Quarterly Disciplinary Review - Summer Issue/June 2006

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 they should periodically 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. Additional information about obtaining a CRD Individual Snapshot is available at www.nasdr.com/qualifications.asp.

Borrowing Funds from a Customer

  • Registered Representative Fined and Suspended for Borrowing Money from a Customer - NASD settled a matter involving a registered representative who borrowed $10,000 from a customer. The written procedures of the representative's member firm prohibited registered persons from borrowing money from customers. The customer was not a member of the representative's immediate family, was not in the business of lending money, and did not have a personal relationship with the representative. NASD concluded that, by borrowing money from the customer, the representative violated NASD Rules 2110 and 2370. NASD suspended the representative for 30 business days and fined him $5,000.

Exercising Discretion Without Written Authority or Firm Approval

  • Registered Representative Censured and Fined for Exercising Discretion in Customer Accounts Without Written Authority and Firm Approval - NASD settled a matter involving a registered representative who executed six discretionary securities transactions in customer accounts without having prior written authorization from the customers and prior acceptance of the accounts as discretionary by his employer firm. NASD found that the representative's conduct violated Conduct Rules 2110 and 2510, fined the representative $7,500, and censured him.

Falsely Signing Customer Application as Having Witnessed Customer's Signature

  • Registered Representative Fined and Suspended for Falsely Signing a Customer's Annuity Application As Having Witnessed the Customer's Signature When He Did Not In Fact Witness the Signature - NASD settled a matter involving a registered representative who signed a customer's annuity application as having witnessed the customer signing it when he in fact did not witness the customer signing it. NASD held that the representative's actions violated Conduct Rule 2110, suspended the representative for 10 business days, and fined him $10,000.

Non-Securities Activities Away from Member Firm

  • Registered Representative Suspended and Fined for Engaging in Outside Business Activities Without Providing His Member Firm with Prior Written Notice - NASD's National Adjudicatory Council (NAC) found that a registered representative violated Conduct Rules 2110 and 3030 when he failed to notify his member firm of non-securities business activities away from the firm. The registered representative argued that he was not yet "employed by" the outside business because it had not yet become a viable entity, and that he therefore hadn't violated Rule 3030. The NAC rejected this argument and stated that an associated person is required to disclose outside business activities at the time when any steps are taken to commence the activities. The NAC also rejected the representative's argument that his conduct fell outside the scope of Rule 3030 because he did not receive compensation. The NAC noted that Rule 3030 attaches potential liability regardless of whether the associated person received compensation from the outside activity. The NAC fined the representative $5,000 and suspended him in all capacities for 60 days.

Research Report Violations

  • Registered Representative Fined and Censured for Rule Violations Related to Research Reports - NASD settled a matter involving a registered representative who submitted advance copies of research reports that he had prepared for his employer firm to the companies whose equity securities were the subject of the reports. The reports contained price targets, research ratings and research summaries, and the representative provided them to the companies without first providing drafts to the firm's legal or compliance department on five separate occasions. Additionally, the registered representative published research reports on four occasions that did not disclose the valuation methods used to determine price targets contained in the reports. NASD concluded that the representative's conduct violated NASD Conduct Rules 2110 and 2711, censured him, and fined him $15,000.

Sales Literature that Does Not Conform to Rule Standards

  • Registered Representative Suspended for Distributing to Customers Sales Literature that Did Not Conform to Applicable Rule Standards - NASD settled a matter involving a registered representative who distributed to potential investors three items of sales literature that did not conform to the applicable standards for communications with the public contained in NASD's Rule 2210. The sales literature focused exclusively on the potential benefits of the recommended investments without disclosing the risks, contained exaggerated representations about the representative's employer firm, and implied that a somewhat illiquid investment was in fact liquid. NASD concluded that the representative violated Rules 2110 and 2210 and suspended the representative in all capacities for one calendar month.

Settling Customer Complaint Without Firm Approval or Authority

  • Registered Representative Suspended and Fined for Settling a Customer Complaint Away from His Member Firm - NASD settled a matter involving a registered representative who settled a customer complaint by paying the customer $500 without providing his member firm with prior notice or obtaining his member firm's prior approval of the settlement. NASD concluded that the representative violated NASD Rule 2110, suspended the representative for two months, and fined the representative $5,000.

Submitting Personal Expenses to Firm for Reimbursement as Business Expenses

  • Registered Representative Barred for Charging Personal Expenses on a Firm Credit Card and Requesting Reimbursement from the Firm - NASD settled a matter involving a registered representative who charged a personal expense to a business credit card that his member firm had issued to him for business use only. The representative thereafter submitted to the firm a written request for reimbursement of the expense and misrepresented to the firm that the expense was business related. NASD concluded that the representative's conduct violated Rule 2110 and barred the representative.