FINRA Rules and Regulations – Common FINRA Violations
The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that oversees and regulates the behavior of firms and professionals in the financial industry in the United States. Common FINRA violations can lead to disciplinary actions, fines, or other penalties. The following is a list of common FINRA violations and the corresponding rules and regulations that may apply.
Fraud and Misrepresentation Fraud and misrepresentation may include making false statements or providing inaccurate information to clients or investors, such as misrepresenting investment products or performance. Rule 2010 (Standards of Commercial Honor and Principles of Trade) and Rule 2020 (Use of Manipulative, Deceptive, or Other Fraudulent Devices).
Unauthorized Trading Trading without the client’s consent or exceeding the authority granted by the client. Rule 2010 and Rule 2510 (Discretionary Accounts).
Churning Excessive trading of a client’s account to generate commissions for the broker, which can result in substantial losses for the client. Rule 2111 (Suitability) and Rule 2020.
Suitability Violations Recommending investments that are not suitable for a client’s financial situation, objectives, or risk tolerance. Rule 2111 and Rule 2090 (Know Your Customer).
Failure to Supervise Firms and their supervisory personnel must adequately supervise their brokers and advisors to ensure compliance with industry rules and regulations. Failure to do so can result in violations. Rule 3110 (Supervision) and Rule 3010 (Supervision), which relates to written supervisory procedures.
Failure to Disclose Conflicts of Interest Brokers and firms must disclose any potential conflicts of interest that could impact their recommendations or actions. Rule 2010 and Rule 3240 (Borrowing from or Lending to Customers).
Insider Trading Trading securities based on material, nonpublic information is illegal and a significant violation of securities laws. FINRA does not have a specific rule covering insider trading, as it falls under broader federal securities laws and regulations, such as the Securities Exchange Act of 1934 and Rule 10b-5.
AML (Anti-Money Laundering) Violations Firms are required to have robust AML programs to detect and report suspicious transactions that could involve money laundering or other illegal activities. Rule 3310 (Anti-Money Laundering Compliance Program) and Rule 2010.
Selling Away Brokers conducting business outside their firm without proper disclosure or approval can be in violation of FINRA rules. Rule 3280 (Private Securities Transactions) and Rule 2010.
Customer Complaints and Disputes Failing to handle customer complaints or disputes appropriately and in accordance with regulatory procedures can lead to violations. Rule 4530 (Reporting Requirements) and Rule 2010.
Recordkeeping Violations Failing to maintain accurate and complete records of transactions, communications, and other activities as required by FINRA rules and regulations. Rule 4511 (General Requirements), Rule 4513 (Records of Written Customer Complaints), and Rule 2010.
Marking the Close Manipulating the closing price of a security by placing orders to buy or sell at or near the market close can lead to violations. Rule 2020 (Manipulative and Deceptive Devices) and potentially other market manipulation rules.
Private Securities Transactions Engaging in private securities transactions without proper disclosure and approval from the firm can be a violation. Rule 3280 and Rule 2010.
Unauthorized Borrowing or Lending Brokers borrowing or lending money from or to clients without proper authorization can violate FINRA rules. Rule 3240 and Rule 2010.
FINRA Rules and Regulations
FINRA’s primary mission is to protect investors. The rules and regulations are designed to ensure that brokers, financial advisors, and financial firms act in their clients’ best interests, provide suitable investment recommendations, and disclose potential conflicts of interest. This protection is particularly important for individual investors who may have limited knowledge of financial markets and securities. FINRA rules require financial professionals to provide clear and accurate information to investors. This transparency helps investors make informed decisions about their investments and understand the risks associated with different financial products.
As you may be aware, FINRA operates the largest securities dispute resolution forum in the United States. If investors have disputes with their brokers or financial firms, they can use FINRA’s arbitration and mediation services to seek resolution. This provides an efficient and cost-effective way for investors to address grievances.
Consequences for Common FINRA Violations
These common FINRA violations can result in a range of consequences for individuals and firms in the financial industry. The severity of the consequences depends on the nature and extent of the violation. Some of the potential consequences of common FINRA violations include:
Fines: FINRA has the authority to impose monetary fines on individuals and firms that violate its rules. The amount of the fine can vary widely depending on the severity of the violation and the financial impact on investors.
Suspensions: Violations may lead to temporary suspensions of a broker’s license or a firm’s registration. During the suspension period, the individual or firm is prohibited from engaging in certain securities-related activities.
Bars: In more serious cases, FINRA can bar individuals from the industry. A bar is a permanent or indefinite prohibition from participating in any securities-related activities.
Restitution: In cases where investors have suffered financial losses due to a violation, FINRA may order restitution. The responsible party or firm is required to compensate the affected investors for their losses.
Censures: A censure is a formal reprimand by FINRA, and it becomes part of the individual’s or firm’s regulatory record. It serves as a public acknowledgment of wrongdoing.
Supervisory Actions: FINRA may impose additional supervisory requirements on firms and individuals as part of the disciplinary process. These requirements may include enhanced supervision, additional reporting, or changes in business practices.
Expulsion: In the most severe cases, FINRA can expel a firm from its membership. This effectively terminates the firm’s ability to conduct business in the securities industry.
Public Records: Disciplinary actions and violations are made part of the public record. Investors and the public can access this information through FINRA’s BrokerCheck system, allowing them to make more informed decisions about potential investments and financial professionals.
Civil or Criminal Penalties: Some violations may lead to civil or criminal penalties imposed by other regulatory bodies or law enforcement agencies. For example, securities fraud or insider trading may result in legal action by the SEC or the Department of Justice.
Professional Repercussions: Individuals with a history of FINRA violations may find it challenging to secure employment or maintain a career in the financial industry. Firms with repeated violations may suffer reputational damage.
Loss of Licenses and Certifications: Violations can lead to the revocation of licenses or certifications required to work in the financial industry, such as securities licenses (e.g., Series 7) or financial planning certifications (e.g., CFP).
Hiring a FINRA Attorney
This information is all publicly available and provided to you by The White Law Group. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Seattle, Washington.
For a free consultation with national securities fraud attorneys, please call our offices at 888-637-5510. The White Law Group represents investors throughout the country in claims against their brokerage firms.
For more information on The White Law Group, visit https://www.whitesecuritieslaw.com