We took a look at FINRA’s enforcement cases reported for January 2019 with respect to individual financial advisors, wanting to see what type of cases there were. These cases are reported for January, so that means that, for the most part, they were resolved or became final during that month, or in the two months prior, but the actual misconduct may be several years old by the time the case is resolved. Here’s a quick overview of what we found, focusing only on cases only against individuals.
For the January monthly report, we identified 39 cases against only individuals, not counting Rule 9552 non-summary suspension proceedings. Nine of these, 23% of the monthly total, were for a Rule 8210 offense.The means the rep. did not respond to FINRA’s Rule 8210 letters seeking information, documents or testimony during FINRA’s investigation. The reality is that for at least several of these, had the rep. cooperated with FINRA, if there was a violation uncovered and an enforcement action to come, it likely would have been resolved more favorably than by ending with a bar from the industry for the Rule 8210 violation. Advisors should remember that not responding to FINRA almost always ends with a bar, but most cases, except egregious ones, can often be resolved with sanctions that are not as significant.
Other cases involved conversion of funds (6 cases), with a rep. accused of converting funds of customer or the firm. Everybody knows not to steal, but there’s typically a few cases like this each month. Four cases involved falsification of documents – firm documents – including, for example order tickets. Two cases involved participation in an undisclosed OBA (outside business activity). Two cases involved selling away – participating in private securities transactions away from the firm. Three cases involved U4 violations – failure to report information on the U4. Tax liens not being reported are good examples of these types of regular violations. Three cases involved improper use of discretion – using discretion without getting written approval from the client and having the firm approve the account as discretionary.
There were a few cases that I found interesting, that I thought I’d highlight for you.
One case involving a former Merrill Lynch rep., resulted in the rep. being barred over an allegation that he submitted reimbursement requests for his out of pocket childcare expenses .Over a two year period, this rep. allegedly submitted 24 reimbursement requests, totaling just over $4900, that contained fake invoices and signatures from the childcare provider. It seems that the firm had a benefit wherein employees could obtain reimbursement for certain expenses, after providing certain documentation, etc. FINRA found that these reimbursement requests were fake, that the childcare provider did not actually care for the rep’s child during this time, and that the rep. was not entitled to the reimbursements. This rep. settled the case with FINRA, and was barred from the industry.
In another settlement, a rep. was fined$5,000 and suspended for 15 business days based on allegations that she distributed a letter from the manager of a fund that contained misleading statements about the fund. FINRA found that the rep. forwarded the letter to retail investors along with her own misleading commentary about the fund’s prospects. These statements were imbalanced, FINRA said, and did not provide a sound basis for evaluating the relevant facts. The rep. distributed these materials without approval of the firm.
Two cases involved reps. using personal email, or text messages for communications with clients about securities business.
In the first case, FINRA found that the rep. used his personal email, on occasion, to conduct business – sending people forms to complete and return and to communicate about business matters.The rep. had certified to his firm on compliance questionnaires that he did not use a personal email account in this matter. When the firm discovered that he was using his personal email account, they sought access to it, and the rep. provided his password, but then went in and began deleting business emails.
FINRA charged the rep. with a violation of Rules 4511 and 2010. Rule 4511 requires firms to make and preserve books and records as set forth under the law and FINRA found that the rep. caused his firm to fail to maintain required books and records by using his personal email account, which was not monitored and archived, for business purposes. The rep. was suspended for 60 days and fined $10,000 in this settlement.
In the other case involving similar issues, FINRA found that a rep. exchanged hundreds of business-related text messages and emails through his personal email with one client, over about 7 years. One such communication included a written complaint from the client, alleging that the rep. failed to follow his instructions about a certain position in his brokerage account. The rep. failed to report the complaint to his firm, and failed to report it on his Form U4, and answered falsely on compliance questionnaires on the issue of whether he had received any customer complaints.
FINRA also found that this rep. paid two customers money to settle complaints they had against him, without the knowledge or consent of his broker-dealer, and also falsely certified on compliance questionnaires that he had not settled any complaints away from the firm.
But wait, there’s more: FINRA also reported that the rep. violated Rule 8210 by providing misleading testimony to FINRA in their investigation, explaining that the rep. testified that he did not send text messages to customers, when, FINRA says, he actually sent hundreds of text messages to customers and was conducting business with clients via text message. FINRA notes in the settlement document that later, in subsequent testimony, the rep. clarified his prior testimony and admitted that he had, in fact, communicated with clients via text messages.
For all of this, FINRA imposed a fine of $20,000 and a suspension for 18 months, which might seem rather lenient to some. Additionally, however, because FINRA found that the rep’s failure to report the customer complaint on his U4 was willful, the result is that the rep. is statutorily disqualified from being associated with a broker-dealer. So, he is effectively barred and out of the business.
There were many more cases reported that involved violations by broker-dealers, and many cases that involved non-summary suspension proceedings, where former reps failed to respond to FINRA’s Rule 8210 letters and were suspended, and if they don’t respond timely, that suspension will convert to a bar.
If you are facing a FINRA investigation, we’ve got lots of information about that process for you here on our blog and youtube channel. And, we have a free offer for you as well –click on the “Free Info” link at the top of our webpage, and then request a copy of my book, The Financial Advisor’s Guide to Regulatory Investigations. Just fill out the request form, and we’ll get one out to you right away, while supplies last. If you are not facing a regulatory investigation, you can also order a copy of the book online at Amazon.