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Regulatory Sanctions

FINRA Priorities – Quarterly Disciplinary Review [First of 2 Parts]

April 11, 2018

by Howard Haykin


FINRA published its Quarterly Disciplinary Review for the second quarter of 2018, offering a sampling of hot-button cases - i.e., FINRA priorities - involving broker-dealers and their associated persons. Disregard this list at your own peril:


See Details Below

1.  Recommending Unsuitable & Speculative Energy-Sector Securities to Retail Customers

2.  Impersonating Shareholders for Proxy Voting and Facilitating the Casting of False Proxy Votes

3.  Participating in Undisclosed Private Securities Transactions, Submitting False Compliance Questionnaires, & 'Lying' to FINRA Requests for Information

4.  Churning & Excessive Trading


See Details in Second Posting - Part Two

5.  Failing to Provide Written Notice of a Financial Interest in Outside Brokerage Accounts
6.  Borrowing Funds From Customers, Engaging in Undisclosed Outside Business Activities, & Making False Certifications on Compliance Questionnaires
7.  Conducting Inadequate Due Diligence for an Offering of Convertible Notes



1.  RECOMMENDING UNSUITABLE & SPECULATIVE ENERGY-SECTOR SECURITIES TO RETAIL CUSTOMERS.    This matter involved a registered rep (“RR”) who recommended unsuitable and speculative energy-sector securities to retail customers.


Between November 2012 and October 2015, the RR recommended that more than 50 of his customers become significantly over-concentrated in a single sector of the overall energy market. In certain instances, the over-concentration exceeded 50% of the customer’s net worth, exclusive of the customer’s personal residence.


The over-concentration involved 4 speculative equity securities within the energy sector. Due to the speculative nature of the recommended securities, the volatility of the energy market and the high level of concentration, the RR’s customers were exposed to significant (and for the most part unsuitable) investment risk and potential losses. In 2015, when the energy market began a downturn, the RR’s customers suffered millions of dollars in aggregate losses.


The RR’s actions violated FINRA Rules 2111 (suitability) and 2010 (ethical standards) – and he was barred from the industry.


2.  IMPERSONATING SHAREHOLDERS FOR PROXY VOTING AND FACILITATING THE CASTING OF FALSE PROXY VOTES.    This matter involved an RR who impersonated shareholders for proxy voting, and facilitated another RR’s submission of false proxy votes.


Between May and September 2015, the RR worked as an entry-level internal wholesaler at a FINRA member firm. It was the RR’s first job out of college. The RR’s job responsibilities included contacting financial advisors to discuss investment opportunities in certain non-traded REITs and other funds.


In 2015, an affiliate of the RR’s member firm retained the firm to conduct proxy solicitation services for the annual shareholder meetings for several of the affiliate’s sponsored funds. As part of the proxy solicitation services, the RR’s firm required that its internal wholesalers contact shareholders and encourage them to record their vote with the affiliate’s proxy tabulation service. Because the various funds required tens of thousands of shareholder votes to achieve a quorum to hold the meetings, proxy season was a high-pressure environment. The firm encouraged its employees to work long hours and make no less than 200 shareholder calls per day, while firm management monitored the progress of the proxy solicitation calls every 30 minutes. 


Between May and September 2015, the RR made thousands of phone calls to shareholders and encouraged them to vote. However, ........

►   On 3 occasions, at the direction of his supervisor, he impersonated 3 shareholders in phone calls with reps of the affiliate’s proxy tabulation service, and he voted the shareholders’ shares in favor of board and management proposals; and, 

►   At his supervisor’s direction, the RR participated on several telephone calls where he introduced his supervisor as a certain shareholder or the shareholder’s financial advisor. The supervisor then impersonated the shareholder or financial advisor and fabricated shareholder votes in favor of board and management proposals for various funds of the member firm’s affiliate. 


The RR's actions violated FINRA Rule 2010 (ethical standards) – and he was suspended for 2 years.


3.  PARTICIPATING IN UNDISCLOSED PST'S, SUBMITTING FALSE FIRM COMPLIANCE QUESTIONNAIRES, & PROVIDING FALSE STATEMENTS TO FINRA.    Ths matter involved an RR who participated in undisclosed Private Securities Transactions (“PSTs”), submitted false firm compliance questionnaires (“ACQs”), and provided false statements in response to FINRA Requests For Information (“RFIs”).


