Articles Posted in FINRA Rules

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On January 3, 2020, FINRA released an AWC for Robert James D’Andria, Case No. 2017056579502.  At first blush the AWC seems rather plain vanilla.  The FA recommended high-risk products, in this case leveraged and inverse exchange-traded notes and funds, to retail investors and FINRA deemed those recommendations to be unsuitable.  FINRA suspended the FA for 2 months and fined him $5,000.

In a typical suitability case, FINRA would claim that the account was over-concentrated in a given sector, or the position was too large relative to the portfolio as a whole, or the account was over-traded, or the investment was inconsistent with the investor’s stated investment objectives.  And, in a typical case, FINRA would claim that the customer suffered meaningful losses.

In this AWC, however, FINRA does not claim that the investments were inconsistent with the customers’ investment objectives.  Nor does FINRA claim that the investors were unsophisticated or otherwise lacked the ability to assess the merits of these investments.  So, this begs the question:  where’s the violation?

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FINRA published an interesting arbitration award on December 27, 2019.  In Raymond James & Associates, Inc. v. Gregory D. Clark (FINRA Case Number 18-04011), Raymond James claimed that Mr. Clark breached a settlement agreement related to the repayment of a promissory note.  Raymond James requested, and was awarded, compensatory damages of $206,000 plus interest pursuant to Florida Statutes § 55.03.  You can access the Award by clicking here.

Things get interesting when analyzing the procedural rulings of this case.

Motion to Bar Presentation of Defenses and Facts

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On December 16, 2019, FINRA released the AWC in Matter No. 2018060843801 (In re Molteni) [click here to read the AWC].  At first blush, the AWC seems to concern a garden variety violation in which the FA failed to amend his Form U4 to disclose two federal tax liens.  This doesn’t seem to be the violation of the century, right?  Even FINRA’s Sanction Guidelines suggest a regulatory slap on the wrist of a modest fine and 10 day suspension.

So here is where things get interesting.  FINRA more or less sanctioned Molteni in accordance with the Sanction Guidelines.  They hit him with a $5,000 fine and a 3 month suspension.  However, FINRA also found that he “willfully” failed to disclose the federal tax liens.  In the world of FINRA regulation, the word “willful” carries an awful lot of weight.

What does it mean to act “willfully”?

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FINRA wants a member firm to enforce its written supervisory procedures.  And FINRA wants a member firm to recommend securities that fit within the customer’s investment objectives.  And certainly FINRA wants a member firm to avoid falsification of business records.  So what happens when a member firm doesn’t quite live up to FINRA’s expectations?  Let’s play the over / under game and try to guess the size of the FINRA sanction when a member engages in the following misconduct:

  • Failure to enforce WSPs governing the sale of high-risk mutual funds subject to significant volatility
  • Failure to reallocate portfolios to reduce risk or otherwise update investment objectives to correspond with the assumption of additional risk

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FINRA is on the look-out for violations of Rule 3280, which prohibits an FA from participating in a private securities transactions without giving written notice to the broker-dealer and receiving written approval.  A “private securities transaction” is any securities transaction outside the scope of the FA’s employment with the broker-dealer.  Private securities transactions remain a regulatory focus for FINRA.  As noted by FINRAs CEO, Robert Cook, in the 2019 Risk Monitoring and Examination Priorities Letter:  “we are particularly concerned about fundraising activities for entities that the associated persons control or in which they have an interest…”

Case In Point

In the Matter of Michael Jason Collins, FINRA Matter No. 2017056104801 (see the AWC itself)

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FINRA operates the largest securities dispute resolution forum in the United States.  Virtually all disputes between customers and brokerage firms are resolved by arbitration before FINRA.  Similarly, virtually all disputes between employees and brokerage firms are likewise resolved by arbitration before FINRA.

It is common in any arbitration that a party may seek documents or testimony from a non-party.  If the non-party is a FINRA member or an employee of a FINRA member, the arbitrators are free simply to “order” that person or company to testify or supply documents (FINRA Rule 12513).  However, does the jurisdiction of FINRA arbitrator extend to companies or persons that are not FINRA members or employees of FINRA members? The answer is, kind of sort of yes, but with some wrinkles.

Let me explain and take it from the top.  First, the laws in the United States favor arbitration.  The Federal Arbitration Act (ʺFAAʺ), 9 U.S.C. § 1 et seq., ʺreflects a legislative recognition of ʹthe desirability of arbitration as an alternative to the complications of litigation.ʹʺ  Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 844 (2d Cir. 1987).  Thus, one question is:  does FINRA even have a rule which permits an arbitrator to issue a subpoena to a non-member or an individual not employed by a member?  The answer is, yes:  FINRA Rule 12512 states, “Arbitrators shall have the authority to issue subpoenas for the production of documents or the appearance of witnesses.”

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Did you recently lose a serious amount of money because you took the bad advice given to you by your broker? If so, don’t despair. There may be a way for you to recoup the money that you invested. You may even be able to sue for punitive damages on top of the amount that you recently lost. To do so, you will need to contact a firm of experienced NYC investment fraud attorneys.

Don’t Let a Faulty Adviser Drain Your Investment Account


If you were misled by a negligent or incompetent financial adviser, you may have recourse to the law. If you can prove that they intentionally misled you, mismanaged your funds, or otherwise behaved in an unlawful manner, you may be able to file a claim against them in arbitration.

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When a registered representative leaves a broker-dealer, there are many different service and compliance issues that emerge. There are also competing interests between the firm and the representative, each of whom want to keep the customer’s business. At the same time, the customer wants to maintain steady and uninterrupted service. FINRA Regulatory Notice 19-10 sets forth obligations that members must follow when a registered representative departs a firm. Herskovits PLLC can assist firms and registered representatives that need assistance in understanding or implementing FINRA’s directives.

It is common in the industry for registered representatives to move between firms. FINRA expects that the firms and representatives continue to prioritize the customers’ interests when a registered representative leaves the firm. First and foremost, the firm must inform the customer how their account will continue to be serviced after the representatives moves from the firm. Then, the firm must provide its customers with full and complete answers when the firm is asked about the representative who is leaving.

Firms must ensure that the customers know that they have the option to keep their account at the firm and have the account serviced by a new representative. They must also provide the contact of the departing representative to the customer if the representative has given their consent to their contact information being distributed. In other words, customers must be able to make their own choice about what to do with their account.

Ever since it was implemented, brokers have relied on the Protocol for Broker Recruiting to be able to take some of their clients with them when they leave a firm, but a recent ruling by a state court in Georgia might jeopardize the Protocol’s protections.

The Appeals court’s ruling concluded the case against four former Aprio brokers, who failed to give 60 or 90 days’ notice before moving to Morgan Stanley, as it was established in their employment agreements.

Instead of giving Avrio a heads up, they announced they were leaving and quit on the same day. As soon as they had a foot out the door, they reached out to all their clients, in an attempt to bring them over to Morgan Stanley. Naturally, many followed, and Aprio lost a significant amount of business.

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FINRA has announced it will increase its scrutiny of the cryptocurrency market. As several regulatory bodies endeavor to establish their jurisdiction over the crypto space, FINRA will now boost its oversight of registered firms’ participation in its burgeoning market.

In a new regulatory notice, the self-regulatory organization asked its 3,700 member firms to notify it if they trade in cryptocurrency, accept cryptocurrency from clients, manage crypto funds, participate in the sale of digital tokens, or even offer advice relating to cryptocurrency.

FINRA will also monitor virtual currency mining and any other related use of blockchain technology.

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