by James Dunlap
FINRA has warned member firms to protect investors against unauthorized withdrawals from their accounts, including unauthorized withdrawals by spouses, children, or care-giving relatives. This article discusses some of the violations. These violations entitle an investor to legal and equitable relief by State and Federal law.
Failure to Supervise
FINRA requires that each member firm establish and maintain a system to supervise the activities of each registered representative, registered principal, and other associated person to achieve compliance with applicable securities laws and regulations. These rules are intended to protect all investors from–among other risks—the risk of theft of their savings—including by family members.
By failing to implement a system to properly verify that withdrawal instructions are genuine, a member firm is in violation.
Federal courts declare a broker must supervise discretionary transactions on a daily basis as well as monthly reviews. Federal courts have declared that the fact that a potential wrongdoer is related by blood or marriage to the account holder is irrelevant—the client must be protected against all potential wrongdoers.
Failure to Provide Account Statements
The New York Stock Exchange requires member firms to properly provide account statements to customers at the customer’s address. For example, a member firm directly violates this rule by allowing account statements to be sent to a customer’s relative and not to a customer’s address.
Failure of Due Diligence, Supervision, and Good Business Practices
The New York Stock Exchange requires member firms to “engage in good business practices.” In addition, the New York Stock Exchange requires member firms to use due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization. The New York Stock Exchange also requires every member firm to supervise diligently all accounts handled by registered representatives of the organization.
Violation of Anti-Money Laundering Rules
FINRA requires member firms to establish and implement Anti-Money Laundering (“AML”) policies and procedures designed to monitor, analyze, and investigate suspicious transactions; i.e., unauthorized withdrawals from an IRA account by a non-customer.
Failure to Conduct Honest and Fair Dealings
FINRA requires every member, in the conduct of its business, to observe high standards of commercial honor and just and equitable principles of trade. Due diligence needs to be in place to verify withdrawal instructions delivered to it are by an authorized person, and verification that instructions were legitimate.
Failure to Protect Senior Investors against Abuse by Family Members
FINRA provided member firms with specific “red flags” of which it should note to fulfill its duties to customers to avoid financial abuse by family members. FINRA provided the following specific “red flags”.
1. Sudden, atypical or unexplained withdrawals;
2. drastic shifts in investment style;
3. inability to contact the senior customer;
4. signs of intimidation or reluctance to speak in the presence of a caregiver;
5. isolation from friends and family.
The whole point of a client’s establishing a discretionary account is to turn over to the investment firm management and investment responsibilities that the client either does not want to have or feels inadequate to handle.
To learn more about James Dunlap, visit him at www.jamesdunlaplaw.com.
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