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How serious are violations of supervisory and fair dealing rules?

On Behalf of | Oct 12, 2021 | FINRA, Securities Litigation

The Financial Industry Regulation Authority (FINRA) requires those who provide a recommendation for a transaction or investment strategy involving a security to a client have reasonable basis for the advice. The organization states this basis should be the result of reasonable diligence for the specific customer’s investment portfolio. A failure to support the recommendation when questioned could result in allegations of a violation of supervisory and fair dealing rules.

But how bad can a violation really be? Are we talking a slap on the wrist and reminder to follow the rules in the future or something more? The extent of the repercussions will depend on the details of the situation, but a recent case provides an example of just how bad it can get.

In this case, FINRA accused Merrill Lynch, Pierce, Fenner & Smith Incorporated of a violation of its supervisory and fair dealing rules when it failed to take steps to bring short positions for municipal securities in its control within 30 days as required by FINRA Rule 2010.

The giant in the investment management company world ultimately agreed to settle allegations of these violations as well as allegations of violations of the Municipal Securities Rulemaking Board (MSRB) regulations for $1.5 million. FINRA also imposed additional sanctions on the management company.

The lesson: securities litigation like allegations of supervisory and fair dealing rule violations can lead to huge financial penalties and additional sanctions that can pose additional administrative burdens on your practice. Working with legal counsel to build a defense to the allegations can better ensure a more favorable outcome and allow you the freedom to focus on other areas of your practice that require your attention.