[ by Howard Haykin ] FINRA disciplined dozens of individuals last quarter - yet, only a few rise to the status of being a "message case," or stood out as being particularly egregious to the regulator. Continue reading to learn from others' mistakes, in the following categories (cases 1-2-3 covered in this posting;  cases 4-5-6-7 will be published Tuesday).

1. Exercising Discretion Without Approval.
2. Engaging in Private Securities Transactions and Failing to Respond to Information Requests ("RFI").
3. Converting Customer Funds, Failing to Disclose Outside Business Activities, Misrepresenting Facts and Failing to RFI.
4. Selling Unregistered Securities and Communicating With Customers From a Personal Email Account.
5. Failing to Provide Notice of Outside Brokerage Accounts and Notice of Broker-Dealer Employment, and Misrepresenting Information.
6. Impersonating Customers.
7. Recommending Unsuitable Transactions.

........................................................................................................ 1.  Exercising Discretion Without Approval. A Registered Representative ("RR") exercised unauthorized discretion in a customer account.  During a 3-month period, the RR effected 38 discretionary trades in a customer’s securities account, all the while without having received customer’s prior written authorization nor his employer firm’s acceptance of the account as discretionary.  Such actions would violate NASD Rules 2110* (ethical standards) and 2510 (discretionary accounts). Sanctions. To settle FINRA charges, the RR agreed to a 2-month suspension in all capacities and a payment of $21,364 in fines and disgorgement. 2.  Engaging in Private Securities Transactions and Failing to Respond to Information Requests. An RR engaged in a private securities transaction ("PST") without his firm’s prior approval and refused to provide information to FINRA during its investigation of his activities.  The PST involved a “participation agreement” offered by a limited liability corporation (LLC). The agreement provided that, in return for investments, participants would receive a potential return of up to 4% per month and principal would be available for return upon request. The agreement also provided that the LLC would use the investors’ funds to provide advances to merchants who met certain sales history and operations parameters. The merchants were expected to repay the advances, which would be limited to $50,000, within 6 months at an annual interest rate of 76%. Individuals who referred potential participants to the LLC for investment received commissions of 1%-2% per month. FINRA concluded that the participation agreement constituted an investment contract and therefore a security under Section 3(a)(10) of the Securities Exchange Act of 1934. The RR obtained a check in the amount of $203,000 from an individual that the individual made out to herself and then endorsed to the RR.  Days later, the RR deposited the check into his personal checking account.  Weeks later, he withdrew $200,000 of the funds by causing the bank to issue a cashier’s check to the LLC. The RR gave the check to the LLC and, in return, received 4 monthly payments equal to 4% of principal plus a commission of 2% for 2 months. The LLC thereafter collapsed, and the representative did not receive any further payments. Having allegedly engaged in a PST for compensation, without notifying his firm in writing and obtaining the firm’s prior approval, the RR's alleged conduct would have violated NASD Rules 2110* (ethical standards) and 3040 (private securities transactions).  After the LLC collapsed, FINRA requested copies of all records for bank accounts and financial accounts in which the RR held an interest during the period related to the misconduct. The RR produced some monthly statements and copies of certain checks drawn from his accounts, but refused, even after a 2nd request, to provide copies of checks deposited into his accounts. FINRA specifically requested information related to the $202,673 check. Through counsel, the RR refused to provide the information. The RR's alleged conduct would violate FINRA Rules 8210 (requests for information) and 2010 (ethical standards). Sanctions: To settle FINRA charges, the RR agreed to be barred from the industry. 3.  Converting  Customer Funds, Failing to Disclose Outside ("O/S") Business Activities, Misrepresenting Facts, Failing to Respond to Information Requests. FINRA settled a matter involving a RR who engaged in O/S business activities without obtaining his firm’s prior written approval, misrepresented the O/S activities to the firm, converted customer funds and failed to respond to several FINRA RFI's.  In 2008 and 2009, the RR formed a variety of holding companies and partnerships in which he maintained an ownership interest. He also held positions with these entities for which he received compensation. The RR failed to obtain his member firm’s prior written approval for his employment with these entities and receipt of compensation. Additionally, the representative completed a firm compliance survey in which he incorrectly answered “no” to the questions of whether he participated in any O/S business activities and whether he was involved in any O/S business relationships with clients; these answers were material misstatements. FINRA concluded that the RR's activities violated NASD Rules 3030** (outside business activities) and 2110* (ethical standards), and FINRA Rule 2010 (ethical standards). Throughout 2009, the RR made 3 withdrawals totaling $540,000 from a customer’s securities account without the customer’s knowledge or authorization. The customer’s accountant questioned the withdrawals, and the representative stated that the funds had been invested in an O/S private business entity. The RR stated that he executed the transfers based on his written discretionary authority. The discretionary authority that the customer had granted, however, did not include authority to transfer funds or securities out  of the customer’s securities account. The RR and his firm negotiated a settlement with the customer whereby the customer received a refund of his money plus interest and fees. FINRA concluded that the RR's alleged conduct would constitute conversion of customer funds and violated FINRA Rules 2010 (ethical standards) and 2150(a) (improper use of customer funds), and NASD Rules 2330(a)† (improper use of customer funds) and 2110* (ethical standards). FINRA requested that the RR submit a written statement explaining his actions, with supporting documents. The  RR submitted a written statement, but failed to produce any documents.  FINRA thereafter requested several times that the RR produce the documents and appear for on-the-record testimony. The RR refused to appear or produce the documents. FINRA concluded such alleged conduct would violate FINRA Rules 8210 (requests for information) and 2010 (ethical standards). Sanction. To settle FINRA charges, the RR was barred from the industry in any capacity. Footnotes used in cases. *   NASD Rule 2110 has been superseded by FINRA Rule 2010, effective 12/15/08. **  NASD Rule 3030 has been superseded by FINRA Rule 3270, effective 12/15/10. †    NASD Rule 2330(a), (e) and (f) has been superseded by FINRA Rule 2150, effective 12/14/09. ‡    NASD Rule 2310 and IM 2310-2 have been superseded by FINRA Rule 2111, effective 7/9/12. For further details, refer to:   [FINRA Quarterly Disciplinary Review, July 2012].