Articles Tagged with FINRA Rule 2310

The Financial Industry Regulatory Authority (FINRA) recently sanctioned broker Michael A. Barina (Barina) over allegations that Barina failed to conduct reasonable due diligence into the offering a private placement security.  In addition, FINRA alleged that the broker commingled certain funds.

Barina first became registered with FINRA in 1999.  Barina was registered from November 13, 2009, through November 14, 2011, with Coker & Palmer, Inc. (Coker & Palmer).  In November 2011, Barina became registered with Aegis Capital Corp. until May 2013.  Thereafter, Barina was registered with Merrimac Corporate Securities, Inc. until October 2013.

Brokerage firms and brokers are responsible for conducting due diligence on all securities recommended by a broker.  The due diligence requirement is heightened where the investment recommendation is a private placement offering or other type of non-public offering where there is no public information available and brokerage firm is acting as the underwriter of the securities.

A leveraged Exchange Traded Fund (non-traditional or leveraged ETFs) is a security that employs debt, or leverage, in order to amplify the returns of an underlying stock position.  Leveraged ETFs are generally available for most security indexes such as the S&P 500 and Nasdaq 100.  A leveraged ETF with 300% leverage will return 3% if the underlying index returns 1%.  Nontraditional ETFs can also be designed to return the inverse of the benchmark.

Leveraged ETFs are generally used only for short term trading.  The Securities Exchange Commission (SEC) has warned that most leveraged ETFs reset daily, meaning that they are designed to achieve their stated objectives on a daily basis.  As a result, the performance of nontraditional ETFs held over the long term can differ significantly from the performance of their underlying index or benchmark during the same period.  The Financial Industry Regulatory Authority (FINRA) has acknowledged that leveraged ETF carry significant risks and are inherent complexity of the products.  Accordingly, FINRA advises brokers that nontraditional ETFs are typically not suitable for retail investors.

Recently, FINRA sanctioned and suspended broker Michael E. French (French) over allegations that the broker recommended unsuitable transactions in leveraged and inverse ETFs in the accounts of elderly customers.  FINRA also alleged that French held the leveraged ETFs in his customers’ accounts for extended periods contrary to Wells Fargo Advisor’s (Wells Fargo) written supervisory procedures.

The Financial Industry Regulatory Authority (FINRA) has barred Chad David Kelly (Kelly) concerning allegations of churning (excessive trading) and unauthorized trading.  “Churning” is excessive investment trading activity that serves little useful purpose or is inconsistent with the investor’s objectives and is conducted solely to generate commissions for the broker.  Churning is also a type of securities fraud.

FINRA alleged that Kelly willfully violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act of 1934”), Rule 10b-5, and violated FINRA Rules 2020, and 2010, NASD Rules 2120, 2110, 2310, and IM-2310(a) and (b).

According to FINRA, excessive trading violation occurs when: 1) a broker has control over the account and the trading in the account, and 2) the level of activity in that account is inconsistent with the customer’s objectives and financial situation.  Where an intent to defraud or reckless disregard for the customer’s interests is present the activity is also churning.  Section 10(b) of the Exchange Act of 1934 prohibits the use of “any manipulative or deceptive act or practice” in connection with the purchase or sale of a security and Rule 10b-5 prohibits “any device, scheme, or artifice to defraud.”  NASD Rule 2310(a) provides that when recommending the purchase, sale, or exchange of any security a broker “shall have reasonable grounds for believing that the recommendation is suitable for such customer…”  A broker’s recommendations must “be consistent with his customer’s best interests.” NASD IM-2310-2(a)(1) also require that the broker must “’have reasonable grounds to believe that the number of recommended transactions within a particular period is not excessive.”  NASD IM-2310-2(b)(2) prohibits brokers from excessively trading in customer accounts.

In April 2013, the Financial Industry Regulatory Authority (FINRA) requested that Eric Foster (Foster) provide information concerning possible securities laws violations.  By July 2013, Foster failed to respond to FINRA’s requests and imposed a permanent bar from the securities industry.

The FINRA bar isn’t the first time Foster has been sanctioned by FINRA.  In February 2012, Foster settled charges that he violated FINRA Rule 2110 by effecting unauthorized transactions in the account of a deceased customer.  In so doing, Foster exercised discretion in the customer’s account without written authorization.  The settlement resulted in a $12,471 fine and restitution and a three month suspension.  In December 2011, Foster settled charges brought by Illinois Securities Department concerning allegations that he churned the account of a senior citizen earning large commissions for himself while reducing the equity in the account to zero

Foster was a registered representative of Halcyon Cabot Partners, Ltd. from July 2010 through June 2012.  Previously, Foster was associated with Arjent Services, LLC from October 2010, until July 2010.  Foster was also associated with Maxim Group LLC from October 2002 until October 2008.