Articles Posted in It Would Be Funny If It Were Not True

This last post, in the series of ever changing FINRA enforcement horizon, contains a summary of enforcement actions that the average investor would apt to be exposed to.  However, please keep in mind that this list is not exhaustive.  Individuals are always trying to come up with new ways to separate an individual from their money.  Consequently, it is necessary for you to remain ever diligent and take immediate action if you suspect that something is wrong.

1.     Unsuitable Recommendations:

• FINRA settled a matter involving a registered representative who recommended two unsuitable investments to a customer. At the time of the recommendations, the registered representative’s customer was contemplating early retirement in the near future, seeking growth and income, and wanting to withdraw a monthly amount without paying the IRS tax penalties. The representative recommended class A shares of three mutual funds and a cash management trust. The customer invested his entire retirement savings of $530,000 and paid an upfront load of $9,786 for the mutual fund purchases. The annual expenses for the class A shares was $2,934, and the representative received $6,889 in connection with the purchase.  Later that same day, the representative learned from a colleague that a particular deferred variable annuity offered an income protection rider. Despite never having sold a deferred variable annuity before, the representative recommended, on the same day as the mutual fund purchases, that the customer liquidate his mutual fund shares to purchase the variable annuity. The customer agreed, and the representative moved all of the customer’s retirement savings into a variable annuity at a total cost to the customer of $10,513. The representative received $21,145 in compensation on the variable annuity purchase. Subsequently, the variable annuity company miscalculated the customer’s monthly withdrawal and failed to factor into the calculation the customer’s tax limitations, thereby rendering the annuity’s income protection rider moot.  The representative failed to notice the miscalculation until a later date.  FINRA concluded that the representative’s recommendation of these two transactions on a single day was unsuitable for the customer because they resulted in the customer unnecessarily paying an upfront sales charge for the first investment and substantially higher annual fees, and an over-concentration of the customer’s investments in an illiquid deferred variable annuity. FINRA found that the representative’s conduct violated NASD Rules 2310 (recommendations to customers) and 2110 (ethical standards), and NASD IM-2310-2 (fair dealing with customers). As such, FINRA suspended the registered representative from associating with any member firm in any capacity for one month and fined the representative $5,000.

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.

Let’s see, if you can guess, how many different types of FINRA enforcements actions typically arise during a quarterly reporting period such as the fourth quarter of 2011. 

In reviewing the below described summaries, the reader will be amazed as to the stupidity underlying some actions, the negligence and/or fraud perpetrated against the investing public and/or the downright theft of a customer’s hard earned money.

1.     Entering Fictitious Trades and Causing Inaccurate Firm Records:

A alleged story of the greed of a few causing the suffering of many.  

The Securities and Exchange Commission recently charged six former top executives of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud, alleging they knew and approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans.

Fannie Mae and Freddie Mac each entered into a Non-Prosecution Agreement with the Commission in which each company agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting nor denying liability. Each also agreed to cooperate with the Commission’s litigation against the former executives. In entering into these Agreements, the Commission considered the unique circumstances presented by the companies’ current status, including the financial support provided to the companies by the U.S. Treasury, the role of the Federal Housing Finance Agency as conservator of each company, and the costs that may be imposed on U.S. taxpayers.