Between January and June 2012, the RR participated in PSTs by soliciting at least 30 prospective investors, including several customers of his member firm, to invest in convertible notes being offered by a private company. The RR: (i) sent prospective investors information about the private company from his the firm email account; (ii) arranged meetings where prospective investors could meet with reps of the private company to obtain additional information; (iii) facilitated movement of funds for 3 of the firm customers, so they could make aggregate investments of $175,000 in the convertible notes; and, (iv) invested $50,000 of his own money in the convertible notes. The RR's failure to provide prior written notice of his participation in the PSTs violated NASD Rule 3040 (PSTs) and FINRA Rule 2010 (ethical standards).


In May 2012 and November 2012, respectively, the RR responded to his member firm’s ACQs by falsely denying that he had participated in any PSTs during the months since completing his previous questionnaire. The RR’s false responses on the firm’s ACQs violated FINRA Rule 2010 (ethical standards).


Later, when FINRA investigated this matter, the RR provided false responses to requests for information and documents: (i) he denied having participated in any PSTs involving the firm customers; and, (ii) he denied having made any personal investment in the private company that was the subject of the PSTs. The RR’s false statements violated FINRA Rule 8210 (provision of information and testimony and inspection and copying of books) and FINRA Rule 2010 (ethical standards).


As a result of all his violations, RR was barred from the industry.


4.  CHURNING AND EXCESSIVE TRADING.    This matter involved an RR who churned and excessively traded 4 customer accounts, 2 of whom were senior citizens. The RR’s misconduct occurred between April 2014 and October 2016.


A 59 year-old emergency room physician opened an account at the RR’s member firm, investing nearly $60,000. The customer worked extremely long hours and did not take personal calls while at work; his experience with the stock market was limited to selecting mutual funds in an employee retirement account. So, he naturally relied on the RR’s investment advice and followed his recommendations. The RR proceeded to churn and excessively trade the customer’s account, and, in just over one year, the customer suffered losses of more than $40,000, while the RR generated sales charges of more than $30,000.


A 65-year old insurance salesperson … he opened an account with the RR, investing nearly $45,000. His investment experience was limited to owning a few stocks of companies that were his clients. From April 2014 to December 2014 (9 months), the RR exercised control over the customer’s account and executed 31 transactions in the account - many of which enriched the RR, but provided no economic benefit to the customer. For example, in December 2014, the RR recommended the purchase of 250 shares of a company, marked-up the trade to include a sales charge, and, later that same day, sold the shares. Although the RR sold the customer’s shares at a higher price than the purchase price, the customer nevertheless suffered a loss due to the RR’s marked up sales charge. Over the course of 9 months, this customer suffered losses of more than $25,000, while the RR generated sales charges of nearly $20,000.


A retired, 86-year old, customer … opened the account with the RR. The customer’s annual income was $50,000. From August 2014 to April 2015 (9 months), the RR exercised control over the customer’s account, churned and excessively traded the account, and effected 39 transactions in the customer’s account. While the customer suffered losses in excess of $40,000, the RR generated sales charges of nearly $20,000.


A 41-year old farmer … he opened the account with the RR. This customer had limited investment experience, with no more than 5 years of experience with both stocks and bonds. He had an income of $700,000 and a net worth of $6.5 million, but a liquid net worth of $50,000. Between December 2015 and September 2016 (10 months), the RR exercised control over the customer’s account, and engaged in active trading by effecting more than 130 transactions in the account. For example, in September 2016, the RR recommended the purchase of 1,500 shares of a company, marked-up the trade to include a sales charge, and, one week later, recommended the sale of those shares at a higher price and marked-down the trade to include a sales charge. But, similar to the 2nd customer, this customer suffered a loss on an otherwise profitable transaction due to the marked-up and marked-down sales charges. Because of the RR’s actions over the 10 months, the customer had a profit of $300, while the RR generated sales charges of nearly $95,000.


All told, between April 2014 and October 2016, the 4 customers incurred more than $115,000 in cumulative losses, and $160,000 in sales charges. In addition, since over half of the trades were mark-ups or mark-downs, the customers could not appreciate the extent of the costs.


The RR’s actions violated Section 10(b) and Rule 10b-5 of the Exchange Act (employment of manipulative and deceptive devices), and FINRA Rules 2020 (use of manipulative, deceptive or other fraudulent devices), 2111 (suitability) and 2010 (ethical standards). For this misconduct, the RR was barred from the industry.