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.  Today, Tuesday, we begin with Category 3. 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 3 and 4 summaries (cases 5 - 7 will appear in the next post). If you choose, click and go directly to the source:  [FINRA Quarterly Disciplinary Review, April 2012]. __________________________________________________ 3. Trading Securities Based on Material Non-Public Information. A Registered Rep allegedly traded securities based on material, non-public information. The RR received info about 2 issuers, and he knew when he received the information that it had been misappropriated, and he knew it was illegal to trade on this information.  Nonetheless, he used the information when deciding to purchase and sell the securities of those issuers in accounts he controlled, and he derived illegal profits from the trades. Actions of this nature would violate Section 10(b) of the Exchange Act (fraud), Exchange Act Rule 10b-5 (fraud), and NASD Rules 2120† (fraud) and 2110** (ethical standards).

PostScript. RR agreed to be barred from the industry to settle with FINRA.

4. Converting Customer Funds, Providing Customers With False Account Statements and Failing to Disclose Outside Business Activities. A Registered Representative allegedly converted customer trust funds.  The RR had been appointed by an individual as trustee for 2 trusts established to provide living expenses and medical care for the individual’s disabled child.  On behalf of the trusts, the RR established several checking accounts, opened a brokerage account at his firm in the name of one trust, and acquired 3 life insurance policies on behalf of the other trust. He served as the broker of record for the brokerage account and agent of record for the life insurance policies.  During a 9-year period, the RR wrongfully and without authorization disbursed funds to himself from one trust’s checking accounts and brokerage account - and used those funds for his own benefit.  During a 6-year period, the RR wrongfully and without authorization disbursed funds to himself from the 2nd trust’s 3 life insurance policies - and used the funds for his own benefit.

Actions of this nature would constitute conversion of funds - violations of FINRA Rule 2010 (ethical standards), and NASD Rules 2330(a)  and 2110 (ethical standards).

The RR also covered up the alleged withdrawals by providing false and misleading fabricated account statements and correspondence to the parents of the disabled child, for whom the trusts were established.  The information sent grossly overstated the value of the trusts’ assets - e.g., the RR reported that one trust held assets in excess of $585,000 when in fact it held assets of $180.

Actions of this nature would violate FINRA Rule 2010 (ethical standards) and NASD Rule 2110 (ethical standards).

For a period of some 10 years, the RR failed to provide written notice to his firm that he served as trustee to the 2 trusts and had received compensation of about $2,000 per year for this service.  The RR lied on firm questionnaires by stating that he received NO compensation from any outside sources.

Actions of this nature would violate NASD Rules 3030§ (outside business activities) and 2110 (ethical standards), and FINRA Rule 2010 (ethical standards).

PostScript. The RR was barred from the industry to settle the FINRA charges.