FINRA (Financial Industry Regulatory Authority) is a non-governmental organization that regulates member brokerage firms and exchange markets. FINRA works along side the government agency, Securities and Exchange Commission.
According to the Broke and Broker blog which focuses on securities fraud, “FINRA alleged that Crossman made intentionally false statements to Merrill Lynch through his submission of the January 2017 expense report in an attempt to obtain an unjustified reimbursement for expenses that had not been incurred, in violation of FINRA Rule 2010.”
FINRA Rule 2010 requires all associated persons to observe high standards of commercial honor and just and equitable principles of trade. A registered representative who provides false or misleading information to his member-firm employer violates FINRA Rule 2010. It is a rather broad rule for ethics and accuracy and reminds me of the “Books and Records” rule of the Securities Exchange Act (Section 17(a).
This puts the blame specifically at the employee level but the issue of ‘errors’ on expense reports is not new to Merrill. According to a memo reviewed by AdvisorHub, the firm found that 66% of business development account (aka BDA) claim submissions were returned “due to errors and ineligible expenses.”
FINRA’s Disciplinary Actions Report (link)
Joshua Thomas Crossman (CRD #2633781, Jupiter, Florida)
May 2, 2018 – An AWC was issued in which Crossman was assessed a deferred fine of $10,000 and suspended from association with any FINRA member in all capacities for six months. Without admitting or denying the findings, Crossman consented to the sanctions and to the entry of findings that he intentionally made false statements to his member firm in an expense report in an attempt to obtain reimbursement of approximately $524 for expenses that he did not incur. The findings stated that Crossman instructed his assistant to submit the expense report seeking reimbursement for mileage and dinner expenses. Crossman represented that these expenses were incurred during two meetings and a dinner with prospective clients. Subsequently, Crossman admitted to the firm that the meetings and dinner did not take place and that he submitted the false expense report to avoid forfeiting the unused funds in his business development account. As a result, the firm rejected Crossman’s expense report and no funds were disbursed to him. The suspension is in effect from May 7, 2018, through November 6, 2018. (FINRA Case #2017053816101)
Firms should also be mindful of how they track and control gifts and ‘expenses with others’ as per FINRA Rule 3220 (Influencing or Rewarding Employees of Others), 3221 (Restrictions on Non-Cash Compensation) and 3222 (Business Entertainment). Many firms are using pre-spend approval processes on these higher risk categories of spend.