FINRA - Law Offices of Robert Wayne Pearce, P.A

Jul 13, 2021

FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade

FINRA Rule 2010 states that FINRA members must observe “high standards of commercial honor and just and equitable principles of trade” in the conduct of their business. If you think this rule seems broad, that’s because it is. And unfortunately, FINRA members do not always live up to these high standards prescribed in FINRA Rule 2010. So what do you do if your broker or financial advisor has failed to comply with its obligations under FINRA 2010? Broker misconduct costs investors millions of dollars in investment losses each year. Such losses are often the result of fraud, misrepresentation, or negligent supervision of your account. While such misconduct can result in severe financial ramifications for you, fortunately there are avenues to hold these wrongdoers accountable. If you suffered losses that you believe are a result of your broker failing to uphold the high standards of commercial honor and equitable principles of trade, contact The Law Offices of Robert Wayne Pearce, P.A. Discuss your case with an experienced investment loss attorney as soon as possible to see how you may be able to recover. Overview of Other Notable FINRA Rules Typically, FINRA Rules outline the specific conduct prohibited by the rule itself. For example: FINRA Rule 1122 prohibits FINRA members and other individuals from filing membership or registration information with FINRA that contains incomplete or inaccurate information; FINRA Rule 2111 requires brokers to only recommend investments or investment strategies that are suitable for the client; and FINRA Rule 5270 prohibits the front running of block transactions. So where does FINRA Rule 2010 come into play? Oftentimes, investors utilize Rule 2010 to address misconduct not described in other FINRA rules. Rule 2010 operates as a catch-all provision to protect investors from financial negligence and other unethical practices by financial advisors and institutions. What Does Rule 2010 Prohibit? Rule 2010 sanctions brokers for bad faith or unethical “business-related” misconduct. Receiving a sanction under Rule 2010 does not necessarily mean the broker violated the law, even though a securities law violation on its own supports a finding that a broker violated Rule 2010. Conduct deemed unethical or immoral, though not necessarily prohibited by law, authorizes discipline under the rule. Business-Related Requirement FINRA Rule 2010 mandates that the alleged misconduct be business-related to qualify for discipline under this rule. In a 2019 FINRA disciplinary action, a FINRA Hearing Panel explained that the relationship between the FINRA member’s unethical actions and the conduct of his or her securities business do not have to be closely connected. Rather, the Panel implied that Rule 2010 extends to any misconduct that “reflects on the associated person’s capacity to comply with the regulatory requirements of the securities business and to fulfill [his or her] fiduciary duties in handling other people’s money.” Examples of FINRA Rule 2010 Violations Ultimately, every case alleging violation of Rule 2010 requires individual analysis to determine if the misconduct amounts to a violation of the rule. To determine whether the rule was violated, evaluation of both the totality of the circumstances and the context of the misconduct is required. Remember, a Rule 2010 violation occurs even in circumstances when a broker does not commit a violation of state or federal law. Actions considered a violation of Rule 2010 include: Misappropriating funds from clients or an employer; Sharing the confidential information of customers without approval; Forging signatures; Making alterations to important financial documents; Soliciting donations for personal benefit or other unauthorized uses; Misrepresenting financial information to customers; and Refusing to pay attorney fees and other expenses after initiating litigation against a customer. Rule 2010 allegations arise frequently in conjunction with allegations that a broker violated another FINRA Rule. Contact an Investment Loss Attorney to Answer Your Rule 2010 Questions Arguably at the core of securities regulation is FINRA 2010. Without such a rule, FINRA members would have no overarching obligation to conduct their business with such high standards of honor and integrity. Of course, even with Rule 2010 in place, FINRA members will inevitably fall short of these standards. When they do, know you can turn to The Law Offices of Robert Wayne Pearce, P.A. With more than 45 years of experience representing investors and holding their brokers and financial advisors accountable for misconduct, you can be confident that our team has the knowledge and resources necessary to fight for you. Attorney Robert Pearce has a strong record of success, recovering funds for more than 99% of his investor clients. To discuss your case and start the process toward compensation, contact us today for a free case evaluation.

Jul 9, 2021

FINRA Know Your Customer Rule and Investment Suitability—How Does it Apply to You?

