Securities firms and brokers can’t always “blame it on the market” when it comes to investor losses. In addition to state and federal securities laws, FINRA rules impose obligations upon securities firms and brokers.
In particular, FINRA rules require that brokers observe high standards of commercial honor and just and equitable principles of trade.
The FINRA rules also prohibit any manipulative, deceptive, or fraudulent actions (FINRA Rules 2010 and 2020, formerly NASD Rules 2110 and 2120).
- If you have suffered investment losses and believe that your securities firm or broker has engaged in one of these forbidden practices, please call us at 305.912.3000 or complete our short contact form. Sonn Law Group is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies.
Further, securities firms are responsible for training and supervising their brokers, investigating and approving securities for sale to clients, and approving sales and marketing materials provided to clients. Additionally, firms and brokers occupy a position of trust and confidence with their clients, which creates a fiduciary relationship requiring that firms and brokers exercise a high standard of care to their clients.
The following broker practices constitute serious violations of securities regulations, and make the brokerage firm liable for the customer’s investment losses:
FINRA Rule 2111, formerly NASD Rule 2310
A broker must have reasonable grounds for each recommendation made to you. The broker generally determines whether the recommendation is suitable based on your other securities holdings, financial situation, and risk tolerance. In addition, before a firm offers a security to its customers, the firm must conduct due diligence, that is investigate the facts surrounding the security, to confirm that it is suitable for any customer of the firm. A classic example of an investment which is not suitable for any investor is a Ponzi scheme.
2. Selling away
FINRA Rule 3280, formerly FINRA Rule 3040
A broker may only sell securities with the knowledge and approval of his or her firm. When a broker sells securities without processing the order through the firm and without the firm’s permission or knowledge, this violates FINRA rules. Federal and state law define securities broadly. Therefore, even products such as leasing arrangements or promissory notes, may be securities which require firm approval. Selling away often involves investment securities that are in the form of a private placement or other non-public investment.
3. Unauthorized trades
Your broker is prohibited from entering an order with your express, detailed permission unless you have granted your broker or the firm written discretionary authority. Verbal authority to place trades in your account without your express, detailed permission is impermissible.
FINRA Rule 2111, formerly NASD IM-2310-2
Churning occurs when a broker engages in excessive buying and selling of securities in a customer’s account primarily to generate commissions that benefit the broker. For churning to occur, the broker must exercise control over the investment decisions in your account, such as through a formal written discretionary agreement. Frequent in-and-out purchases and sales of securities are unnecessary to meet your investment goals may be evidence of churning.
Your broker may not place your checks or money intended for securities transactions into his/her own bank account or insurance business account, no matter how small the amount of money or how short a length of time involved. Mixing client funds with his or her own funds is a mishandling of client funds that may violate not only FINRA rules, but also state and federal criminal law.
6. Conflicts of interest
Brokers must avoid conflicts of interest in client transactions. For example, if a broker owns shares of a thinly traded stock in his or her personal account, the broker’s motivation to recommend a large purchase of that stock to his customers is suspect, where the recommendation likely will drive up the price of that stock.
7.Sharing in accounts
Your broker generally may not share profits or losses in your account.
8. Switching and break-point sales for mutual funds
FINRA Rule 2342, formerly NASD Rule 2830
Mutual funds are typically long-term investments. A broker should refrain from switching a customer between funds with similar investment objectives, which may be a violation of securities rules if the switch has no legitimate investment purpose and needlessly will impose another commission charge and increased tax liability on the customer. A break-point sale occurs when the sale of a mutual fund at a set dollar amount allows the customer to move into a lower sales charge bracket. If your broker recommends that you purchase a quantity just below the point you could save significant commission charges by purchases a few more shares usually is not in your best interests and violates securities rules.
9. Rumors, knowingly false and misleading statements, incomplete information
Recommendations, analyses, and statements made to customers must have a reasonable basis in fact. Withholding material information from a customer can be fraud. If your broker tells you to buy or sell a security based on a “hot tip,” this may be securities fraud. If the “hot tip” fails to pan out, the broker has mislead his or her client. Conversely, a “hot tip” may be a violation of insider-trading rules (see below).
10. Best prices and exercise of market discretion
The SEC, FINRA, and the exchanges have developed a series of trade practice rules to ensure that traders and market makers execute orders at the best prices and exercise market discretion in the interest of their customers, including:
Trading ahead of customer limit orders
FINRA Rule 5320, formerly NASD IM-2110-2
FINRA members acting as market makers are prohibited from trading ahead of customer limit orders and must ensure that such orders are executed at the most favorable price possible under prevailing market conditions.
FINRA Rule 5270, formerly NASD IM-2110-3
A broker/dealer is prohibited from buying or selling a security or an option on a security while in possession of material, non-public information concerning an imminent block transaction in the security or option on the security.
Trading ahead of research reports
FINRA Rule 5280, formerly NASD IM-2110-4
FINRA member firms are prohibited from trading activity that changes the firm’s position in a Nasdaq® or exchange-listed security traded in the third market, or in any derivative security based on or related to the underlying security, in anticipation of the issuance of a research report in that security.
FINRA Rule 5240, formerly NASD IM-2110-5
A FINRA member firm may not coordinate its prices (including quotations), trades, or trade reports with any other member; direct or request another member to alter a price (including a quotation); or engage, directly or indirectly, in any conduct that threatens, harasses, coerces, intimidates, or otherwise attempts improperly to influence another member. This includes any attempt to influence another member to adjust or maintain a price or quotation and refusals to trade or other conduct that retaliates against or discourages the competitive activities of another market maker or market participant.
If you have suffered investment losses and believe that your securities firm or broker has engaged in one of these forbidden practices, please call us at 305.912.3000 or complete our short contact form. Sonn Law Group is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies.