FINRA, the Financial Industry Regulatory Authority, is responsible for overseeing and regulating broker-dealers in the United States. FINRA enforces rules and regulations meant to protect investors and ensure high standards of commercial conduct in the securities industry. Unfortunately, some brokers and firms fail to uphold their duties, leading FINRA to take disciplinary action.
Brokers face a complex web of FINRA rules and regulations. Even inadvertent violations can carry serious consequences like monetary fines, suspensions, disclosures on public records, and in extreme cases being barred from the securities industry.
This article will educate brokers on the top 10 most common FINRA violations to be aware of and steps to proactively avoid them. Doing so is crucial to maintaining high compliance standards and ensuring your clients’ interests are protected.
Top 10 Most Common FINRA Violations
1. Private Securities Transactions
FINRA Rule 3280 requires written notice and firm approval prior to participating in any private securities transaction outside of regular scope of employment. This includes investments in limited partnerships, hedge funds, REITs, or stocks and bonds of private companies.
Violating these “selling away” restrictions is one of the most common FINRA offenses. Even legitimate transactions done without proper disclosures can lead to significant sanctions.
2. Suitability Requirements
FINRA Rule 2111 obligates brokers to ensure any investment recommendations or trades made on behalf of retail customers are suitable based on their profile, goals, risk tolerance, and other factors.
Making unsuitable trades a client disapproves of after fully understanding risks can draw regulatory action. Navigating complex suitability requirements poses challenges.
3. Supervision Policies
FINRA Rule 3110 mandates broker-dealers establish and enforce written procedures to supervise activities of all associated persons. Failing to do so is an area ripe for violations.
Lacking adequate supervision of registered representatives’ communications and transactions often arises in other FINRA actions. Firms must prove diligent oversight.
4. Outside Business Activities
FINRA Rule 3270 covers disclosures and approvals required regarding registered persons’ external business activities. This includes activities generating revenue outside the brokerage firm.
Neglecting to disclose often draws violations here. Activities must not present conflicts of interest involving the firm or clients.
5. Standards of Commercial Honor and Trade
FINRA Rule 2010 is a broad ethical standard requiring observed high standards of commercial honor and just and equitable principles of trade. Rule reflects negatively on broker profession.
Any unscrupulous business conduct violating moral standards falls under this rule. Significant for electronic communications, advertising, and fiduciary duties towards clients.
6. Manipulative and Fraudulent Devices
Section 10(b) of the Securities Exchange Act and Rule 10b-5 prohibit employing any scheme to defraud, making untrue statements, or engaging in any act operating as a fraud in connection with the purchase or sale of securities.
Covers wide breadth of potential conduct involving dishonesty, deception, or manipulation related to securities transactions that harms investors.
7. Misuse of Customer Funds
FINRA Rule 2150 prohibits improper use of customer securities or funds, or commingling them with the firm’s funds. Required to keep customer assets segregated.
Mishandling customer funds violates fundamental trust and poses high sanctions. Also covers inaccurate reporting of custodied assets.
8. Failure to Respond to FINRA Information Requests
FINRA Rule 8210 grants authority to require testimony, provide documents, and supply written information from member firms and associated persons.
Failure to fully comply with requests or respond on time is an automatic violation. Impedes investigations, hence strictly enforced.
9. Form U4 Reporting Obligations
FINRA Rule 1122 requires keeping Form U4 updated within 30 days of any reportable events like bankruptcy, liens, judgments, criminal charges, or customer complaints.
Late disclosures or omitting material facts from registration forms brings frequent violations. Keeping broker records current is imperative.
10. Email and Social Media Communications
FINRA Rules 2210, 3110 cover standards for communications with the public. Requires retaining, monitoring, and approving business communications by brokers.
Regulatory actions often arise from improper usage of email, social media, and other electronic correspondence channels.
Causes and Controversies Around Violations
While the above are frequently violated regulations brokers should be familiar with, it’s worth examining common problems that lead to infractions as well as areas of controversy:
Inadvertent Violations – Many brokers stumble into violations unintentionally. Complex rules coupled with oversights, lack of training, or misinterpretations often trigger them rather than ill intent. Fostering a compliance-focused culture is crucial.
Unjust Claims – Some critics argue vague rules like “Standards of Commercial Honor” are too broad and let FINRA pursue unmerited claims of violations in arbitration. Brokers deserve strong due process protections against unfounded allegations. Work with a FINRA arbitration lawyer for the best protection against unjust claims.
Communication Issues – Monitoring and retaining all electronic communications like emails and social media posts poses challenges but lack of compliance in this area commonly causes violations.
Know-Your-Customer Requirements – Brokers must develop diligent customer suitability and due diligence processes. Weak KYC practices can fail to prevent risks and lead to infractions.
Best Practices for Avoiding Violations
Proactively strengthening compliance helps substantially lower risks of FINRA violations:
- Maintain meticulous records, documentation, and retention policies.
- Closely monitor emails, mobile messages, and social media for reps.
- Conduct regular compliance audits and training, empower ethics culture.
- Verify all transactions fit customers’ risk profiles and needs.
- Keep U4s and other registrations current, omit no material facts.
- Appropriately disclose all external business activities and potential conflicts.
- Never commingle customer assets or funds with the firm’s.
- Closely supervise all representatives and their communications.
- Seek guidance for unique situations with potential gray areas.
- Respond precisely and promptly to all FINRA information requests.
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