Quarterly Disciplinary Review - Spring Issue/March 2003

The Office of General Counsel (OGC) of NASD Regulatory Policy and Oversight publishes the Disciplinary Update to provide registered representatives with a summary sampling of recent disciplinary actions involving misconduct by registered representatives. The sample of disciplinary actions includes settled matters and decisions in litigated cases (Hearing Panel and National Adjudicatory Council (NAC) decisions).

OGC chose the particular actions summarized below to call attention to, and remind registered representatives of, specific conduct that violates NASD Rules and will result in disciplinary action. This document is not intended to replace or supplement the disciplinary information and decisions contained on the NASD Web site (www.finra.org). The decisions and settlements referenced in this document are subject to the restrictions regarding the release of disciplinary information contained in IM-8310-2 in the NASD Manual.

Chat Rooms, Electronic Bulletin Boards, and Message Boards

Registered Representative Barred for Posting False Messages and Baseless Price Projections in an Internet Chat Room — NASD settled a matter involving a registered representative that posted eight false messages and baseless price predictions in an Internet chat room concerning a security that he owned. NASD found that the registered representative violated NASD rules and barred the representative from associating with any member firm in any capacity.
Registered Representative Fined and Suspended for Statements that He Posted on an Internet Finance Message Board — NASD settled a matter involving a registered representative that posted 75 messages on an Internet finance message board in which he failed to disclose the fact that he was a registered representative and the name of the member firm with which he was associated. NASD also found that the representative posted 15 messages in which he made statements containing predicted or projected investment results and that, in one message, he made exaggerated, unwarranted, or misleading statements. NASD found that the registered representative violated NASD rules, fined the representative $10,000, and suspended him in all capacities for 40 days.

Misrepresentations to Customers

Registered Representative Suspended and Fined for Misrepresenting Call Features to a Customer — NASD settled a matter involving a registered representative that misrepresented the call features of federal agency debentures by not adequately explaining to five customers the call features of the debentures. NASD found that the registered representative's actions violated NASD rules, suspended the representative in all capacities for three months, and fined him $10,000.
Registered Representative Suspended, Fined, and Required to Requalify for Making Material Misrepresentations to Customers — NASD settled a matter involving a registered representative that materially misrepresented to customers the features of callable certificated of deposit (CDs) that he sold to those customers. NASD found that the representative misrepresented to customers that the CDs were one-year CDs when in actuality they had 15 to 20-year maturity dates and that the CDs could be redeemed without penalty at any time with no risk to principal when in fact the CDs had to be sold in the secondary market in sales that entailed significant potential loss of principal. NASD also found that the representative crossed out all the risk disclosures on the product acknowledgment form provide to the customers, thereby leading his customers to believe that the products did not entail risk. NASD found that the registered representative's actions violated NASD rules, suspended the representative in all capacities for two years, required that he requalify by examination before acting in any registered capacity, and fined him $25,000.

Unsuitable Recommendations and Excessive Trading

Registered Representative Fined and Suspended for Unsuitable Recommendations — The SEC affirmed NASD's findings and the sanctions imposed in a case in which both the nature of the securities that a representative recommended and the representative's level of trading were unsuitable. The customer was a middle-aged widow with an annual income of $25,000, a net worth of $100,000, and an investment objective of income. When the customer transferred her account to the representative, her account held conservative investments. The representative sold the customer's conservative investments, purchased speculative oil, gas, and mining stocks, and increased the customer's level of risk by trading her account on margin. As to findings that the nature of the representative's recommendations were unsuitable, the NAC and the SEC rejected the representative's defenses that the customer maintained additional undisclosed assets, that she understood the risks associated with speculative investments, and that she actively sought to change her investment strategy to growth and speculation. The SEC reiterated the NAC's findings that a registered representative does not satisfy NASD's suitability requirements simply by disclosing the risks associated with an investment and that, even in cases in which a customer affirmatively seeks to engage in highly speculative or aggressive trading, a representative is under a duty to refrain from making recommendations that are incompatible with the customer's financial profile. The SEC also held that, when a customer refuses to supply financial information, the registered representative must make recommendations only on the basis of the concrete information that the customer did supply. As to findings that the level of trading was unsuitable, the NAC and the SEC found that an annualized turnover of 5.12 was excessive. The SEC concluded that, in effect, the representative sold every stock in the customer's portfolio roughly every 10 weeks and that activity of that nature is unsuitable. The SEC upheld the NAC's imposition of a $25,000 fine and three-month suspension in all capacities.
Registered Representative Fined and Suspended for Unsuitable Recommendations — The SEC affirmed NASD's findings and the sanctions imposed in a case in which both the nature of the securities recommended and the level of trading were unsuitable. The customer was elderly, retired, in poor health, risk averse, and had an investment objective of income. The representative sold the customer speculative "house stocks" in which his firm made a market. As to findings that the nature of the representative's recommendations were unsuitable, the NAC and the SEC rejected the representative's defenses that the customer sought to share in the large profits that could be made from the appreciation of low-priced securities. The SEC reiterated the NAC's findings that a registered representative's recommendations must be consistent with his customer's best interests, regardless of his customer's interest in purchasing low-priced stocks. As to findings that the level of trading was unsuitable, the NAC and the SEC found that an annualized turnover of 8.5 was excessive. The SEC concluded that the average holding period for the securities in the customer's account was 40 days and that the annualized cost-to-equity ratio was 54 percent, meaning that the account would have required a 54 percent annual appreciation to break even. The SEC concluded that this level of trading was excessive. The SEC upheld the NAC's imposition of a $25,000 fine and two-year suspension in all capacities.
Registered Representative Fined and Suspended for Unsuitable Recommendations — NASD settled a matter involving a registered representative that made unsuitable recommendations in two accounts of a public customer. The customer was elderly, retired, had an annual income of less than $50,000, had a net worth of less than $500,000, and had an investment objective of conservative, long-term growth. NASD found that the representative recommended an investment strategy that was unsuitable based on the facts that the customer disclosed to him regarding her financial situation, needs, and objectives. NASD found that the registered representative's actions violated NASD rules, suspended the representative in all capacities for 90 days, and fined him $5,000.
Registered Representative Fined and Suspended for Unsuitable Recommendations — NASD settled a matter involving a registered representative that made unsuitable recommendations and excessively traded a customer's account. NASD found that, for a period of six months, the representative recommended an investment strategy that was unsuitable in view of the frequency and nature of the recommended transactions and the customer's financial situation, objectives, circumstances, and needs. NASD found that the registered representative's actions violated NASD rules, suspended the representative in all capacities for 90 days, and ordered that he pay restitution to the customer in the amount of $20,000.