Whenever I speak at compliance meetings or other gatherings of financial advisors, a common question I receive runs like this: “What are the typical violations that result in FINRA sanctions against an advisor?” The violations that FINRA brings formal enforcement cases for are wide-ranging and varied each month, but there are some “routine” types of actions that seem to lead to sanctions. And, I think that by highlighting some of the routine type of actions, as well as some of the more interesting ones, financial advisors can be reminded of their compliance obligations as well as perhaps some best practices to implement to make sure that they avoid regulatory problems.
We’ve reviewed the reported enforcement actions from FINRA for the third quarter of 2018 (those actions reported by FINRA for July, August and September 2018). This review identified 135 reported cases against individuals that included a bar or a suspension, among other sanctions. For each case, we selected a primary violation, though in many cases there were two or more different rule violations. We’re reporting these based on our analysis of the more significant issues based upon the report, and this is more art than science in categorizing the primary violation. Our findings show that 57% of the reported actions (77 of the 135 cases) involved one of these five rule violations as follows:
* Rule 8210 violations – failing to respond to FINRA’s request for information, documents or for testimony – 34 cases.
* Conversion of funds – 13 cases.
* Making unsuitable recommendations of a security or unsuitable recommendations as to a pattern or strategy of trading – 11 cases
* Participating in an undisclosed outside business activity – 11 cases.
* Selling away or otherwise participating in a private securities transaction away from the advisor’s broker-dealer – 8 cases.
By far, the most commonly cited violation for each of the three months was a Rule 8210 violation for failing to respond to FINRA’s Rule 8210 requests for information or testimony. The standard sanction for a Rule 8210 violation is a bar. Of these, I imagine that many of the cases would have been resolved for sanctions of less than a bar had the advisor responded to FINRA and cooperated with their investigation. Of course, some of these would have ended up with a bar if the violations were egregious, such as those involving conversion of funds, etc. The point is that it is easy to imagine that several of these advisors wound up with a public record showing a bar from the industry, when it very well could have been resolved for something less serious.
Beyond these top 5 violations reported for the quarter, other types of violations for which FINRA imposed sanctions included the following: improper use of discretion, misrepresentations of fact or material omissions in connection with a transaction or offering, failure to supervise subordinate representatives, forgery of client signatures or other alteration of documents, causing the firm to maintain in accurate books and records, improperly receiving loans from client(s), check kiting/personal financial misconduct, falsified expense reports, settling a complaint away from the firm by reimbursing a customer directly for losses, and more.
There were two cases that I thought were worth a mention, and both of these do not involve misconduct directly with a client.
* In August, FINRA reported that they suspended an individual for 3 months and fined him $5,000 for causing his firm’s books and records to be inaccurate. The rep., who was soon leaving to join another firm, directed his office assistant to remove the phone numbers of his 322 clients from the firm’s database, and the office assistant and an intern did that, leaving the firm’s records incomplete and inaccurate.
* In September, FINRA reported an settlement with an advisor who was assessed a deferred fine of $5,000 and suspended from association with any FINRA member in all capacities for six months. FINRA found that on 30 occasions over about 3.5 years, the advisor falsified expense reports to obtain reimbursement for legitimate business expenses for which he lost or did not obtain receipts. The report explains that the advisor submitted receipts for personal expenses, such as personal taxi rides and meals, close to the time and amount of legitimate business-related expenses he incurred. The advisor then submitted data for his personal receipts to match the business expenses and was reimbursed a total of $950.37 for his personal expenses to offset the business related expenses, for which he lost his receipts (or had not obtained a receipt). FINRA found that falsifying an expense report is unethical business conduct under FINRA Rule 2010.
Advisors are wise to remember that FINRA can, and does, sanction advisors for alleged misconduct that does not directly involve a client. The scope of Rule 2010, which requires advisors to “observe high standards of commercial honor and just and equitable principles of trade” is very broad and can be applied to a wide variety of situations.
If you are facing a regulatory investigation by FINRA, and have concerns about what might happen, we invite you to contact us to discuss your situation. If you’ve just received a Rule 8210 letter, before you do anything, be sure to read Joel Beck’s book, The Financial Advisor’s Guide to Regulatory Investigations. You can request a copy, for free, on our website here, or you can purchase a copy on Amazon.