[ by Howard Haykin ]

FINRA Quarterly Disciplinary Review for January 2013 calls attention to recent disciplinary actions involving alleged misconduct by registered representatives ("RRs").  The sampling of cases includes settled matters and decisions in litigated cases [National Adjudicatory Council, or "NAC", decisions, and SEC decisions in FINRA cases].   All together, FINRA presents 8 categories of cases.  In this posting we present three.

The highlighted violations in these case studies are on FINRA's radar - i.e., they've been singled out by FINRA because they're viewed as having the potential to cause significant harm to investors, and/or because RRs have committed these violative actions in all too often. 

[C-I Take Away:  FINRA member firms should place these violations on their own radars, and should make the effort to work with sales reps on containing or preventing such high-profile violations.  Failure to heed from others' mistakes can lead your RRs to becoming FINRA's next message cases, or worse.]

1.  Failing to Conduct Inquiry to Ensure That Customer’s Trading Instructions Are Not Manipulative.   This case, heard in FINRA’s NAC, involved an RR who allegedly acted unethically - in that he failed to inquire diligently into a customer’s trading instructions, which appeared suspicious in nature.  Confronted with such a scenario, the RR failed to fulfill his obligation to ensure that the trades were not for manipulative purposes. NAC ruled that the RR should have conducted a diligent inquiry when presented with suspicious circumstances surrounding trading activity. 

• i.e., when the timing and size of a customer’s orders are sufficiently suspicious, the RR should recognize the facts and be put on notice that the customer might be participating in a manipulative scheme.
• yet, the RR failed to ensure the accurate preparation of order tickets, thereby causing his member firm’s books and records to be inaccurate.

Violations & Sanctions:  The RR's alleged actions would violate NASD Conduct Rules 3110 (books and records), and 2110** (ethical standards).  The RR accepted a 1-year suspension in all capacities, and a $25K fine for failing to conduct an adequate inquiry into his customer’s trading instructions. NAC further disciplined the RR by issuing a concurrent 30-day suspension and an additional $5K fine for causing his firm’s books and records to be inaccurate.

2.  Failing to Provide Member Firm With Notice of Outside Business Activities and Improperly Administering a State Insurance Continuing Education Course.   An RR had formed 2 business entities without providing notice to his member firm;  the RR further allegedly acted improperly during the course of administering a state insurance continuing education course.

The RR with a business partner formed the 2 business entities - one for engaging in purchase-order financing;  the other for raising capital to fund the operations of an oil and gas refinery.  Again, no disclosure was made to his employer.

While administering a state insurance continuing education course, the RR allegedly committing 3 violative actions:  (i) RR provided multiple choice answers for an exam to attendees;  (ii) RR completed the course exam for another RR who left early;  and, (iii) the RR submitted to state insurance regulators an inaccurate form which stated that another RR had completed the continuing education exam when, in fact, he had not.

Violations & Sanctions.   The RR's alleged actions would violate FINRA Rule 2010 (ethical standards).  RR accepted a 4-month suspension in all capacities. 

3.  Selling Away.   An RR participated in private securities transactions without providing prior written notice to, and obtaining prior written approval from, his member firm.  For six months, as part of the private securities transaction, the RR allegedly sold about $300,000 in promissory notes and common stock to 4 investors - 3 of whom were customers of the RR's firm.  At the time of the sales, the RR knew that his firm had previously decided not to place these securities on its approved product list. The RR not receive commissions from the investments.

Violations and Sanctions.   By allegedly participating in these private securities transactions without notifying one's firm and without getting prior written approval, an RR would violate NASD Rule 3040 (private securities transactions) and FINRA Rule 2010 (ethical standards).  The RR agreed to accept a 3-month suspension in all capacities, and a $5K fine.

For further details in these and other cases, go to:   [FINRA Quarterly Disciplinary Review, January 2013].