Form U4 disclosures, misappropirations, and outside business activities are violations that recently caught FINRA's attention, along with 6 others violative actions by brokers and associated persons.  Follow the odyssey as Compliance-Insights sums up what "what went wrong" in these message cases.   [Case studies 4, 5, 6 appear after jump.]

1. Entering Fictitious Trades and Causing Inaccurate Firm Records.
2. Improper Transfer of Confidential and Proprietary Information.
3. Misrepresenting Information Regarding Prospectus Delivery.
4. Willful Failure to Disclose Material Information on a Form U4.
5. Misappropriation of Customer Funds and Failure to Respond to FINRA Investigation.
6. Improperly Engaging in Outside Business Activities and Failing to Respond to FINRA Information Requests.
7. Unsuitable Recommendations
8. Improper Exercise of Discretion, Unsuitable Recommendations and Failur to Disclose Risks.
9. Conversion of Customer Funds.

1.  Willful Failure to Disclose Material Information on a Form U4. Over some 7 years, an RR compiled one federal tax lien, 3 civil judgments, 2 bankruptcies, and a state tax lien - while working for 11 different member firms.  Perhaps not surprisingly, none of those material events ever made it to his Form U4.   FINRA noted the RR's failures as willful - although that would be understating the situation. FINRA NAC (National Adjudicatory Council) found that, under the '34 Exchange Act, this RR is statutorily disqualified from the securities industry.  The NAC further decided that his conduct required him to requalify as a corporate securities limited representative and to be assessed all hearing costs.

For violating NASD Rule 2110 (ethical standards) and NASD IM-1000-1 (filing of misleading information as to membership), the RR received a 2-year suspension.

2.  Misappropriation of Customer Funds and Failure to Respond to FINRA Investigation. An RR, who sold securities and insurance products, misappropriated an insurance customer’s funds, then failed to respond to FINRA’s investigation.  For insurance products, he was required to immediately remit funds collected from customers to the insurance company or to deposit the funds in a segregated account held in trust for customers. The RR collected two $500 checks from a customer as payment for the purchase of two insurance policies, which he deposited into his business checking account.  By month's end, funds were fully spent and the account was in a negative balance. The following month, the RR purchased policies for the customer by making a partial payment with his own funds.  Later in the month, the RR paid the remaining balance, again out of his own funds.  Thereafter, FINRA conducted an investigation of the RR's conduct and sent 2 requests for information and documents (RFI's) and 1 request that the RR appear to testify (mailed to his CRD address of record).  The letters were returned, marked “unclaimed” and “undeliverable,” and the RR neither responded nor appeared to testify.   [C-I Note: At least this case ended on a somewhat positive note - the customer came out whole, after the RR remitted the full $1,000 for the policies - albeit one month late.]

FINRA concluded the RR's conduct violated FINRA Rules 2010 (ethical standards) and 8210 (requests for information), and he was barred from the industry.

3.  Improperly Engaging in O/S Business Activities, Failing to Respond to FINRA Info Requests. For nearly 3 years, an RR served as a sales associate for a business that provided identity theft protection.  The RR received compensation for this marketing work.  At no time did the RR notify his member firm in writing of his outside business activities. In 2 separate letters, FINRA requested that the RR provide information and documentation re: his outside business enterprise. The RR failed to respond to either.  FINRA then filed a disciplinary complaint against him, and he fully responded.

For violating NASD Rules 3030 (outside business activities) and 2110 (ethical standards), and FINRA Rules 8210 (requests for information) and 2010 (ethical standards), the RR received a 2-year suspension.  The RR filed for bankruptcy protection, so FINRA was precluded from fining him.

For further details, go to:   [FINRA Quarterly Disciplinary Review, January 2012]