This is a continuation of the discussion concerning both the typical and unusual types of FINRA enforcement actions that regularly appear on the horizon.

1.     Willful Failure to Disclose Material Information on a Form U4:

  • FINRA’s NAC issued a decision in which it found that a registered representative willfully failed to disclose material information on a Form U4. The registered representative failed to disclose a federal tax lien, three civil judgments, two bankruptcies, and a state tax lien on Forms U4 and amendments to Forms U4 that the representative filed while employed with 11 different member firms over the course of seven years. Additionally,  the NAC’s decision included a finding that the information the representative omitted from his Forms U4 was material, and the representative willfully failed to disclose the information. The NAC therefore found that, under the Securities Exchange Act of 1934, the registered representative is statutorily disqualified from the securities industry.  The NAC found that the representative’s conduct violated NASD Rule 2110 (ethical standards) and NASD IM-1000-1 (filing of misleading information as to membership).  As such, the NAC suspended the representative in all capacities for two years, required the representative to requalify as a corporate securities limited representative and assessed costs.

2.     Misappropriation of Customer Funds and Failure to Respond to FINRA Investigation:

  • FINRA settled a matter involving a registered representative who violated FINRA’s ethics rules by misappropriating an insurance customer’s funds and failing to respond to FINRA’s investigation. The registered representative sold securities and insurance products. For insurance products, he was required to immediately remit funds collected from insurance customers to the insurance company or deposit the funds in a segregated account held in trust for customers. Early in the month of December, the registered representative collected two $500 checks from a customer as payment for the purchase of two insurance policies. The representative deposited the funds into his business checking account, thereby commingling the funds with his own money.  By the end of December, the representative had used the funds for his own business expenses, and his business account held a negative balance. In January, the registered representative purchased policies for the customer by making a partial payment with his own funds. Later in the month, the representative paid the remaining balance out of his own funds. Thereafter, during an investigation of the registered person’s conduct, FINRA sent two requests for  information and documents and one request that the representative appear to testify to the representative’s address as listed in the Central Registration Depository (CRD®). The letters were returned, marked “unclaimed” and “undeliverable,” and the representative neither responded nor appeared to testify.
  • FINRA concluded that the registered representative’s conduct violated FINRA Rules 2010 (ethical standards) and 8210 (requests for information). As such, FINRA barred the representative in all capacities.

3.     Improperly Engaging in Outside Business Activities and Failing to Respond to FINRA Information Requests:

  • FINRA settled a matter involving a registered representative who improperly engaged in a business enterprise away from his member firm without providing the firm with prior written notice, and failed to respond to FINRA requests for information until FINRA filed a complaint against him.  During a period of nearly three years, the representative was a sales associate for a business that sold services to protect against identity theft. During this time, the representative received compensation from the business for marketing its services. The representative failed to provide prompt written notice to his member firm that he was engaged in such business activities.  In two separate letters, FINRA requested that the registered representative provide information and documentation regarding his outside business enterprise. Both letters were delivered, but the registered person failed to respond to FINRA until FINRA filed a disciplinary complaint against him, at which time he fully responded. 
  • FINRA concluded that the registered representative’s conduct violated NASD Rules 3030 (outside business activities) and 2110 (ethical standards), and FINRA Rules 8210 (requests for information) and 2010 (ethical standards).  FINRA suspended the representative from associating with any member firm in any capacity for two years. The representative filed for bankruptcy protection, so FINRA was precluded from fining him.

If you have not already gotten bored, please go to post number 3.