[ by Howard Haykin ]

Willful Failure to Keep Form U4 Up-to-Date;  Exercising Unauthorized Discretion leaves Customer with over $480K loss;  RR accepts $5K fine. 

FINRA Has 9 (nine) priorities.  Click the linked titles to read #'s 1-2-3. #'s 4+5 are posted here. 

All others are accessible at:  [FINRA Quarterly Review, October 2012]

1. Sharing Commissions With an Unregistered Individual and Providing False Information to Firm.  [posted Friday]
2. Fraudulently Misappropriating Customer Funds.  [posted Monday]
3. Recommending Unsuitable Transactions to a Customer.  [posted Monday]
4. Willfully Failing to Disclose Material Information on a Form U4.   [posted here]
5. Exercising Discretion Without Customer and Firm Approval.   [posted here]
6. Improperly Engaging in Outside Business Activities, Improperly Accepting Gifts From a Customer, and Misrepresenting to a Member Firm the Receipt of Monetary Gifts From a Customer
7. Recommending Unsuitable Transactions to a Customer
8. Improperly Borrowing From a Customer and Misrepresenting Facts to a Member Firm
9. Selling Away

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FINRA Priority #4 for October - Willfully Failing to Disclose Material Information on a Form U4.

Recently, FINRA reports that an RR willfully failed to amend his Form U4 to disclose tax liens and judgments, and that it allegedly took him 6 months to disclose a bankruptcy filing on his Form U4. 

• During a 5-year period, the IRS issued 2 federal tax liens against the RR, the representative entered into 2 agreed-upon tax judgments and a civil judge entered a judgment against the RR. 
• RR failed to disclose the federal tax lien and 3 judgments on the Form U4 while he was employed with a member firm for nearly 11 years.
• RR nevertheless, on several occasions, submitted attestations or reports, or met with firm auditors, and confirmed that he understood his obligations to report liens and judgments and that he had none to report.
• Same RR, working for same member firm, filed a voluntary petition for bankruptcy protection under Chapter 7 of the Bankruptcy Act.  It took him about 6 months to report his bankruptcy filing, both  to his member firm and to amend his Form U4.

FINRA concluded that the RR's above failures violated Article V, Section 2(c) of NASD’s and FINRA’s By-Laws (applications for registration), NASD Rule 2110 (ethical standards) and FINRA Rule 2010 (ethical standards).  More significantly, the RR had willfully acted in failing to comply with the applicable rules.  As such, RR agreed to a $10K fine and 6-month suspension in all capacities.

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FINRA Priority #5 for October - Exercising Unauthorized Discretion in a Customer Account.

An RR exercised unauthorized discretionary authority in a customer account - he or she had not gotten written approval to do so - either from the member firm or from the customer. During a 2-day period, the RR allegedly exercised his or her own discretion in that customer’s account to execute 8 options transactions.  Needless to say, these transactions resulted in significant losses for the customer - in excess of $480,000.

FINRA found that this conduct violated NASD Rule 2510 (discretionary accounts) and FINRA Rule 2010 (ethical standards).  The RR agreed to settle the FINRA charges, agreeing to a $5K fine and a 30-day suspension in all capacities.

[C-I Note:  kay.  Once again, a FINRA sanction defies logic.  Broker exercises discretion in entering into 8 options trades - each trade must have involved hundreds, if not thousands of contracts.  Customer is out >$480K, but broker pays only a $5K fine.  Yes, he or she also must sit out for 30 business days.  Where is the equality?  No where is it mentioned whether the firm or the RR was required to make the customer whole - i.e., provide restitution for the losses - nor does it say anywhere that the RR agreed to be disgorged of commissions earned on the monster options trades.  Hopefully, the financial ledger was evened out somewhere along the line and FINRA simply elected not to mention these additional facts. 

Let's say that this same RR got verbal permission from the customer to exercise discretion - though nothing's in writing, either from the customer or the firm.  FINRA rules and, oftentimes, firm policies are usually very specific as to requiring prior written authorization, which would mean that there should be little, if any, wiggle room - except under the most extraordinary set of circumstances - though I'd hazard to guess what those might be.  Also, who's to say that when the RR losses nearly half a million dollars for the customer, the customer can claim he never gave authorization - and asks the RR or his firm to provide written proof.  While a man or woman is as good as his or her word, in today's world ethics is not widely-practiced.

So, in either case, the RR and probably the firm lose - but with a fine of $5K hanging in the balance, there's little chance it'll bust anyone's career.]