Quarterly Disciplinary Review - Winter Issue/December 2003
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.
Failure to Disclose on Form U4
- Registered Representative Barred for Failing to Disclose Material Information on a Form U4 - NASD settled a matter involving a registered representative who failed to disclose on a Form U4 that he had plead guilty to a felony pursuant to a deferred sentence that enabled him to withdraw his plea and have the case dismissed upon completion of community service. The representative also failed to disclose that he was charged with a misdemeanor involving retail theft. NASD found that the representative violated NASD Rule 2110 and IM-1000-1 and barred him in all capacities. Additionally, since the settlement included a finding that the representative willfully failed to disclose material facts, under the Securities Exchange Act of 1934, the representative may be statutorily disqualified from the industry.
Failure to Respond to NASD Information Requests
- Registered Representative Barred for Failing to Respond to NASD Requests for Information and On-The-Record Testimony - The NAC found that a registered representative violated NASD rules when he failed to respond to NASD's requests for information and on-the-record testimony. The NAC held that NASD maintained jurisdiction over the representative to request information notwithstanding that the representative had left the industry six months prior to the first information request. The NAC also rejected as a defense the representative's assertion that, in failing to respond, he relied on the advise of counsel. The NAC barred the representative in all capacities and assessed costs.
- Registered Representative Fined and Suspended for Executing One Unauthorized Transaction - The NAC found that a registered representative violated NASD rules when he executed a stock purchase in his customer's account without his customer's knowledge or authorization. The customer paid for the purchase even though it was not authorized because the customer believed that the representative would sell the stock on the same day at a small profit. The NAC rejected the representative's contention that the customer was confused about the conversations that he had had with the representative and that the customer had actually authorized the purchase. The NAC suspended the representative in all capacities for 10 business days, fined him $10,000, and imposed costs.
- Registered Representative Fined, Suspended, and Ordered to Requalify for Unsuitable Recommendations - The SEC affirmed NASD's findings and the sanctions imposed in a case in which a registered representative recommended the purchase of a concentrated position in one speculative security, partially on margin. The customer was a young, unmarried college student with no income. Except for a co-ownership interest in a condominium with her mother, her equity account constituted her sole assets. The SEC held that, while investing a certain amount of money in speculative investments might have been justified, concentration of the entire amount in one speculative security created a substantial risk that the customer would lose all or most of the assets in her account. The SEC rejected the representative's defenses: (1) that the customer was young and had a lifetime of earning potential ahead of her; (2) that she was fully informed of the risks inherent in the strategy that he recommended; (3) that, because she was studying economics in college, she had sufficient knowledge to evaluate the suitability of the investments; (4) that the registered representative had notified the customer's mother, accountant, and attorney of the investments that he made; and (5) that the customer had changed her investment objectives from income to growth and speculation. The SEC upheld the NAC's imposition of a $25,000 fine, one-year suspension in all capacities, and requirement to requalify.
- Registered Representative Fined, Suspended, Ordered to Pay Restitution, and Ordered to Requalify for Unsuitable Recommendations - The SEC affirmed NASD's findings and the sanctions imposed in a suitability case in which a registered representative recommended that the customer invest $2.1 million of his retirement savings in Class B shares of five different mutual funds. The customer was a retired pilot whose investment objectives were safety of principal and long-term growth. The SEC held that the representative's purchases of Class B shares rather than Class A shares were unsuitable because: (1) they resulted in significantly higher commission costs; (2) they included the payment of contingent deferred sales charges; (3) Class A shares with similar investment objectives and performance were available in the same mutual fund families; and (4) the representative could have taken advantage of breakpoint discounts if he had purchased Class A shares. The SEC reiterated the NAC's findings that a registered representative's suitability obligation encompasses the requirement to minimize the sales loads that a customer pays for mutual fund shares, when consistent with the customer's investment objectives. The SEC upheld the NAC's imposition of a $40,000 fine, one-year suspension in all capacities, order to pay $55,567 in restitution, and requirement to requalify as a principal.
- Registered Representative Fined and Suspended for Unsuitable Recommendations - NASD settled a matter involving a registered representative who purchased on behalf of his customer in excess of $3.5 million worth of Class B mutual fund shares. NASD concluded that the recommendation to purchase Class B shares was unsuitable because: (1) the customer could have purchased Class A shares without paying up-front charges that he paid for Class B shares; (2) Class A shares involved lower ongoing expenses than Class B shares; and (3) Class A shares did not involve contingent deferred sales charges. NASD found that the representative violated Rules 2110, 2310, and IM-2310-2, fined him $60,000, and suspended him for 30 days.