[ by Howard Haykin ]

FINRA Quarterly Disciplinary Review for April 2013 calls attention to recent disciplinary actions involving alleged misconduct by registered representatives ("RRs").  The sampling of cases may include settled matters and decisions in litigated cases [National Adjudicatory Council, or "NAC", decisions, and SEC decisions in FINRA cases].   This quarter, FINRA presents 8 categories of cases.  We address 4 of the cases in this posting.

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 may want to consider placing the noted violations on their own radars, and make the effort to work with sales reps on containing or preventing such high-profile violations.  Failure to heed from others' mistakes can lead to your RRs becoming FINRA's next message cases, or worse.]

......................................................................................................................................................

Case 1.  Misusing Customer’s Personal Information and Submitting Falsified Reimbursement Requests.   This case, adjudicated in FINRA's NAC involved a registered representative ("RR") who allegedly misused a customer’s personal information.  The RR listed a customer as a guarantor of a student loan he sought to obtain for his daughter’s college education.  In doing so, he provided customer's confidential personal data, namely:  customer’s name, address, gross monthly income, monthly mortgage payment, Social Security number. in the loan documents.  The information was easily accessed from the broker-dealer's records. 

The NAC concluded that such conduct would violate FINRA Rule 2010 (ethical standards).

The RR also allegedly falsified checks and submitted false expense reports for reimbursements that were not yet due to him.  It was the firm's policy to reimburse certain business-related expenses only after the RR incurred and paid the expenses.  While this RR incurred these valid expenses, it is said he had not yet made payment on the expenses.  However, the RR allegedly altered personal checks to give the false impression that he had in fact paid the expenses.

NAC concluded such conduct would violate NASD Rule 2110* (ethical standards) and FINRA Rule 2010 (ethical standards).

FINRA Sanctions:   The RR was barred from the industry and assessed hearing and appeal cost. 

[C-I Note:   If the customer did not agree to guarantee the college loan, then use of such customer's personal info would appear to violate a fiduciary obligation on the part of the RR - as well as any other associated person of the broker-dealer.  Such conduct, along with the RR's apparent lying, would appear to justify the barring of RR from the industry.  However, if the customer had, in fact, agreed to guarantee the loan, and understood that sensitive personal info would be shared with others, then FINRA's sanctions seem quite draconian in nature.]

......................................................................................................................................................

Case 2.  Falsifying an Expense Report and Supporting Documentation.    The case before the NAC, involve another RR who allegedly falsified an expense report and supporting documentation to obtain a $500 reimbursement to which he was not entitled. The RR apparently fabricated a hotel invoice and letter and falsified a personal check to obtain reimbursement from his firm for a work-related seminar he had not actually conducted.  The RR admitted his misconduct when confronted.

Violations and Sanctions.   Such conduct would violate NASD Rule 2110* (ethical standards);   to settle FINRA charges, the RR agreed to a 6-month suspension in all capacities and a $5K fine.

......................................................................................................................................................

Case 3.   Backdating Insurance Documents.    An RR allegedly backdated two insurance forms by 8 months and signed one of the forms.  Apparently the RR backdated the forms in order to help his customer, who faced a fine from her homeowner’s association for not having provided proof of homeowner’s insurance.  The false representations of date gave the impression that the customer was in compliance with her homeowners' association requirement because the backdating made it appear that she had an effective homeowner’s insurance policy on the earlier required date. 

Violations and Sanctions.  For trying to be a good guy, the RR went out on a limb and allegedly violated FINRA Rule 2010 (ethical standards). RR agree to settle the FINRA charges with an 8-month suspension in all capacities and a $5K fine.  [ C-I Note:  It might be a neighborly gesture on the customer's part to assist the wayward RR during his 8-month furlough.  In the end, once again, "NICE GUYS FINISH LAST."]

......................................................................................................................................................

Case 4.  Excessive Trading and Exercising Discretion Without Authorization.   An RR allegedly traded excessively and exercised discretion without authorization in the customer account of a retired widow, 69, who was lived in retirement on an annual income of $14K and liquid net worth of $100K.  It was at this time that the RR became the sole RR of record on the customer’s IRA account.  The account was valued at $18.5K and, not surprisingly, the customer had little investment knowledge or experience.  Her risk tolerance was moderate (C-I: Higher than what one might expect.].  Her investment objective was long-term growth. 

Over a 1-year period, the RR effected 76 transactions in the account - at least 56 trades on an unauthorized discretionary basis.  Securities were held between 2 and 119 days.  The RR generated commissions of nearly $15.5K and costs totaling $16.7K.  In order to break even, according to FINRA, the customer would have had to achieve an 86% return on investment.

Needless to say, the RR did not have the customer’s authorization to exercise discretion, and his firm did not permit discretionary trading.

Violations and Sanctions.   Such conduct would violate NASD Rules 2310 (suitability) and 2510 (discretionary accounts), NASD IM-2310-2** (fair dealing with customers), and FINRA Rule 2010 (ethical standards).   RR agreed to settle FINRA charges with a 6-month suspension, a $5K fine, and a $2K restitution to customer. 

[C-I Note:  And where was the firm's designated supervisors while all the trades were effected?  Did the firm have supervisory control procedures in place?  Did the firm even care?  To what extent did FINRA sanction the firm - which would appear to be the bigger issue.]

For further details on these and other cases, go to:   [FINRA Disciplinary Review, April 2013].