FINRA regulates the conduct of brokers in the securities industry to protect investors from suffering losses due to financial advisor misconduct. The agency formulates rules to outline the behavior expected of broker-dealers and financial advisors when dealing with their investment clients. Nevertheless, FINRA receives thousands of customer complaints every year alleging violations of FINRA Rules. FINRA Rule 2090, the Know Your Customer (KYC) rule, and FINRA Rule 2111, the suitability rule, mandate minimum knowledge requirements for brokers when making investment recommendations and commonly appear in these customer complaints. If you suffered investment losses due to unsuitable investment recommendations, The Law Offices of Robert Wayne Pearce, P.A., can help you determine if your broker violated one of these rules. Contact our office today for a free consultation. FINRA Rule 2090: Know Your Customer Rule FINRA Rule 2090, or the Know Your Client rule, requires financial advisors to know the “essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer” when opening and maintaining a client investment account. The “essential facts” described in the rule include details that are required to: Service the account effectively; Satisfy any special handling instructions for the account; Understand the authority of anyone acting on the customer’s behalf; and Comply with applicable laws, regulations, and rules. The KYC rule protects clients from investment losses by requiring their financial advisor to learn detailed information about their personal financial circumstances. The rule protects financial advisors by outlining the essential information about customers at the outset of the relationship, prior to any recommendations. Additionally, the financial adviser receives notification of any third parties authorized to act on the customer’s behalf. The Know Your Client rule acts in tandem with the suitability rule, FINRA Rule 2111. The information learned by financial advisors through the KYC requirement factors into the analysis of whether an investment recommendation is suitable. FINRA Rule 2111: Suitability Alleged violation of investment suitability requirements resulted in 1,220 customer complaints filed with FINRA in 2020 alone, down from 1,580 complaints in 2019. The suitability rule requires financial advisors to have a “reasonable basis” to believe that a recommended transaction or investment strategy is suitable for the customer. A financial advisor determines the suitability of a transaction or investment strategy through ascertaining the customer’s investment profile. Factors involved in a suitability analysis include the customer’s: Age, Investment experience, Financial situation, Tax status, Investment goals, Investment time horizon, Liquidity needs, and Risk tolerance. Numerous cases interpret the FINRA suitability rule as requiring financial advisors to make recommendations that are in the best interest of their customers. FINRA outlines situation where financial advisors have violated the suitability rule by placing their interests above the interests of their client, including: A broker who recommends one product over another to receive larger commissions; Financial advisors who recommend that clients use margin to purchase a larger number of securities to increase commissions; and Brokers who recommend speculative securities with high commissions because of pressure from their firm to sell the securities. Any indication that a financial advisor has placed his or her interests ahead of the client’s interest can support a claim for a violation of the suitability rule. Rule 2111 consists of three primary obligations: (1) reasonable basis suitability, (2) customer-specific suitability, and (3) quantitative suitability. Reasonable Basis Suitability Reasonable basis suitability requires a financial advisor to have a reasonable basis to believe, based on reasonable diligence, that a recommendation is suitable for the public at large. A financial advisor’s reasonable diligence should provide him or her with an understanding of risks and rewards associated with the recommended investment or strategy. A failure to comprehend the risks and rewards associated with a particular investment prior to recommending the investment to a client can result in allegations of misrepresentation or fraud. If a broker fails to perform reasonable diligence regarding either component, the financial advisor violates this obligation. Customer-Specific Suitability Customer-specific suitability involves considering the specific details about an individual customer to determine if a transaction or investment strategy is suitable. The financial advisor reviews the details outlined above to determine the suitability of a particular transaction or strategy for each customer. Quantitative Suitability The quantitative suitability element requires financial advisors to recommend transactions that are suitable when viewed as a whole, not only when viewed in isolation. This element aims to prevent financial advisors from making excessive trades in a client’s account solely for the purpose of generating commission fees. Factors such as turnover rate, cost-equity ratio, and use of in-and-out trading indicate that the quantitative suitability obligation was violated. What Constitutes “Reasonable Diligence” FINRA’s suitability rule requires brokers to exercise “reasonable diligence” in attempting to obtain customer-specific information. The reasonableness of a financial advisor’s effort to obtain such information will depend on the facts and circumstances of each investment relationship. A financial advisor typically relies on the responses provided by the customer in compiling information relevant to the customer’s investment profile. Some situations may prevent a broker from relying exclusively on a customer’s responses, including times when: A financial advisor poses misleading or confusing questions to a degree that the information-gathering process is tainted; The customer exhibits clear signs of diminished capacity; or Red flags exist that indicate the information may be inaccurate. Additionally, the suitability rule requires brokers to consider any other information provided by the customer in connection with investment recommendations. Hiring an Investment Loss Attorney Violation of FINRA Rules 2090 and 2111 result in significant financial losses for investors every year. If you suffered losses because of unsuitable investment recommendations, you have the right to seek compensation from the parties responsible for your losses. Cases against brokers and registered investment advisors can be complex for attorneys without experience in securities law. Robert Wayne Pearce has over 45 years of experience representing investors in disputes against financial advisors and broker dealers. Mr. Pearce has tried, arbitrated, and mediated hundreds of investment-related disputes involving complex securities and FINRA rule violations. In fact, Mr. Pearce serves...

Mar 2, 2019

A Stockbroker’s Introduction to FINRA Examinations and Investigations

Brokers and financial advisors oftentimes do not understand what their responsibilities and obligations are and what may result from a Financial Industry Regulatory Authority (FINRA) examination or investigation. Many brokers do not even know the role that FINRA plays within the industry. This may be due to the fact that FINRA, a self-regulatory organization, is not a government entity and cannot sentence financial professionals to jail time for violation of industry rules and regulations. Nevertheless, all broker-dealers doing business with members of the public must register with FINRA. As registered members, broker-dealers, and the brokers working for them, have agreed to abide by industry rules and regulations, which include FINRA rules.