FINRA shined a spotlight on 9 types of violations that registered reps and others committed in the most recent quarter.   Today’s 3 case studies - beginning with "Improper Sharing in a Customer’s Losses" - can be read after the jump.  To see our discussion on the first 3 cases, go to:  FINRA Disciplinary Hi-Lites - Part One.

1. Impersonating a Customer.
2. Private Securities Transactions and Outside Business Activities.
3. Inaccurate Information on a Customer Application.
4. Improper Sharing in a Customer’s Losses.
5. Ethical Violation Resulting From Prohibited Campaign Contribution.
6. Improper Borrowing and Misrepresenting Scholarship Fund’s Value.
7. Selling Away.
8. Trading on Non-Public Information.
9. Matched Buy-Sell Trades.

1.  Improper Sharing in a Customer’s Losses. A Registered Rep tried to do the right thing - but in the wrong way. At the opening of a new account, the customer chose quarterly automatic re-balancing of her account - i.e., securities are automatically purchased and sold if any asset category in the customer’s account deviated from his chosen account allocation by more than 5% of the account’s value.

By September 2008, customer became concerned about stocks and ordered the RR to liquidate about $100,000 of her securities positions - which the RR executed.  However, he forgot about the account’s automatic re-balancing feature.  As a result, in October, the automatic feature reinvested the customer’s sales proceeds.  When the RR reviewed the rebalanced account, he mistakenly assumed he had forgotten to process the customer’s sales order in September - and proceeded as follows:

• RR contacted the customer and told her he had not executed her sales request.
• RR "made it up" to customer by mailing a $15,000 check, which represented the losses that the RR calculated the customer’s account had incurred.
• RR, however, didn't tell his firm about the payment until FINRA walked in to do an investigation - 6 months later, in April 2010.
• RR failed to obtain written authorization from firm and customer to share in the customer’s losses, and had not previously contributed financially to the customer’s account.

FINRA Sanction. Registered Rep violated NASD Rules 2330 (Customer's Securities or Funds) and 2110 (Ethical Standards), resulting in a $5,000 fine.

2. Ethical Violation Resulting From Prohibited Campaign Contribution. A Registered Rep did wrong, knew he did wrong, then paid the price. He made numerous political contributions to various candidates and parties in a manner contrary to state law.  He did so through a series of political campaign contributions for local, county, municipal and statewide races in his state.

All told, he donated about $120,000 to 19 campaigns, all in the names of his wife and step-children.  The RR later admitted to violating a section of the state code that prohibited political contributions in another person’s name.  The state’s election commission fined the RR $95,000 and the state's securities division issued a 45-day suspension on his securities license on charges his actions were "not of good business repute."

FINRA Sanction. The Registered Rep violated NASD Rule 2110 (ethical standards), resulting in a $10K fine and 60-day suspension.  [C-I Note: Hopefully the suspensions were concurrent.]

3.  Improper Borrowing and Misrepresenting Scholarship Fund’s Value. A Registered Rep improperly borrowed $5,000 from a customer;  the loan was not memorialized in writing.  What was wrong, here?

• RR's firm prohibited borrowing money from customers.
• Loan failed to meet specific limitations outlined in NASD Rule 2370(a)(2).
• RR never told the firm about the loan, and thus failed to get its approval.  [C-I Note: Which he wouldn't have gotten, anyway.]

The RR also served as treasurer and on the Board of an incorporated scholarship fund.  In these roles, he received monthly account statements for a securities account that the fund owned at a FINRA member firm and for which he was the representative of record.  The RR reported orally and in writing to the fund’s Board members the most recent month-end total value of the fund’s investments.

• RR, for more than one year, materially overstated the total value of the fund’s investments.

FINRA Sanction. The RR violated NASD Rules 2370 (borrowing from/ lending to customers) and 2110 (ethical standards), and FINRA Rule 2010 (ethical standards), resulting in his being barred from the industry.   [C-I Note: Something is missing here, because the "crimes" don't quite fit the punishment.  First, it's likely he refused to cooperate in a FINRA investigation.  Second, the RR must have been taking money out of the scholarship fund - why else would he overstate the fund values?]

For further details, go to:  [FINRA Quarterly Disciplinary Review,  August 2011].