Unauthorized trades, sharing, borrowing and IPO restrictions

Four rules with one shape

Unauthorized trading is entering an order the customer did not authorize. The authorization must be specific to the trade — the security, the side and the amount — unless the representative holds written discretionary authority accepted by the firm. A vague instruction to do what seems best is not authorization for a particular trade; it is a request for discretion, and discretion has to be documented in advance.

The usual sharing rule requires prior written authorization from both customer and firm, and sharing in direct proportion to financial contributions. Immediate-family accounts are exempt from the proportional-share limit, but still need the written approvals.

Customer loans require firm procedures that permit them and a listed category. Categories include immediate family, an ordinary-course commercial lender, two registered persons of the same firm, and qualifying personal or business relationships outside the broker-customer relationship. The last three categories require prior written firm approval. Procedures may waive notice or approval for family and ordinary-course lender categories. Customer consent alone does not satisfy the rule.

Restricted persons, including broker-dealers, associated persons and certain relatives, are generally barred from buying new equity issues, subject to defined Rule 5130 exceptions. Firm approval alone cannot waive a restriction.

Rule 2165 permits a temporary hold for suspected financial exploitation when its conditions are met. A Specified Adult is age 65 or older, or age 18 or older with a mental or physical impairment the firm reasonably believes prevents protection of their own interests. Age 65 is not the only route. A hold is permitted, not required; notice, internal review and other rule conditions apply.

Signatures belong to the person whose name they are. Forgery is signing or affixing another person’s name or initials on a document without that person’s prior permission; falsification is creating a document or entry that gives a false appearance through altered or untrue information. FINRA treats both as violations of Rule 2010, and where the document is a firm book or record, of Rule 4511 as well. A representative who signs a customer’s name on an account form or wire instruction to save time is committing forgery, even if the customer would have agreed.

Customer money, promises against loss and the trusted contact

Two more prohibitions sit in the same FINRA rule as sharing, and neither has an approval route. No member or associated person may make improper use of a customer’s securities or funds: moving a customer’s cash to cover a personal trade is misuse the moment it happens, whether or not the money comes back before the next statement. And no member or associated person may guarantee a customer against loss, however the promise is worded or put in writing.

For every account other than an institutional one, the firm makes reasonable efforts at opening to get the details of a trusted contact person, someone the customer authorizes the firm to contact, and a customer who declines can still open the account. The firm may contact that person to address possible exploitation, or to confirm contact details, health status or a guardian, executor, trustee or holder of a power of attorney. The trusted contact gets no power to trade.

Exam terms

Unauthorized trade

An order entered without the customer’s specific authorization or written discretion.

Sharing in an account

Sharing profits and losses; prior written approvals and generally a proportional contribution.

Borrowing from a customer

Prohibited unless firm procedures and a permitted category both apply.

New issue

An initial public offering of equity, subject to the restricted-person rule.

Restricted person

Someone generally barred from new equity issues, including industry people and certain relatives; defined exceptions exist.

Temporary hold

A permitted pause under Rule 2165 for suspected exploitation of a Specified Adult, subject to rule conditions.

The paperwork offenses

Falsifying, backdating or fabricating a firm record is misconduct. Firms must keep accurate records under applicable recordkeeping rules. Do not confuse a lawful, recorded correction with concealment or fabrication.

The second is withholding. FINRA staff may require a member, a person associated with a member, or any other person subject to FINRA’s jurisdiction to provide information orally, in writing or electronically, and to permit the inspection and copying of books, records and accounts, with respect to any matter involved in an investigation, complaint, examination or proceeding. No member and no such person may fail to provide that information or testimony, or fail to permit that inspection.

Follow firm procedures to fulfill a valid FINRA request. Embarrassment does not excuse withholding required information. Rule 8210 prohibits failure to provide information or permit inspection pursuant to the rule; this duty does not depend on whether FINRA later proves the underlying allegation.

Exam terms

Falsifying a record

Altering, backdating or fabricating a firm record; misconduct in its own right.

Withholding documents

Failing to provide information or permit inspection when FINRA requires it.

Worked example

A representative is offered a $20,000 loan by a long-standing customer. No family, lending-business, same-firm or qualifying outside relationship applies. The representative also seeks a personal IPO allocation with no Rule 5130 exception.

1. A customer loan needs firm procedures that permit it and a listed category.
2. A long broker-client relationship alone does not qualify. An outside personal relationship can qualify, but these facts rule it out. Approval cannot create a missing category.
3. An associated person is a restricted person. With no rule exception here, the IPO purchase is prohibited. Ordinary firm approval cannot permit it.
4. Decline these requests and follow firm reporting and recordkeeping procedures.

Check yourself

Try a question, then read the explanation to review the rule.

Same rule, new context

Related practice

• Unauthorized trading, sharing and borrowingPractice this
• Falsifying or withholding documentsPractice this
• Trusted contact person: asking, opening without one, and the rolePractice this
• Customer funds: improper use and promises against lossPractice this