In fall 2014, I was approached by a retail broker (“the broker” or “my broker client”) who, after an internal investigation, recently had been fired by his brokerage firm in New Jersey for repeatedly violating the brokerage firm’s policy with respect to customer signatures on account documents.
Shortly after firing the broker, the brokerage firm had completed and filed, with securities regulators, a Form U-5 (Uniform Termination Notice for Securities Industry Registration) reporting the cessation of the broker’s employment. On the Form U-5, the brokerage firm stated that it discharged the broker because the broker did not follow the brokerage firm’s policy with regard to customer signatures on account documents.
Because, in effect, the brokerage firm had alleged on the Form U-5 that the broker was fired because he violated investment-related statutes, rules or regulations, The Financial Industry Regulatory Authority, Inc. (“FINRA”) recently had dispatched an inquiry letter to the broker asking for a signed, written statement replying to the firm’s allegations.
FINRA made these requests under FINRA Rule 8210, which requires brokers and advisors to provide information and records. The broker retained my law firm to represent him in FINRA’s Rule 8210 investigation of him.
I interviewed the broker at length. In addition, I obtained from the broker, and reviewed, all documents relating to the Termination Explanation included in the broker’s Form U-5. In interviewing the broker and reviewing the relevant documents, I discovered that the broker had committed very serious violations of securities rules.
More particularly, for three and a half years, on a monthly basis, the broker had written the payment amount and the date on photocopies of individual retirement account (“IRA”) distribution request forms which eight customers had signed and, but for the payment amount and the date, had completed. So, too, for one year, on a monthly basis, the broker had written the payment amount and the date on photocopies of IRA distribution request forms which another four customers had signed and, but for the payment amount and the date, had completed.
In other words, for three and a half years and on more than 300 occasions, the broker had forged or falsified documents relating to twelve customers‘ accounts.
By repeatedly forging or falsifying account records, the broker had violated FINRA Rule 2010. FINRA Rule 2010, entitled “Standards of Commercial Honor and Principles of Trade,” states: “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”
FINRA’s Sanction Guidelines provide that, for securities rule violations by respondent brokers such as writing information on forms which customers have already signed and have otherwise completed, (i) the monetary sanction is a fine of $5,000 to $100,000, (ii) “in cases where mitigating factors exist [FINRA is to] consider suspending [the] respondent [broker] in any and all capacities for up to two years,” and (iii) “in egregious cases, [FINRA is to] consider a bar from the securities industry.” FINRA, Sanction Guidelines 37 (Mar. 2015). Thus, my broker client was facing harsh penalties for his repeated falsification or forgery of account records.
I drafted the required, signed statement to FINRA responding to the brokerage firm’s allegations on the Form U-5. In the written statement responding to the firm’s allegations, I maintained that numerous factors mitigated the seriousness of my broker client’s actions. I requested that FINRA limit any penalty to the issuance of a Cautionary Action to the broker.
A Cautionary Action is an informal disciplinary action that is not reported on a brokerage firm’s Form BD (Uniform Application for Broker-Dealer Registration) or on an individual’s Form U-4 (Uniform Application for Securities Industry Registration or Transfer). Instead, a Cautionary Action is a private admonishment that FINRA believes the broker or advisor has violated securities laws or rules.
In the written statement to FINRA which I prepared responding to the brokerage firm’s allegations against the broker, I explained, in great detail, that (i) the broker showed remorse for his ill-considered actions, had never been the subject of a customer complaint, had never been disciplined by FINRA, and was demonstrably of good moral character, (ii) the broker had a good-faith, albeit mistaken, belief that the brokerage firm expressly or impliedly authorized him to write the payment amount and the date on photocopies of IRA distribution request forms which twelve customers had signed and otherwise had completed, (iii) the broker’s errant actions did not result in the potential for monetary or other gain by him, and (iv) neither the broker’s customers nor the brokerage firm suffered any harm as a result of the broker’s actions.
Moreover, my written statement, verified by the broker, responding to FINRA’s inquiry letter set forth at length, among other extentuating circumstances, that (v) the broker did not attempt to conceal his errant actions, and did not attempt to lull into inactivity, mislead, deceive or intimidate customers, regulatory authorities, or the brokerage firm, (vi) to the contrary, although the broker now understood that such oral authorizations were insufficient, each of the involved customers orally had authorized the broker to write the payment amount and the date on photocopies of IRA distribution request forms which the customer had signed, and (vii) the sizes of the IRA distributions at issue were small.
After reviewing my written statement, sworn to by the broker, responding to FINRA’s inquiry letter, FINRA declined to fine the broker. So, too, FINRA declined to suspend or bar the broker from the securities industry. Instead, FINRA merely issued a Cautionary Action to the broker.
Particularly given the gravity and numerosity of my broker client’s violations of securities rules, this resolution of FINRA’s Rule 8210 investigation of my broker client with no monetary fine and no suspension, bar or other sanctions was a highly favorable, near-optimal result.
Providentially, and as a result of the exceptional leniency of the punishment which I obtained for my broker client in FINRA’s investigation, the broker demonstrated to prospective employers that he had rehabilitated himself, obtained new employment, resurrected his career (which had been imperiled by FINRA’s investigation), and resumed supporting his family.
If you are a securities industry professional in the New York City area and FINRA has called you to testify under oath in an on-the-record interview, call Attorney David S. Rich at (212) 209-3972.