FINRA reported dozens of disciplinary actions last quarter – with seven (7) categories standing out as being particularly egregious to FINRA.  C-I covered Categories 1 and 2 last week in Part One.  On Tuesday, we covered Categories 3 and 4 in Part Two.  Today, Wednesday, we conclude with Categories 5, 6, and 7. Continue reading the post to 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 5, 6, and 7 summaries. If you choose, click and go directly to the source:  [FINRA Quarterly Disciplinary Review, April 2012]. __________________________________________________ 5.  Misusing Non-Customer Funds, Failing to Respond to FINRA Information Requests and Failing to Disclose Liens. A Registered Rep over the span of 5 years, allegedly misappropriated 2 individuals’ funds for his own use.  One individual tendered a check for $175,000 to the RR to open a brokerage account.  The RR never opened the account and instead deposited the check into his personal bank account.  He concealed his misconduct by sending the individual fabricated account statements and making regular cash distributions to the individual.  The individual later gifted the brokerage account that he believed he had funded to another individual.  The RR continued to misappropriate funds and sent similar fabricated account statements to the 2nd individual.

Actions of this nature would violate NASD Rule 2110 (ethical standards).  FINRA sent a Rule 8210 request for information ("RFI") to the RR to inquire into his possible misappropriation of customer and noncustomer funds.  After granting 2 extensions of time, the RR refused to respond to FINRA’s requests.  This action violated FINRA Rules 8210 (requests for information) and 2010 (ethical standards).

The RR also allegedly failed to disclose a tax lien and a judgment lien.  In September 2007, the IRS filed a tax lien of about $93,000 against the RR, which remained unsatisfied.  In May 2008, the RR lied on his Form U4 by answering "NO" to the question of whether he had any unsatisfied judgments or liens against him. Similarly, in February 2008, a state court entered a $300 judgment against the RR, and in August 2008, the court issued a judgment lien against the Rep.  While the judgment remained unsatisfied, the RR never amended his Form U4 to disclose the lien.

Actions of this nature would violate NASD Rule 2110 (ethical standards), IM-1000-1 (misleading membership and registration information), and FINRA Rules 1122 (misleading membership and registration information) and 2010 (ethical standards).

PostScript. RR agreed to be barred from the industry in a settlement with FINRA.

6.  Private Securities Transactions. A Registered Rep allegedly engaged in private securities transactions ("PSTs") without obtaining prior firm approval. The RR referred 14 individuals, some were his customers, to an unrelated entity, which initially claimed to offer forex opportunities - but later claimed to offer investments in a hedge fund. All told, the 14 individuals invested $750,000 with the expectation that the entity would provide returns of 12% per annum for 2 years. The RR received $8,600 for the referrals.  FINRA concluded that the proposed  investments were securities, and that the RR failed to provide his firm with prior written notice and obtain the firm’s prior approval.

Actions of this nature would violate NASD Rules 2110 (ethical standards) and 3040 (PSTs). PostScript. RR agreed to an 18-month suspension and a $15K fine to settle the FINRA charges.

7.  Engaging in Private Securities Transactions and Improperly Borrowing Money From a Customer. A Registered Rep allegedly engaged in private securities transactions ("PSTs") without firm approval and improperly borrowed funds from a customer.  During a 2-year period, the RR sold $1,712,500 in notes and debentures, both of which were securities, to 32 customers through private placements away from his firm.  The RR received $171,000 in commissions for the sales.  The RR failed to provide his firm with prior written notice and obtain the firm’s prior written approval.

Actions of this nature would violate NASD Rules 2110 (ethical standards) and 3040 (private securities transactions).

In November 2008, the same RR allegedly borrowed $10,000 from one customer and $5,000 from another.  He executed a promissory note for repayment of the $10,000 loan but failed to abide by the terms of the note.  The first customer filed an action against the RR in May 2011, which prompted the RR to repay the $10K note with interest. The RR, who had not documented the $5K loan in writing and did not have terms for repayment, nevertheless repaid the $5K loan at the same time he repaid the first customer, in May 2011.  The RR did not disclose either loan to this member firm - because the firm’s policies prohibited loans from customers without prior firm approval.

Actions of this nature would violate NASD Rules 2370 (borrowing from or lending to customers) and 2110 (ethical standards). PostScript. The RR agreed to a 2-year suspension and a $181K fine in a settlement with FINRA.