The Financial Industry Regulatory Authority (FINRA) is the self-regulatory organization of the investment industry. As such, FINRA expects all registered brokers and firms to follow its best practice and ethics guidelines.
Unfortunately, that doesn’t always happen. That’s why FINRA has developed a list of practice violations that can result in fines and penalties. Among these are:
Scott L. Silver
Managing Partner
Scott Silver is the chairman of the American Trial Lawyers Association, Securities and Financial Fraud Group and routinely represents elderly investors and their families. He has extensive experience pursuing claims in arbitrations conducted by the Financial Industry Regulatory Authority (FINRA) and in federal court for violations of various states’ laws against elder abuse.
Breach of Fiduciary Duty
Excessive Trading or Churning
Failure to Supervise
Unsuitable Investment Advice
Broker Theft and Fraud
Trust and Estate Abuse
Breach of Fiduciary Duty
Investment losses that are the result of a breach of fiduciary duty can be a cause of action in an arbitration claim for damages. In many instances, the failure to disclose all relevant information concerning an investment recommendation may be the result of a conflict of interest between the financial advisor and his client. Financial advisors are required to avoid any conflicts of interest when providing investment advice for financial elder abuse.
Excessive Trading or Churning
Excessive trading occurs when a stockbroker engages in trading in excess of the investor’s goals in order to generate commissions. If the recommended investment strategy has, as its sole purpose, the enrichment of the brokerage firm and/or stockbroker by generating excessive commissions, fees, or costs, it may constitute a breach of fiduciary duty and a conflict of interest.
Failure to Supervise
Brokerage firms are responsible for the supervision of all the activities of their registered representatives, known as financial advisors or stockbrokers by the investing public. The Financial Regulatory Industry Authority (FINRA) establishes the required supervision of a registered representative as well as compliance with the securities industry standards of care for the handling of customer accounts.
Unsuitable Investment Advice
Brokerage firms and their representatives are required to only recommend suitable investments to their customers. Unsuitable advice is a violation of the “know-your-customer” FINRA Rule 2090 and “suitability” FINRA Rule 2111. The “know-your-customer” rule requires “reasonable due diligence” to determine all the “essential facts” concerning every customer of the brokerage firm. The “suitability” rule requires that brokerage firms and their representatives have a “reasonable basis” to believe that a recommended investment or strategy is suitable based on a customer’s financial situation and investment profile.
Broker Theft and Fraud
Simply put, the misappropriation or theft of client funds is prohibited. Examples of broker theft or fraud include borrowing money from a client without paying it back, forging letters of authorization to transfer funds from a customer’s account, and sending unsolicited account withdrawal checks to customers; these checks are claimed to be issued in error, and when the customer returns one, the broker deposits the money in a different account. In addition, any attempt by a brokerage firm to cover up theft or the receipt of unauthorized loans by one of their registered representatives makes the firm complicit in the fraud.
Trust and Estate Abuse
Financial advisors and brokers are prohibited from becoming entwined in a client’s estate or trust, whether this relationship involves being personally named as a beneficiary in a client’s will, using an elderly client’s assets for his or her own benefit (conversion), improperly being assigned or abusing durable power of attorney, or failing to allocate the funds as directed by a client’s instructions and wishes.