While brokers diligently strive to adhere to FINRA’s rules, there are times where they inadvertently violate them. Brokers can also face unjust accusations and unfounded claims. In these cases, brokers can find themselves facing unwarranted or false allegations that tarnish their records and professional reputations.
Compliance with FINRA rules is crucial. With that in mind, here are some of the most commonly violated rules.
Private securities transactions: FINRA’s rule regarding private securities transactions, or PSTs, is straightforward but critical. Before a broker engages in a PST, they must provide their firm with a written description of the transaction and their role in it. If the broker is receiving compensation, the broker is required to report it. The firm bears the responsibility of supervising the transaction, as though it were executed on its behalf. FINRA’s stated purpose for this requirement is to make sure that brokers do not attempt to bypass this rule for personal gain or to evade supervisory oversight.
Suitability: When a broker recommends a securities transaction to a customer, the recommendation must align with that customer’s investment portfolio, needs and financial situation. If a broker suggests a transaction that is not in line with the customer’s investor profile, or one that primarily benefits the broker rather than the customer, it constitutes a violation of the suitability rule. The suitability rule often puts brokers under regulatory scrutiny, as customers can easily lodge allegations that trigger investigations.
Supervision: The supervision rule is exactly what it sounds like — it mandates that registered firms establish a robust system for supervising brokers and other firm representatives. The system’s primary goal is to make sure that brokers adhere to applicable securities laws and regulations. Additionally, each firm must designate a representative responsible for overseeing its supervision system. FINRA claims that effective supervisory systems can help detect and prevent broker misconduct, thereby safeguarding investors’ interests.
Outside business activities: OBAs, for short, represent a critical aspect of financial advisory regulation, wherein employees of registered firms are strictly prohibited from engaging in outside work or receiving compensation from another entity without prior written notice to their employing firm. FINRA’s stated aim with this rule is to ensure transparency and enable firms to assess potential conflicts of interest that might arise from such activities.
Frequently, brokers properly seek guidance from their firms about whether their involvement with an external entity constitutes an OBA — only to later face termination for alleged nondisclosure.
Standards of commercial honor and principles of trade: One of the fundamental principles of which FINRA boasts enforcement is the requirement for registered firms to uphold high standards of commercial honor and abide by just and equitable principles of trade. Firms are explicitly prohibited from making false, misleading or exaggerated claims in any sales literature intended for public consumption. In essence, this rule mandates that firms adhere to both legal and ethical guidelines in their business practices.
The enforcement of high standards of commercial honor and equitable principles of trade, as mandated by FINRA, has become a prominent and challenging issue in recent times. One specific area of concern revolves around electronic signature (e-signature) violations. In response to the growing use of e-signatures, FINRA has heightened its focus on detecting instances of alleged signature forgery or falsification.
Use of manipulative, deceptive or other fraudulent devices: This rule prohibits members from employing manipulative, deceptive or fraudulent devices in any transaction, purchase or sale of a security. Yet, inadvertent and alleged violations of this rule can occur, especially in the context of off-channel communication devices. The advent of messaging apps has transformed communication, though it has also presented a significant compliance challenge for brokerage and advisory firms. Recent regulatory scrutiny has particularly focused on the personal and off-channel communication policies of registered investment advisers and broker/dealers.
Misuse of customer’s funds or securities: FINRA rules also prohibit borrowing a customer’s funds or securities without proper authorization. This rule is in place to protect against forgery, deception or illegal manipulation that could harm investors’ assets and trust.
All regulatory enforcement investigations begin with a simple inquiry, but they can quickly escalate to disclosures, suspensions, fines and a possible bar from the industry altogether. Given the high stakes involved, responding promptly, consistently and with a high degree of precision is crucial.
This story was excerpted from the AdvisorLaw blog. Read the complete article here.