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Regulatory Sanctions

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

April 12, 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.  Failing to Provide Written Notice of a Financial Interest in Outside Brokerage Accounts
2.  Borrowing Funds from Customers, Engaging in Undisclosed Outside Business Activities, and Making False Certifications on Firm Compliance Questionnaires
3.  Conducting Inadequate Due Diligence for an Offering of Convertible Notes


See Details in the Earlier Posting (Part One)

4.  Recommending Unsuitable and Speculative Energy-Sector Securities to Retail Customers

5.  Impersonating Shareholders for Proxy Voting and Facilitating the Casting of False Proxy Votes
6.  Participating in Undisclosed Private Securities Transactions, Submitting False Compliance Questionnaires, and 'Lying' to FINRA Requests for Information
7.  Churning & Excessive Trading



1.  FAILING TO PROVIDE WRITTEN NOTICE OF A FINANCIAL INTEREST IN OUTSIDE BROKERAGE ACCOUNTS.    This matter involved a registered rep (“RR”) who failed to provide her member firm with written notice of her interest in 5 outside brokerage accounts and failed to provide prompt written notice to the executing firms of her status as a person registered or associated with a FINRA member firm.


Even though the RR had 2 open brokerage accounts at the time she became registered with a firm, she failed to disclose those accounts to her new firm. Subsequently, when the RR opened 3 other accounts, she once again failed to provide written notification to the firm. It was not until 1 to 3 years after opening them did the RR disclose 3 of the 5 accounts to her firm. She closed the other 2 accounts prior to disclosing them in writing to the firm.


Rather than making the required disclosures to her firm, the RR relied on her spouse, who also was a registered rep with the firm during part of the period, to complete the firm’s annual outside brokerage account disclosures on her behalf. That said, the RR did not include on her own annual disclosure forms the original 2 outside brokerage accounts, and she failed to promptly report the remaining 3 accounts. In addition, the RR failed to provide any written notice to the executing firms to inform them of her status as an associated person of a FINRA member firm.


The RR’s actions violated NASD Rule 3050(c) (transactions for or by associated persons) and FINRA Rule 2010 (ethical standards) – for which she was fined $5,000 and served a one-month suspension.


2.  BORROWING FUNDS FROM CUSTOMERS, ENGAGING IN UNDISCLOSED OUTSIDE BUSINESS ACTIVITIES, AND MAKING FALSE CERTIFICATIONS ON FIRM COMPLIANCE QUESTIONNAIRES.    This matter involved an RR who borrowed funds from customers, engaged in undisclosed outside business activities (“OBAs”), and made false certifications on firm compliance questionnaires (“ACQs”).


Between 2008 and 2015, the RR accepted 5 loans from 4 customers of his member firm – even though firm policy prohibited registered reps from accepting loans from firm customers under any circumstances.

►  In 2008, a $20,000 loan from a firm customer.

►  In 2009, $27,000 in 2 loans from another firm customer.

►  The RR did not disclose these loans to the firm as required, and he falsely certified on 2 firm ACQs over 2 years that he was aware of, understood, and complied with the firm’s prohibition on borrowing and lending arrangements between registered reps and customers.


►  In 2011 and 2015, while associated with another FINRA member firm, the RR borrowed $31,000 and $11,000, respectively, from 2 customers of that firm.
►  Needless to say, that second firm also strictly prohibited borrowing and lending arrangements between registered reps and customers. Yet, the RR falsely certified on 6 firm ACQs over 5 years that he was aware of, understood, and complied with the firm’s prohibition on borrowing and lending arrangements between registered reps and customers.


Depending on the timing of the loans, the RR borrowings and false certifications violated either NASD Rules 2370 (borrowing from or lending to customers) and 2110 (ethical standards), or FINRA Rules 3240 (borrowing from or lending to customers) and 2010 (ethical standards).


The RR also engaged in 2 OBA’s without disclosing those activities to his firms and without seeking those firms’ permission.

►  In 2010, a customer engaged the RR to provide consulting services and paid $1,500 to the RR for his services.
►  Between 2011 and 2016, the RR earned nearly $50,000 in compensation by serving on the board of directors of an entity that had been his customer since 2002.
►  During this same period (2010 to 2016), the RR falsely certified on 6 firm ACQs that he had complied with the respective firms’ policies concerning OBAs. 


Depending on the timing of the RR’s undisclosed OBA’s and his false certifications, the RR violated either NASD Rules 3030 (outside business activities) and 2110 (ethical standards), or FINRA Rules 3270 (outside business activities) and 2010 (ethical standards).


For all these violations, the RR received a 10-month suspension.


3.  CONDUCTING INADEQUATE DUE DILIGENCE FOR AN OFFERING OF CONVERTIBLE NOTES.    This matter involved an RR who, in connection with an offering of convertible notes, did not adequately verify the issuer’s representations or investigate the background of management.


In 2013, the issuer sought financing to develop a digital signage advertising network. The issuer retained the RR’s firm to undertake a private placement, a $1 million “best efforts” offering of subordinated convertible notes with no minimum requirement. The issuer claimed that the securities offering was exempt from registration under Rule 506(b) of Regulation D of the Securities Act of 1933. The issuer’s president signed an investment banking agreement with the RR’s firm in August 2013, and the firm’s president signed the agreement in September 2013. The RR began his review and investigation of the issuer in preparation for the offering shortly thereafter.


However, the RR did not adequately investigate representations made by the issuer; nor did he investigate significant discrepancies in materials provided by the issuer and which were central to the issuer’s business model - such as leases, signage sites and background information related to the issuer’s officers. With regard to the officers, had the RR adequately investigated the background of the issuer’s officers, he would have disclosed prior litigation alleging securities fraud and the existence of liens.


As a result, the RR had no valid basis on which he could conclude that the issuer’s convertible notes were suitable for any customer. Nevertheless, the RR recommended and sold $200,000 of the issuer notes to 2 customers of the firm – which earned him over $13,000 in commissions.


For violating FINRA Rules 2111(a) (suitability) and 2010 (ethical standards), the RR received a 30-day suspension, a $10,000 fine and was disgorged of his earned commissions.