FINRA disciplined dozens of individuals last quarter – yet, only a few rise to the status of being a “message case,” or stood out as being particularly egregious to the regulator. Continue reading to learn from others’ mistakes, in the following categories (cases 4-5-6-7 covered in this posting;  cases 1-2-3 were posted on Monday):

1. Exercising Discretion Without Approval.
2. Engaging in Private Securities Transactions ("PST") and Failing to Respond to Information Requests (“RFI”).
3. Converting Customer Funds, Failing to Disclose Outside Business Activities, Misrepresenting Facts and Failing to RFI.
4. Selling Unregistered Securities and Communicating With Customers From a Personal Email Account.
5. Failing to Provide Notice of Outside Brokerage Accounts and Notice of Broker-Dealer Employment, and Misrepresenting Information.
6. Impersonating Customers.
7. Recommending Unsuitable Transactions.

………………………………………………………………………………………….. 4.  Selling Unregistered Securities and Communicating With Customers From a Personal Email Account. A registered representative ("RR") sold unregistered securities and emailed correspondence from a personal account. In the first half of 2009, 3 customers opened accounts for 3 different LLCs.   Two of the customers transferred into their LLC accounts billions of shares of 2 stocks. The third customer transferred into his LLC account 160 million shares of another stock. The RR was the rep for each of the three accounts, and each of the accounts liquidated all of the shares of stock and wired the majority of the proceeds out of the accounts. Sales in the 3 accounts generated proceeds of approximately $100,000, $230,000 and $50,000, respectively. The 3 securities were neither registered with the SEC nor exempt from registration. FINRA concluded that the rep failed to inquire as to  the securities’ registration despite the questionable circumstances surrounding the sales, and that the representative violated Section 5 of the Securities Act of 1933 and FINRA Rule 2010 (ethical standards). The firm’s WSP’s required RR’s to use the firm’s email account when communicating about firm business, and specifically prohibited the use of an RR’s personal email account for outgoing correspondence.  During the first half of 2009, the RR communicated with several customers, including the 3 customers referenced here, re: activity in their accounts at the firm via his personal email account.  FINRA found that the RR’s alleged conduct would violate FINRA Rule 2010 (ethical standards). Sanctions. The RR received a $50K fine and a 6-month suspension in all capacities. 5.  Failing to Provide Notice of O/S Brokerage Accounts and Notice of B/D Employment, and Misrepresenting Information. The SEC recently upheld an NAC decision in which the NAC fined an RR and suspended him for maintaining O/S brokerage accounts without advising the firms holding the accounts that he was employed at another member firm, and without advising his member firm. The RR, in fact, misrepresented to his member firm that he did not hold O/S accounts.  In the RR’s O/S brokerage accounts, the rep actively traded in the stock of an issuer that RRs he supervised recommended to firm customers. The SEC concluded that this fact underscored the importance of full disclosure. The SEC found that the RR’s trading activities threatened the integrity and transparency of the securities industry, and created an environment ripe for customer abuse. The SEC affirmed the NAC’s findings that the RR violated NASD Rules 2110* (ethical standards) and 3050 (transactions for or by associated persons). Sanctions. SEC affirmed the NAC’s decision to issue a 2-year suspension in all capacities and a $25,000 fine. 6.  Impersonating Customers. An RR impersonated 4 customers over the course of about 2 months, by allegedly placing telephone calls to his former B/D, misidentifying himself as a customer, and impersonating 4 customers to expedite moving the customers’ accounts from the former B/D to the new B/D with which he became associated.  Sometimes the RR used the customers’ personal information, such as birth dates or Social Security #’s to impersonate his customers. Although the RR had the customers’ authorization to transfer their accounts to the new firm, the customers had not authorized the impersonations, which FINRA concluded would violate FINRA Rule 2010 (ethical standards). Sanctions. To settle FINRA charges, the RR agreed to a 1-month suspension and a $5,000 fine. 7.  Recommending Unsuitable Transactions. An RR recommended allegedly unsuitable trades in a customer’s account.  The RR had opened an IRA account for a new customer with approximately $41,000 that the customer had accumulated in an employer-sponsored 401(k) plan with the customer’s previous employer. The customer’s investment experience was limited to her passive role as an investor in the 401(k) plan.  Further, she was a single mother working as a beautician in a hair salon. Over a 2-month period, the RR recommended and caused the liquidation of the securities held in the account, including mutual funds, while investing the proceeds in the common stock of 2 companies.  During this same period, the RR recommended and caused several more purchases and sales involving the common stock of the same 2 companies. When the “dust settled,” the RR allegedly recommended and caused the liquidation of all of the assets in the account,  and used the sales proceeds to purchase warrants 1 of the 2 companies issued.  FINRA concluded that the RR didn’t have reasonable grounds for believing that the recommendations were suitable for the customer because the trading was inconsistent with her financial situation and needs. FINRA found that an over-concentration of the customer’s assets in the securities of one or two companies, each of which carried a level of market risk that was not suitable for the customer given the amount invested and her financial resources, would violate FINRA’s suitability requirements. FINRA concluded that the RR’s alleged activities would violate NASD Conduct Rules 2110* (ethical standards) and 2310‡ (recommendations to customers) and IM-2310-2‡ (fair dealing with customers). Sanctions. To settle FINRA charges, the RR agreed to a $5,000 fine an a 20-day suspension in all capacities. Footnotes used in cases. *   NASD Rule 2110 has been superseded by FINRA Rule 2010, effective 12/15/08. **  NASD Rule 3030 has been superseded by FINRA Rule 3270, effective 12/15/10. †    NASD Rule 2330(a), (e) and (f) has been superseded by FINRA Rule 2150, effective 12/14/09. ‡    NASD Rule 2310 and IM 2310-2 have been superseded by FINRA Rule 2111, effective 7/9/12. For further details, refer to:   [FINRA Quarterly Disciplinary Review, July 2012].