Unauthorized trading FINRA arbitration cases can result in hefty awards, as two brokers recently learned. On February 4, 2021, FINRA ordered two brokers and an advisory firm to pay a $19 million award to an investor. To complicate matters, the investor and the brokers may have been related.

Christopher Bradford: Received One Customer Complaint

If you are looking to invest and you have an investment adviser in your family, it might seem like a natural choice – after all, who could be more trustworthy than your own family member? But as this recent unauthorized trading FINRA case may suggest, if your broker is family, your relationship might be too close for them to treat your investment portfolio with the professionalism that FINRA rules require.

What Happens When Investors Don’t Follow the Unauthorized Trading FINRA Rule?

According to Financial Advisor IQ, this $19 million arbitration award is the largest FINRA award issued since October 2018. The award was divided as follows: One broker was ordered to pay $9 million while the other will pay $602,251. FINRA ordered the advisory firm to pay $4,708,550.

The investor alleged that the two brokers engaged in constructive fraud and made fraudulent misrepresentations and omissions. Allegedly, the two advisers also made unauthorized purchases of stocks for which the advisory firm was a market maker. A “market maker” is a market participant – often a brokerage firm – that both buys and sells shares of a particular stock.

There is no information in the arbitration award that definitively states that the investor and the brokers are relatives, although they all have the same surname. Also, last year the firm fired one of the brokers following allegations regarding unauthorized trades executed on behalf of a family member. The broker was registered with that firm during the relevant timeframe.

In The Wall Street Journal article, “When Family Members Become Clients,” experts suggest that unless you have exceptionally strong boundaries in place, hiring a relative to be your financial advisor might not be a good move. Financial advisor consultant John Nersesian told the Journal, “It’s the casualness of those relationships that can lead to trouble.” 

Unauthorized Trading FINRA Rule and the Firm’s Duty to Supervise

FINRA addresses unauthorized transactions with one of its broadly appliable rules, FINRA Rule 2010. This rule requires that brokers uphold high standards of commercial honor.

Perhaps a familial relationship made the brokers feel more at ease when they allegedly executed unauthorized transactions. No matter what the situation, the firm in question had a duty to supervise their brokers. FINRA Rule 3110 states that firms must maintain a written supervisory system designed to make sure their financial advisors follow the rules. Many firms have systems in place that automatically flag large transactions that could result in serious losses for investors. Hopefully, the firm will put such a system in place in light of this recent award.

Financial Frauds Involving Family Members

Unfortunately, abuse of financial power by relatives is nothing new in the securities industry. We know that family members are responsible for 57.9% of cases of elder financial abuse, and FINRA has steps in place to report suspected financial abuse. FINRA Rule 2165 provides steps to place a temporary hold on an investor’s account when a FINRA member (i.e., a broker-dealer) suspects that financial abuse may be taking place. This abuse is sometimes at the hands of a relative who is also a “trusted contact” for the account.

What Should I Expect from a Financial Advisor?

There are some questions to raise before you enter into a broker-client relationship with a relative:

  • How will you react if your securities lose money?
  • Will your financial adviser experience extra pressure to make sure your portfolio out-performs the market? (Financial advisers looking to achieve this often purchase riskier securities.)
  • Is there a chance that a death or a divorce will complicate your relationship with your financial adviser?

Brokers cannot assume they have an extra degree of freedom with relatives’ accounts. Registered investment advisers and brokers still need to make sure they only recommend suitable investments.

What Should I Do if I Suspect My Financial Advisor of Fraud?

No matter who your broker is, don’t let them get away with causing unnecessary financial losses. Speaking with a securities attorney can offer some clarity about what to do next. Call (877) 238-4175 or email info@fkesq.com for a free case evaluation.

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