As the 2013-14 winter season becomes frostier, FINRA put forth a message of warmth by cautioning firms to turn a cold shoulder to business activities that pose a conflict of interest and instead put investors first.
The SEC in October 2013 announced a new enforcement strategy by cracking down on smaller infractions in order to stop larger and more damaging violations from occurring later on. A big part of the SEC's plan included considerations of suitability and conflicts of interest created by violative unreported outside business activities.
To see just how damaging conflict of interest-spurred misconduct can be, consider these prominent cases:
> When Massachusetts securities regulators successfully sued LPL Financial and ordered $2 million in restitution over non-traded REIT sales, the allegations stemmed from excessive risk taking and transaction activities above limits—nefarious behaviors that rewarded rogue brokers because the worse the behavior became, the more the brokers stood to benefit financially.
> The state's $9.6 million settlement with five other firms in May 2013 likewise confirmed excessive REIT sales in excess of state limitations and company policies/procedures. The alleged violations included marketing REITs that were illiquid and susceptible to high fees, including commissions, and minimum reporting requirements. At the time, the Commonwealth said the firms pushed these products without regard to the best interest of their clients.
For every large scale systematic conflict of interest scheme, just as the SEC suggested, there is a smaller violation that can be equally devastating for individual clients.
> In July 2013, FINRA barred former Wells Fargo Advisors broker Joseph J. Antosh, Jr. over allegations he designated his daughter as beneficiary of an elderly customer's IRA in contravention of firm policy. To do so, Antosh allegedly removed the client's son from the beneficiary role.
> In February 2013, FINRA barred Coto de Caza, California's Neil Copeland Winterrowd for the alleged misappropriation of $1.5 million from multiple customers for personal use. That investigation found that while employed at JP Turner & Company, Winterrowd used a customer's death as an opportunity to submit a request for lump sum payment, solely payable to a group Winterrowd personally owned. Winterrowd allegedly did not properly report this outside business activity which shared his personal Irvine, CA mailing address and submitted over 10 additional withdrawal requests indicating this particular company as payee.
> FINRA also barred California's Rafael Ramon Sanchez for alleged "egregious unethical conduct," including misuse and attempted misappropriation on several occasions of elderly customers' funds. At the root of the Sanchez case, FINRA discovered he too failed to advise his firm of the outside financial activities which posed clear conflicts of interest.
All of this disciplinary action is bittersweet news for investors. On the one hand, it indicates FINRA and other regulators are taking conflict of interest violations and abuses very seriously, including some of the more unusual cases awarding restitution or ordering disgorgement of ill-gotten funds. On the other hand, for some investors, it also validates the harsh reality of regulators closing the barn doors far, far too late.
To encourage firms to weed out the issue of brokers unable to put clients ahead of their own self-interest, FINRA has and continues to issue notices, alerts and reforms meant to combat conflicts of interest. The good news for investors is that as the rules and regulations become clearer and more explicit, instances of broker misconduct likewise will become more apparent.
Furthermore, by encouraging firms to shy away from loaded policies that, for example, outright reward the promotion of one investment over another, including proprietary products or sales volume quotas or bonus structures, FINRA hopes to take the business of investing and return it to best interests of its true stakeholders, the investors.
Eventually, FINRA may move from its "suitability" standard and hold firms and their Associated Persons to a true fiduciary standard, thus ending any question of who comes first in the client-broker relationship.
If you have invested with a broker, adviser or firm whose recommendations, solicitations or other investment actions have posed a conflict of interest and this has resulted in misconduct detrimental to your financial interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881.
News: Finra's call to arms to put clients first (InvestmentNews)