Each quarter, the Financial Industry Regulatory Authority (FINRA) publishes a review of recent disciplinary actions involving stock brokers (known as registered representatives in the industry). This review is intended to provide brokerage firms and brokers with insight into issues that can lead to disciplinary actions. Follow this link to the FINRA site to see the complete Quarterly Review as well as the Monthly Disciplinary Actions.
Here is a summary of some of the issues and conduct FINRA recently addressed:
- Sharing Commissions with Unregistered Persons-A registered broker paid 40% of his brokerage commissions (over a quarter of a million dollars) to an unregistered person who was assisting the broker with his stock picks. The unregistered person had at one time been registered but because of his disciplinary history, was not currently registered to sell securities. FINRA suspended the broker for a year and fined him $20,000.
Fraudulently Misappropriating Customer Funds- A broker convinced two clients to transfer $100,000 to the broker which he then misappropriated. One customer believed he was buying bonds and the second thought he was purchasing a CD. FINRA barred him from the industry.
Comment: Unfortunately here in South Florida, as well as elsewhere in the Sun Belt, there seems to be an abundance of brokers who are willing to take advantage of the resident senior citizens. There is never a time that a customer should be making a check payable to the broker individually. Deposits should be made to your brokerage account.
- Recommending Unsuitable Transactions- A 53-year-old widow working as an administrative assistant in the public schools and earning $55,000 sought advice regarding retirement. She owned a home mortgage free that was worth $500,000 and had $260,000 in retirement funds. The broker drafted a plan that involved taking out a mortgage and investing the proceeds. The broker referred the lady to a related company for the mortgage earning himself a nice finders fee. The proceeds of the mortgage, about $300,000 was invested in an annuity at the broker's instruction, earning him another nice commission. FINRA fined the broker $5,000 and suspended him finding that there was no reasonable basis for recommending the customer mortgage her home and buy an annuity. Comment: Annuities are one of the biggest commission generators for brokers and while there are many suitable annuity products, one must carefully scrutinize the product before investing. Obviously mortgaging a home and investing it in the market has risks beyond what most retirees can tolerate.
- Willfully Failing to Report Material Information- FINRA maintains a running record (CRD) of every broker's employment, regulatory and disciplinary history. It contains dates of employment, reasons for termination, licensing information, including number of times a test has been taken and whether it was passed or failed, as well as disciplinary actions and customer complaints. As a condition of licensing, brokers are required to report certain events to FINRA for inclusion on the CRD. In the case reported a broker did not timely disclose tax liens and judgments and a personal bankruptcy. The broker was suspended for six months and fined $10,000. Comment: Wouldn't you like to know if your broker has tax liens, has filed for personal bankruptcy or has been terminated from other positions? You can obtain this information, free of cost, by visiting FINRA's Broker Check site.
- Exercising Discretion Without Customer and Firm Approval- Broker's are obligated to obtain customer approval before buying and selling in the customer's account. This can be accomplished by a discretionary trading agreement signed by the client and authorized by the employing firm. In this case the broker made trades in options without permission of the customer and in the absence of written authorization. The trades resulted in losses of nearly $500,000. The broker was suspended and fined.
- Improperly Borrowing from a Customer- A broker borrowed $100,000 from a customer in violation of FINRA rules and did not disclose it to his firm. The broker lied about the existence of the loan when completing an employment application at his new firm and then defaulted on the loan. The broker was fined and suspended.
- Selling Away- When a broker attempts to have a customer make an investment in a company or product that is not one authorized by the employing firm, essentially a private securities transaction, it is called "Selling away" as is selling away from the firm. Most firms require that before a broker engage in a private securities transaction the broker must obtain prior firm approval. Brokers often are tempted to raise funds from their customers to fund private investment deals put together by friends and business associates. In this case the broker was suspended, fined and required to repay the finders fee he earned for raising the capital.
If you have questions about your brokerage account or have suffered unexplained losses, please do not hesitate to contact us.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.