. I firmly believe if an analysis of the last 15 years were done on those accounts you would find the commissions earned on these accounts would result in considerably less charges to the client than what the fee-based system would have charged those clients.
Managing a lower risk approach to portfolio management for income has increasingly become a challenge. This is due to a combination of factors. Interest rates that have been falling since 1982 and, at the time of this writing, are in a “protracted low interest rate environment” with the Federal Funds Rate at or near 0%. Rates have remained in such a low rate for approx. 10-15 years, such that bond portfolio’s that previously had a mix of varying higher rates of 4, 5, 6 % plus coupons have matured and are being replaced by 1, 2, and 3% rates with longer duration periods. This creates an almost guaranteed loss unless bonds are held directly till maturity, or ultra-short with low interest coupon rates are used. For Mutual Fund bond portfolios, should interest rates rise in the future, it’s unlikely they would have a gain, but rather a loss. Retirees who are dependent on income to sustain standard of living are being squeezed. Thus, the traditional “balanced” portfolio approach of 50 plus years no longer works efficiently.
In addition, the Fed reserve action has been to force the investment public into higher “risk” assets classes if they want return of any kind. There is an old adage, “never bet against the Fed.” Experientially, I have found that to be generally true. When the current market conditions presented a correction of the Oil & Gas markets, due to sudden cratering of demand caused by Covid-19 pandemic (i.e “shelter in place” shutdown, worldwide) an oversupply condition resulted. I tried to gather as much information as possible of this affect both short term and long term. Most by economists were suggesting that due to the strong underlying economic fundamentals, if the correction presented a 15-20% correction, it should present a “buying” opportunity with a U shaped, or perhaps a V- shaped recovery. It actually corrected 32-38 %. I began discussing with clients a plan of action to make adjustments to their portfolio’s which included purchase of Oil and Gas Stocks at incredible low-price valuations. Fully explaining the risks of loss to this approach, I voiced to every client that historically, markets fell as much as 91% in 1929, 49% in 2001, 58% in 2008-09, so a 32% should not be considered “safe” or the bottom.
In attempting to provide the best educated guidance to advising clients, adjustments began to be made on the accounts as clients individually desired to participate in this strategy on a custom basis for each client. All clients were spoke with personally and plans were devised. These adjustments were started approximately March 9 thru June, 2020. Compliance wanted to know why the large volume of trades were being made on given days. I responded with answers to those inquiry’s that all clients were spoken to, both during and after normal office hours due to the extreme and fast- moving volatility. Compliance seemed satisfied with those responses as I never heard anything back. No response led me to believe that my actions were in compliance. This was the first time an issue was made of the firm’s interpretation of “same day” trades. Trade orders discussed after close of market were entered at market opening the next business day. ONESCO compliance reacted to multiple orders entered at open the next business day claiming it was a violation of the same day trade practice rule on “retail” accounts. I asked compliance at that time of their interpretation of the definition of “day” in that rule. I indicated that if that meant a 24 hr period, then no violation had occurred as trades cannot be made after market close hours the previous day. Peter Weller did not indicate there was a specific definition and declined to answer that question or provide an alternative solution.
As the world “Pandemic” problem continued to play out with a partial or near total shut-down of the world economy, systemic risk began to increase significantly! We’ve not had a world economic shutdown before that I’m aware of, and the risk was unknown. The concern was not the Pandemic, but the ripple effect of the credit markets and business continuity that will likely result from the shut down to the economic system worldwide for indefinite periods of time. In evaluating this risk potential, I began again discussing with clients those concerns. I advised taking some profits on positions that had nearly doubled within that 60-day period and increasing cash position as a hedge. GM (General Motors) in particular was discussed. Their portfolio’s had avoided to largest effect of the 32% correction (as they were in a lower risk position) and were seeing gains of approximately 20% or more in most cases from where their account was in February.
Clients strategically agreed to take the gains on selected security purchases. Exiting selected equity positions to cash as market pricing dictated were entered on the block trade. I discussed potentially using a block-trade approach on those stocks at pre-determined pricing triggers with the trade desk to be more time efficient with multiple client accounts traded. Trading each account individually on each individual stock price trigger would be difficult with over 300 accounts. Trade desk verified it could be done and, in fact, I have done that in the past on at least two occasions several years ago (2015 and 2017) on stocks held in client portfolio’s (Cabot Oil & Gas and China Precision Steel). No compliance concerns were raised at the time of those trades. I also asked the trade desk to connect me to compliance so I could coordinate advisement on this plan that so as not to violate any rules. The trade desk officer was Brian. This can be confirmed on recorded call logs. He did transfer me, however, I got voicemail, I called compliance direct the next morning, and again that afternoon. Again, voicemail both times without a return call. Due to the pandemic, many of the broker/dealer staff was working from home and timely responses were highly inefficient.
