FINRA stands for the Financial Industry Regulatory Authority, an independent organization authorized by Congress to create and enforce rules that help keep investors, and their investments, safe. FINRA’s rules govern registered brokers and broker-dealer firms. Unfortunately, not all brokers follow those rules. Here are some of the most commonly violated FINRA rules.
Registered firms are directed to observe high standards of commercial honor and just and equitable principles of trade, and are prohibited from making claims that are false, misleading, or exaggerated in any sales literature meant for public consumption. In other words, follow all legal and ethical guidelines. Not all firms follow this cardinal rule.
The Supervision rule is exactly what it sounds like. It directs registered firms to create a system to supervise the brokers and other firm representatives, ensuring that they follow the applicable securities laws and regulations. The firm must also designate a representative to oversee that supervision system. A good supervisory system can detect and prevent broker misconduct.
Private Securities Transactions
This rule is pretty straightforward—before a firm member participates in a private securities transaction, that member must provide his firm with a written description of the transaction, and his role in that transaction. Is he receiving compensation? If so, he needs to report that, as well. The firm is responsible for supervising the transaction as if it was executed on the firm’s behalf. Brokers may try to bypass this rule for monetary gain and to try to avoid supervisory oversight.
Suitability of Recommendations to Customers
If a broker recommends a securities transaction to a customer, it must be a proper fit with that customer’s investment portfolio, needs, and financial situation. If a broker recommends a transaction that benefits her instead of the customer, then she is in violation of the Suitability rule.
Use of Manipulative Deceptive, or Other Fraudulent Devices
This rule speaks for itself—members must not use manipulative, deceptive, or other fraudulent devices for any transaction, purchase, or sale of a security. Seems straightforward enough, but some brokers try to work around this rule.
Outside Business Activities
Employees of a registered firm cannot work for, or accept compensation from, another firm, without first providing their firm with written notice. To do so is a direct violation of this rule.
Misuse of Customer’s Funds or Securities
This rule prohibits brokers from borrowing a customer’s funds or securities without authorization. This helps guard against forgery, deception, or illegal manipulation. it is possibly the most abused of all FINRA rules by dishonest brokers.
The attorneys at ChapmanAlbin understand the dangers inherent in violated FINRA rules and are here to help you. If you have a question about an investment or believe you’ve fallen victim to investment fraud, call us for a free consultation.
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