Quarterly Disciplinary Review - Winter Issue/December 2001

The Office of General Counsel (OGC) of NASD Regulatory Policy and Oversight 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 (Hearing Panel and National Adjudicatory Council (NAC) decisions).

OGC chose the particular actions summarized below to call attention to, and remind registered representatives of, specific conduct that violates NASD Rules and will result in disciplinary action. This document is not intended to replace or supplement the disciplinary information and decisions contained on the NASD 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.

False Expense Receipts/Misuse of Firm Funds

  • Registered Representative Disciplined for Following Supervisor's Recommendation to Submit False Expense Receipts—The Securities and Exchange Commission (SEC) upheld the NASD's findings and sanctions against a registered representative who had created and submitted false expense receipts to obtain additional compensation of approximately $5,000 from his employer. Although the registered representative's supervisor devised the reimbursement scheme and assisted the registered person in obtaining the reimbursement, the NAC and the SEC held the registered representative fully responsible, citing his affirmative obligation to maintain high standards of commercial honor and just and equitable principles of trade. The SEC upheld the imposition of a censure and $7,500 fine. (In a separate action, the representative's supervisor settled a disciplinary matter with the NASD and consented to a censure and $10,000 fine.)
  • Registered Representative Fined, Suspended, and Required to Requalify in Case Involving Mutual Fund Trail Commissions—The NAC found that a registered representative converted firm funds and acted unethically when he had directed mutual fund trail commissions from the firm's house account to his own commissions account. The NAC rejected the respondent's argument that he was entitled to receive a portion of the house commissions because of added responsibilities that he had assumed for the firm. The NAC suspended the representative in all capacities for two years, required him to requalify before reentering the industry, and fined him $35,000.

Misrepresentations to Customers

  • Registered Representative Fined and Ordered to Pay Restitution for Misrepresenting Material Facts to a Customer—The NAC found that a registered representative made material misrepresentations regarding the listing of a security on Nasdaq and failed to disclose negative information (such as, that the investment at issue was speculative and that the issuer had experienced losses since its inception) to his customers. The NAC suspended the registered representative in all capacities for one year and fined him $10,000 or, in lieu of the fine, required him to supply proof that he had paid his customers restitution in excess of $20,000 plus interest.

Mutual Funds—Failure to Take Advantage Of Discounts

  • Two Registered Representatives Censured and Fined in Matter Involving Rule 12b-1 Fees—NASD Regulation settled a matter that involved the failure by two registered representatives to advise their client of available discounts on Rule 12b-1 fees totaling $24,000. The registered representatives neither advised the customer nor took advantage of a discount to which the customer was entitled. The registered representatives were each censured and jointly fined more than $9,000.

Selling Away

  • Registered Representative Barred for Selling Away—NASD Regulation settled a matter that involved selling away to 10 public customers. A registered representative sold promissory notes involving two different issuers away from the member firm with which he was associated. For the sales, he earned commissions of approximately $45,000. NASD Regulation concluded that the registered representative sold away from his firm and barred the representative from further securities industry employment.
  • Registered Representative Suspended and Ordered to Pay Monetary Sanctions for Selling Away—NASD Regulation settled a matter involving three instances of selling away during a one-month period. Under the terms of the settlement, NASD Regulation found that the transactions were "for compensation," imposed a fine of more than $2,500, and required the registered representative to pay restitution in excess of $7,000. NASD Regulation also suspended the registered representative in all capacities for a period of one month.

Unauthorized Transactions

  • Registered Representative Fined and Suspended in Disciplinary Matter Involving Unauthorized Reallocation of Money in Variable Annuity—NASD Regulation settled a matter involving a representative's unauthorized reallocation of funds held in a variable annuity. Specifically, the representative caused shares held in three mutual funds to be sold and reinvested in three different mutual funds. The NASD found that the representative's conduct violated NASD rules and fined the representative $2,500 and suspended the representative for 30 days.