FINRA periodically draws bright lines around key rules and areas of concern - currently there are seven such bright lines, or so-called "deadly sins."  Violators run the risk of becoming a message case and being strictly disciplined.  The current list, published today by FINRA, includes settled matters and decisions in litigated cases - National Adjudicatory Council decisions and decisions of the SEC in FINRA cases.

1. Failure to Provide Written Notice of an Outside Brokerage Account.
2. Private Securities Transactions and Outside Business Activities. 
3. Willful Failure to Disclose Criminal History on Form U4.
4. Misrepresentative and Unbalanced “Tweets” and Other Misconduct.
5. Creating and Distributing Continuing Education Answer Key.
6. Effecting Transactions in a Personal Account With Insufficient Funds.
7. Backdating Annuity Applications.

2.  Private Securities Transactions and Outside Business Activities.  FINRA’s NAC also issued a decision involving an RR who participated in private securities transactions and engaged in undisclosed O/S business activities.  The  RR sold membership interests in a real estate limited liability corporation for which he received commissions. The RR also served as the financial officer for the LLC for which he received annual compensation.  NAC determined that the LLC membership interests were in fact securities and that the RR participated in the sales of the LLC membership interests without prior written notice to and approval from his member firm.  NAC rejected the RR's argument that his misconduct should be excused because he relied on the advice of legal counsel.  NAC also found that the RR's work as a financial officer for the LLC constituted O/S business activities, which the RR failed to disclose to his member firm.   NAC found that the RR's conduct violated NASD Rules 3030, outside business activities by an associated person, 3040, private securities transactions by an associated person, and 2110, ethical standards. NAC issued a $16K fine and 1-year suspension. 

3.  Willful Failure to Disclose Criminal History on Form U4.   FINRA settled a matter involving a registered person who willfully failed to disclose his criminal history on a Form U4. The registered person submitted a Form U4 to FINRA in June 2008.  In response to a question that asked whether he had ever been charged with a felony, he falsely answered “no,” even though he had been charged with the criminal felony of 1st-degree burglary 2 years prior. The registered person also falsely answered “no” to the questions of whether he had ever been convicted or pled guilty to a misdemeanor involving the wrongful taking of property and whether he had ever been charged with a misdemeanor.  In 2001, he had been charged with the misdemeanor offense of property theft by check, to which he pled guilty   FINRA found that the registered person’s failures to disclose were willful and violated NASD Rule 2110, ethical standards, NASD Membership and Registration Rule IM-1000-1, filing misleading information as to registration, and Article V, Section 2(c) of the FINRA By-Laws, application for registration.  As such, FINRA issued a $5K fine and 6-month suspension;  because the individual's failures to disclose were willful and involved material information, he is subject to statutory disqualification.

4. Misrepresentative and Unbalanced “Tweets” and Other Misconduct.   FINRA settled a matter involving an RR who failed to notify his member firm that:  (i) he served as president of a jewelry company and as a translator for a foreign currency trading firm;  (ii) he held financial interests or trading authority in multiple brokerage accounts he held away from the firm;  (iii) falsely represented on O/S brokerage account applications that he was not affiliated with a brokerage firm;  (iv) created websites related to the firm without obtaining the firm’s prior approval;  (v) he sometimes touted stocks on his Twitter account and “tweeted” unbalanced stock recommendations that failed to disclose material information.   In 2007 and 2009, the RR allegedly earned remuneration for performing translation services away from the firm and serving as an officer of a jewelry design company without providing his employer firm with prompt written notice.  FINRA concluded that this conduct violated NASD Rules 2110, ethical standards, and 3030, outside business activities by an associated person. 

FINRA further found that the RR opened or maintained at least 13 accounts in which he held a financial interest or over which he held discretionary authority at 2 other B/D's, and that on at least 6 account applications, he falsely answered “no” to the question of whether he was affiliated with a securities firm.  The RR also failed to provide his employer firm with prior written notice of the accounts.  FINRA concluded that this conduct violated NASD Rules 2110* (ethical standards) and 3050 (transactions for or by an associated person).   The registered representative also created two websites that included misrepresentations about his career accomplishments and  employer firm without obtaining approval from a principal of the firm. FINRA found that this conduct violated NASD Rules 2110* (ethical standards) and 2210 (communications with the public). FINRA also found that during eight months in 2009, the registered representative maintained a Twitter account and had more than 1,400 followers. Without notifying a principal of his employer firm, the registered representative posted 32 “tweets” related to a particular security. The tweets were unbalanced, overly positive and often predicted an imminent price increase. In the tweets, the representative failed to disclose that he and his family held a significant number of shares of the security. FINRA concluded that this conduct violated NASD Rules 2210, communications with the public, and IM-2210-1, guidelines to ensure that communications with the public are not misleading, and FINRA Rule 2010, ethical standards. FINRA issued a $10K fine and 1-year suspension.   

5.  Creating and Distributing Continuing Education Answer Key.   FINRA settled a matter involving an RR who violated FINRA’s ethics rules by creating and distributing a continuing education ("CE") answer key.  The RR was an external wholesaler of a universal life insurance policy with longterm care benefits.  In January 2008, certain states began requiring financial advisors who sell long-term care insurance products to retail customers in those states to take a CE course and pass a state CE exam before selling those products.  In July 2008, the RR took a state CE exam and immediately afterward created an answer key for it.  FINRA found that the RR then sent the answer key to 2 RR's in his firm and a portion of the answer key to one outside financial advisor.   FINRA concluded that the RR's conduct violated NASD Rule 2110, ethical standards, and FINRA Rule 2010, ethical standards. As a result, FINRA issued a $5K fine and 60-day suspension.

6.  Effecting Transactions in a Personal Account With Insufficient Funds.   FINRA settled a matter involving an RR who effected transactions in his personal account at his employer firm for which he did not have sufficient funds.  In December 2007, the RR opened a personal account at his employer firm.  Between January 2008 and March 2009, he effected 88 transactions in that account, including checks, debits and ATM withdrawals in the aggregate amount of approximately $11,000.  FINRA found the representative knew or should have known that he did not have sufficient funds to cover the transactions.   FINRA concluded that the RR's conduct violated NASD Rule 2110, ethical standards, and FINRA Rule 2010, ethical standards.  FINRA barred the RR from the industry. 

7.  Backdating Annuity Applications.   FINRA settled a matter involving an RR who backdated annuity applications and acknowledgment forms for clients. Between January and March 2009, the RR backdated annuity applications and annuity acknowledgment forms to provide 23 clients with higher interest rates on the annuity contracts than the annuity company was offering.  The RR backdated the documents to make it appear as if the customers had signed the paperwork on a date when the interest rate the annuity company offered was higher than the interest rate it offered when the RR sold the annuities to his clients.   FINRA concluded that the RR's conduct violated FINRA Rule 2010, ethical standards. FINRA issued a $5K fine and 9-month suspension. 

For further details, go to:   [FINRA Quarterly Review of Disciplinary Actions, July 2011]