Quarterly Disciplinary Review - Spring Issue/March 2005
The Office of General Counsel of NASD Regulatory Policy and Oversight (OGC) publishes the Disciplinary Update to provide registered representatives with a summary sampling of recent disciplinary actions involving misconduct by registered representatives. The sample of disciplinary actions includes settled matters and decisions in litigated cases (National Adjudicatory Council (NAC) decisions and decisions of the Securities and Exchange Commission in NASD cases).
OGC chose the particular actions summarized below to call attention to, and remind registered representatives of, specific conduct that violates NASD Rules and may result in disciplinary action. This document is not intended to replace or supplement the disciplinary information and decisions contained on NASD's Web site (www.finra.org). The decisions and settlements referenced in this document are subject to the restrictions regarding the release of disciplinary information contained in IM-8310-2 in the NASD Manual.
OGC reminds registered representatives that periodically they should review their Central Registration Depository (CRD) information to check that it is current. Every registered representative can review his own CRD information by requesting a copy of his "Individual Snapshot" from NASD. Requests must be in writing and must include the representative's name, home address, social security number or CRD number, and signature. Requests may be sent via facsimile to (301) 216-2716, or via first class mail to: Research (Snapshot), 9509 Key West Avenue, Rockville, Maryland 20850, Attn: Research.
Conversion of Customer Funds
- Registered Representative Barred for Converting Customers' Annuity Disbursements – NASD settled a matter in which a registered representative caused approximately $150,000 in disbursements to be made from two customers' annuities, obtained possession of the funds, and converted the funds to his own use. NASD found that the representative violated Conduct Rule 2110 and barred the representative in all capacities.
Falsification of Firm Records and Forgery
- Registered Representative Suspended and Fined for Signing Customer's Name to 401(k) Rollover Form – NASD settled a matter involving a registered representative who improperly signed a customer's name to a 401(k) rollover form without the customer's permission in order to facilitate the customer's requested rollover. NASD found that the representative's actions violated Conduct Rule 2110, suspended the registered representative in all capacities for 60 days, and fined him $5,000.
- Registered Representative Barred for Forging Signature of Corporate Officer on a Corporate Resolution – NASD found that a registered representative violated Conduct Rule 2110 when he forged the signature of a corporate officer to a corporate resolution. The registered representative at issue believed the representations of another representative at his employer firm that a corporate officer of the firm had executed a corporation resolution stating that the firm had agreed to assist newlysigned professional athletes in their efforts to obtain automobile loans or leases. The representative understood the program to be a method of attracting the athletes as financial advisory clients. In an effort to continue the athlete program, the registered representative at issue traced the name of the corporate officer on another corporate resolution that identified a different automobile dealership for the same professional athlete program. NASD concluded that its authority under Rule 2110 is broad enough to encompass business-related conduct even if the conduct is not related to securities transactions. NASD found that the representative violated Conduct Rule 2110 and barred the representative in all capacities.
- Registered Representative Suspended and Fined for Affixing Customer's Initials to a 529 Plan New Account Application – NASD settled a matter involving a registered representative who affixed a customer's initials to portions of a 529 plan new account form that the customer neglected to complete when the customer executed the new account form. Although the customer had agreed to open a 529-plan account, the customer had not consented to the representative's placing the customer's initials on the new account form. NASD found that the representative violated Rule 2110, suspended the registered representative in all capacities for three months, and fined him $7,500.
Outside Business Activities
- Registered Representative Fined and Suspended for Selling Fixed Annuities Without Providing Member Firm with Prompt Written Notice – NASD settled a matter involving a registered representative who sold more than 20 fixed annuities outside the scope of his relationship with his member firm, received more than $150,000 in commissions for these sales, and failed to provide the member firm with prompt written notice of the sales and commissions. NASD held that the representative's actions violated Conduct Rules 2110 and 3030, suspended the representative in all capacities for six months, and fined him $7,500.
- Registered Representative Fined and Suspended for Failing to Provide Prompt Written Notice to Member Firm of Outside Business Activity – NASD settled a matter involving a registered representative who provided income tax preparation services to 13 customers for a fee outside the scope of his relationship with his member firm and failed to provide prompt written notice of this outside business activity to his member firm. NASD found that that representative violated Conduct Rules 2210 and 3030, suspended the representative in all capacities for 10 business days, and fined the representative $5,000.
- Registered Representative Suspended and Fined for Recommending and Effecting Unsuitable Purchases of Class B Mutual Fund Shares on Behalf of Two Customers – NASD settled a matter involving a registered representative who recommended and effected purchases of Class B mutual fund shares in excess of one million dollars in the accounts of two customers. NASD found that, had the representative recommended Class A shares instead, the customers could have (1) been eligible to receive breakpoints on purchases of Class A shares and avoided or minimized up-front sales charges; (2) paid lower 12b-1 fees throughout the duration of the investment; and (3) avoided being subject to contingent deferred sales charges. NASD found that the representative violated NASD rules, suspended the representative in all capacities for 30 days, and fined the representative more than $60,000 (which included disgorgement of the representative's commissions).
- Registered Representative Suspended and Fined for Recommending Unsuitable Class C Mutual Fund Share Purchases to Customers – NASD settled a matter involving a registered representative who recommended to customers the purchases of Class C mutual fund shares without having a reasonable basis for believing that the recommendations were suitable. NASD found that the recommendations were not suitable because the customers' accounts were economically disadvantaged by the costs associated with the purchases of Class C shares. NASD found that the customers would have incurred fewer costs if the representative had recommended that they purchase Class A shares of the same mutual funds. NASD found that the representative's actions violated NASD's rules, suspended the representative in all capacities for 15 business days, and fined the representative $10,000.
- Registered Representative Suspended and Ordered to Pay Restitution to Customer for Recommending Unsuitable Mutual Fund Switches – NASD settled a matter involving a registered representative who recommended that an elderly, retired client engage in a pattern of mutual fund switching in two different accounts. The switching involved both open-end (Class A and B shares) and closed-end funds and unit investment trust shares. NASD found that the representative's recommendations were unsuitable in view of the frequency of the transactions (Class A shares were held two to three months and Class B shares were held nine to 10 months), the types of investments recommended, and the customer's financial situation and investment objectives. The customer lost approximately $70,000 in both accounts and incurred other added expenses, such as unnecessary contingent deferred sales charges, additional and unnecessary sales loads and commissions, and higher 12b-1 fees. The representative also ignored the customer's option of utilizing repurchase rights, which would have enabled the customer to avoid additional expenses. NASD found that the representative's actions violated NASD's rules, suspended the representative in all capacities for six months, and ordered that the representative pay restitution of more than $22,000 to the customer.