FINRA reported dozens of disciplinary actions last quarter - cheating on insurance exams, misappropriations, lying on annual compliance certifications - you name it, it happened.  But seven (7) stood out as being particularly egregious to FINRA - continue reading and learn from others' mistakes.

1. Unsuitable Switches, Exercising Discretion Without Approval and Providing Inaccurate Information.
2. Unsuitable Switches, Unauthorized Trading, Exercising Discretion Without Approval and Making False Representations.
3. Trading Securities Based on Material Non-Public Information
4. Converting Customer Funds, Providing Customers With False Account Statements and Failing to Disclose Outside Business Activities.
5. Misusing Non-Customer Funds, Failing to Respond to FINRA Information Requests and Failing to Disclose Liens.
6. Private Securities Transactions.
7. Engaging in Private Securities Transactions and Improperly Borrowing Money From a Customer.

Continue reading for cases 1 and 2 summaries (cases 3-7) will appear in a separate post).  Otherwise, click and go directly to the source:  [FINRA Quarterly Disciplinary Review, April 2012]. __________________________________________________ 1.  Unsuitable Switches, Exercising Discretion Without Approval and Providing Inaccurate Information. FINRA settled a matter involving a Registered Representative ("RR") who recommended unsuitable investments to customers, exercised discretionary authority in customer accounts without firm approval, and provided his firm with incomplete and incorrect information regarding his customers’ mutual fund ("MF") and variable annuity ("V/A") switches. Over a 2-year period, the RR excessively traded 7 customers’ MF investments.  The 7 customers were unsophisticated, retired senior investors, ranging in age from 66 to 93 years, with annual incomes between $30K and $55K, with liquid net worths ranging from $50K to $556K.  During this period, the RR recommended some 484 short-term MF switches that involved average holding periods of 50 to 74 days. Adding insult to injury, he recommended that customers purchase only class A and B MF shares, that were designed for long-term investors.  The RR also failed to explain to his customers about costs that could be saved by purchasing class C shares.  [C-I Note: Victims usually don't get choices, and rarely are they read their rights prior to the commission of the so-called crime.  Unfortunately, it comes across as sounding so ludicrous the way FINRA spells out the scenario in elementary fashion, but perhaps they feel it's necessary to provide the basis for the sanctions.]  As a result of the RR's recommendations, his customers incurred $148,000 in unnecessary costs, and the RR pocketed some $120,000 in commissions. Actions of this nature would violate NASD Rules 2310 (recommendations to customers) and 2110 (ethical standards), and NASD IM- 2310-2 (fair dealing with customers). During the same 2-year period, the RR allegedly exercised discretion in those 7 customers’ accounts without having obtained the customers’ prior written authority and the firm’s prior approval.  This type of conduct violates NASD Rules 2510 (discretionary accounts) and 2110 (ethical standards). During a separate 5-month period, the RR allegedly made unsuitable V/A switch recommendations to 3 other customers - all elderly retirees with modest incomes.  Two of the customers held their V/A for only 9 months, and the other held his V/A for 27 months, and all told the three incurred $27,000 in surrender charges.  In light of the customers’ financial objectives and resources, such V/A switch recommendations by an RR are unsuitable and violate NASD Rules 2310 (recommendations to customers) and 2110 (ethical standards), and NASD IM-2310-2 (fair dealing with customers). Finally, the RR was responsible for more than 50 inaccurate MF and V/A disclosure forms.  He filed to include information on disclosure forms that he provided to customers - e.g., he failed to include information re: front-end load charges, CDSC's (contingent deferred sales charges) and surrender time periods.  The RR also pre-dated customer signature lines on the disclosure forms and added fee and expense information to the forms after the customers signed them.  In addition, the RR included inaccurate information on the disclosure forms about the reasons for the  customers’ VA exchanges.  FINRA concluded that such conduct violates NASD Rules 3110# (books and records) and 2110 (ethical standards).

PostScript. RR settled FINRA charges by agreeing to a 2-year suspension, a $25K fine, and the requirement that he retake the Series 7 RR qualification exam registered representative, fined him $25,000 and ordered that he pay restitution to his customers in the total amount of $166,914 plus interest.

2.  Unsuitable Switches, Unauthorized Trading, Exercising Discretion Without Approval and Making False Representations. FINRA’s National Adjudicatory Council (NAC) found that an RR recommended to customers unsuitable MF switch transactions, engaged in unauthorized trading and unapproved discretionary trading, and caused his firm’s books and records to be inaccurate.  The RR recommended unsuitable MF switch transactions in 12 customers’ accounts, that subjected the customers to fees and longer holding periods or denied them lower operating expenses.  The switch transactions apparently caused the RR's customers to incur more than $84K CDSC's and lose the benefits associated with holding class A shares for certain time periods.  In rejecting the RR's argument that the recommendations were suitable because customers agreed to them, the NAC concluded that the representative’s conduct violated NASD Rules 2310 (recommendations to customers) and 2110 (ethical standards), and NASD IM-2310-2 (fair dealing with customers). NAC also found that the RR allegedly engaged in unauthorized trading and exercised discretion in customer accounts without the firm’s and customers’ approval.  The RR allegedly made numerous MF switches in 3 customer accounts without the customers’ permission.  In rejecting the RR's argument that the customers’ testimony was unreliable, the NAC found that the RR's conduct violated NASD Rule 2110 (ethical standards) and NASD IM 2310-2 (fair dealing with customers).  The NAC further found that the RR exercised discretion in 8 customer accounts without proper authorization - and in violation of firm policy, when prohibited RR from discretionary trading.  This type of conduct would violate NASD Rules 2110 (ethical standards) and 2510 (discretionary accounts). Finally, the NAC found that the RR caused his firm to make inaccurate entries in the firm’s MF switch log by misrepresenting the reasons for his customers’ switches.  The NAC further found that the RR had allegedly falsely represented on firm records that certain MF switch transactions were unsolicited when, in fact, they were solicited.  Such actions by an RR would violate NASD Rules 3110 (books and records) and 2110 (ethical standards).

Postscript. The NAC barred the RR from the industry.

End of Part One.  Part Two begins with discussion of Case 3.