This is the third post in the Red Flag series. In the securities compliance and regulation area, the "red flag" language is used quite often. Typically, it is used in terms of making sure that broker-dealer firms and supervisors respond appropriately to red flags. In that regard, it is pretty heavily focused on supervision, or the lack thereof. But individual brokers or registered reps. should also be aware of the red flags that wave in front if them. Recognizing them, and responding to them appropriately, can help keep a rep. out of trouble, or can work to minimize problems when possible.
This is certainly not a complete or exhaustive list of red flags that a broker might see, but it is a good starting point.
First, reps. should be careful not to sign things without reading them. U4s and applications, compliance attestations, and other things change from time to time, and the information asked on them change as well. While you may not think you have anything to report to the regulators or your firm, the items asked on these forms do change, and you should review these documents carefully to ensure you appropriately and adequately completed it before signing. Each year, numerous brokers are disciplined because they failed to read and understand U4s and other registration docs, or they failed to disclose items that required disclosure.
Second, brokers should view any regulatory examination or investigation as a red flag. If you get a letter or phone call (or an in person visit) from FINRA, the SEC, or a state seeking information, be careful. Consider consulting experienced counsel early on for advice and guidance, and assistance in getting the exam resolved in the best manner possible. In my view, the earlier you get an attorney involved, the better. The seriousness of this matter is far too much to cover in a short blog post. For more info. on these, download my free ebook, A Stockbroker's Guide to Regulatory Investigations from www.brokerdefender.com.
Some other red flags that come up are these:
* Getting solicited by someone outside of your firm to engage in a business activity, whether that involves selling something that is characterized as not being a security, or something else. Remember that the outside business activity and selling away rules have teeth, and violations can lead to some significant sanctions.
* Having a client tell you to sign something on their behalf to speed something up, to get an application submitted in time, or whatever. Don't do it. Ever. It's just that simple.
* Another red flag is a customer who wants to limit information given to you, or a client that is difficult to work with. If they are refusing to communicate with you, won't share basic background information, including suitability info. about them, then it will be difficult for you to ensure that you're making suitable recommendations for them. If they don't trust you, you might need to consider showing them to the door and letting them work with another broker at another firm. Such a choice might prevent arbitrations, complaints, and regulatory exams.
*Discretion. Be wary of customers who want you to use discretion in their account, but have not signed written discretionary authority for you and have not had the broker-dealer approve their account as discretionary. These clients might, after a purchase turns south, conveniently tell a different story, leaving you in a bind with your firm and the regulators.
*Authorization. If you are dealing with a couple, understand that each person is different. While one individual might be able to act for both in a joint account, absent trading authorization, a broker should be careful about accepting trade instructions from one client for an account of another. If that's how the clients want to operate, get the right trade authorizations completed and approved by the firm. The same goes for trusts, business accounts, etc.
There are more red flags, and you can find a lot more information about common broker issues, rule violations, and more by using the categories section on the right side of the blog.
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