FINRA compliance rules require that brokers and firms know who has the authority to make decisions regarding a securities account. Transactions in securities accounts must be authorized by the correct person — the principal owner of the account, or one of the account’s official signatories. Brokers must not take instructions from anyone else. There are several FINRA rules that address this issue, including FINRA Rule 2090 and FINRA Rule 3310. Financial advisers who take instructions from unauthorized persons may have to pay a FINRA fine and face additional sanctions.
For example, FINRA recently fined a broker $5,000 as part of an Acceptance, Waiver, and Consent agreement that alleged that the broker had not followed his firm’s policies regarding trading instructions. The regulator further alleged that he had taken instructions from a non-authorized person.
FINRA Rule 2090: Know Your Customer
FINRA Rule 2090 is a FINRA rule of conduct – one of the rules that govern how brokers conduct business with their customers. It requires that a member firm know the names of “any persons authorized to act on behalf of a customer and any limits on their authority that the customer establishes and communicated to the member firm.” There is only one small exception: Companies can adopt a business practice to only accept customers who do not limit the authority of any of the persons acting on the customer’s behalf.
FINRA RULE 3310: Develop and Implement an Anti-Money Laundering Program
FINRA Rule 3110 states that firms must have a “reasonable belief that it knows the true identity of its customers.” They also must conduct “ongoing monitoring to identify and report suspicious transactions and to maintain and update customer information.” This helps prevent money laundering, but it also makes it clear who has the authority to give brokers instructions.
The SEC requires that broker-dealers keep their records current. This aids their “reasonable belief” that they know the identity of their customers. Firms must send account record information to their customers – at least once every 36 months. Firms should make sure investors know they should correct any outdated information so the firm can update their records.
What Happens When Firms Ignore These FINRA Rules?
According to the AWC, from October 2016 to September 2018 a representative executed 14 unauthorized transactions with a total principal value of $60,050. He executed these transactions on behalf of “Company A,” on the instructions of the company owner’s husband. FINRA rules of conduct stipulate that even if the company owner asked her husband to give instructions, she would need to complete third-party authorization granting him that authority.
Why Did the Advisor Execute Unauthorized Transactions?
We can only speculate why an advisor would ignore a FINRA rules and regulation surrounding securities transactions, but the AWC does mention that the registered representative earned $1,955.85 in commissions from the 14 unauthorized transactions. As part of the terms of the AWC, the adviser had to return the commission to his client, in addition to paying the $5,000 FINRA fine.
What Can Investors Do if Brokers Take Instructions from the Wrong Person?
If you believe your broker has followed instructions from someone who is not an authorized signatory on your securities account, you should contact a securities attorney. Contact Fitapelli Kurta for a free case evaluation by emailing email@example.com or calling (877) 238-4175.