As markets appeared to become increasing more unstable, clients who already had an expectation to sell GM at or near a $30 price trigger based on previous conversations, I entered a block order to sell GM in all those accounts. Most all accounts purchased GM between $15 and $21 per share. Compliance indicated this was a violation of the “same day of trade” rule instead of what was formally believed to mean a “24 hour” rule on orders secured after market close on previous day. I don’t believe ONESCO compliance department considered the previously set pricing instruction given by client was a possibility. I found out that the block trade was not executed two days after the date trade entry date. Trade desk clerk was Brian, and trade was entered by my personal conversation with him. However, it was not executed. I inquired as to why the client’s instructed order was cancelled without informing me of the trade cancellation. This placed the clients at additional risk of loss. I began manually trading the client accounts manually as fast as possible to comply with my client’s request. As of the date of this compliance action, GM had not returned to the $30 per share threshold.
It was after this action to attempt to comply with the clients previously determined trade requests that ONESCO terminated my affiliation. I don’t believe there was a violation of the guidelines or firm rules. Previously executed orders of similar nature executed in the past with no repercussion led me to believe the action was consistent with compliance latitude. I have not acted in any way outside of client instructions, approval, or outside the best interest of the client. In the investigation process initiated by FINRA, even their attorney was unsure of interpretation of “same day of trade authorization” rule.
An Oklahoma Department of Securities inquiry resulted in $ 5,000 fine and 10 day suspension (ODS) settled by agreement with language inclusion in the final agreement as follows:
“Representative entered discretionary orders for customer accounts in violation of firm policies.”
ODS issued an order as follows:
“ IT IS HEREBY ORDERED that Respondent’s registrations under the Act as an agent and investment adviser representative are suspended for 10 days, beginning at 12:00 a.m. on September 1, 2021, and ending at 12:00 a.m. on September 11, 2021, and that Respondent pay a civil penalty in the amount of $5,000 to the Oklahoma Investor Education Revolving Fund within thirty (30) days of the issuance of this Order.”
Also, as part of the agreement the following language is part of the sanction and review of the case.
3. CRD. Following the issuance of the Order, the Administrator will cause the Department to amend the Form U6 for Cross that was filed in the Central Registration Depository on July 26, 2021. The amended Form U6 will reflect that this regulatory action was resolved by consent; a suspension and civil penalty were ordered; and the Order is not based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct.”
Subsequently, FINRA also initiated an inquiry August 19th, 2020 on the same matter, and reviewed all evidence to the above (including all phone records) in which during that investigation, I submitted 58 letters signed by clients informing them that all trades were discussed and “authorized” by the client regarding the accounts in question. FINRA was originally seeking a 90-business day suspension and a $10,000 fine. After all evidence was gathered and weighed, the matter was settled by agreement October 2023. FINRA had no customer complaints, and no substantiated evidence of any kind to support any allegation of violation, and none of these client’s lost money. I only agreed to settle with FINRA on this same matter as pursued by ODS due to the fact that a $10,000 fine and 20 calendar day (included weekends, which FINRA almost never agrees to, resulting in a 14 business day) suspension was a lot less financial risk and wear & tear on business operations and risk to clients than the prospect of spending hundreds of thousands of dollars in attorney fees against unlimited resources of the FINRA regulatory authority, and being subject to a court where the judge is the boss of the regulator attorney.
All the evidence and reviews related to this event have been scrutinized thoroughly, and since the time of this event, I have been approved for both Insurance and Securities licensing and/or renewals in the states of Arizona, Arkansas, Oklahoma, Montana, Texas, Colorado, Puerto Rico, and Florida, as well as professional memberships with American College Designations (CLU, ChFC) and MDRT renewal membership (30 consecutive years as a member).
I have served with integrity, honesty, and acted in the best interest of the client in my 38 years of practice and would like to continue this service aspect. I have served on the “Field Advisory Board” for 6 years with Ohio National in the most recent 10 years. This board requires a higher ethical standard in order to serve. Even after this event, it was determined that my standing with that board should continue without concern or diminished capacity. The president (Pat McEvoy) of ONESCO personally attempted to assist me with getting placement with another broker/dealer to service my securities block of business, which I am grateful of even though I didn’t use his connection. In addition, the same executives that oversee the ONESCO branch of Ohio National, nominated me as recent as February 2021 for the Forbes “2020 Top Financial Securities Professionals” ranking to be published in Forbes Magazine as one of the top National Financial Advisors.