A Financial Industry Regulatory Authority ("FINRA") Complaint dated December 21, 2010, alleged that between May 2008 and August 2008, Miguel A. Murillo, was the representative of record for customer RL's account at Aura Financial Services, Inc. ("Aura"). During that time, Murillo was charged with having recommended unsuitable, excessive transactions, which were largely effected through margin. FINRA Department of Enforcement, Complainant v. Miguel Murillo, Respondent (Complaint, FINRA Disciplinary Proceeding 2008014728701, December 21, 2010).
The FINRA Complaint alleged that pursuant to cold calls in early 2008, Murillo solicited RL's business based upon promises of better service and a higher return on investment than that offered by the customer's then current brokerage firm. At the time, RL, a resident of Puerto Rico, was the 60-year-old owner of a small auto parts store and purportedly had limited English competency.
On May 19, 2008, RL signed and returned to Murillo English-language new account form documents, including a margin agreement - those forms were filled out in advance. The Complaint alleges that RL did not fully understand those documents, notwithstanding his signature.
The new account forms at the firm from which RL transferred his account indicated investment objectives of moderate growth and income. The Complaint asserts that RL told Murillo that he wanted his Aura account to be a "conservative retirement account set up because he was nearing retirement age and could not risk any losses with his funds." In contrast to RL's assertion, his Aura new account forms indicated an investment objective of speculation and a risk tolerance of aggressive.
The Complaint further alleges that Aura's new account documents incorrectly listed RL's:
In contrast, RL stated that he told Murillo that his income was between $36,000 and $40,000; his net worth was approximately $500,000; and his liquid net worth was approximately $110,000 (essentially the assets in the transferred account).
Although RL transferred approximately $110,000 in securities to Aura, the customer alleged that he specifically told Murillo that he only wanted to transfer about half that amount because he needed to retain $50,000 for another upcoming investment transaction.
On or about May 28, 2008, Murillo allegedly sold two mutual funds from RL's transferred positions and bought $109,568 worth of securities on margin, generating approximately $4,800 in commission.
On June 3, 2008, Murillo liquidated all of Lopez RL's transferred positions. From approximately June 3, 2008, through about June 18, 2008, Murillo apparently made fourteen margin purchases totaling $391,818; and sold twelve stocks for $284,597. For June 2008, Murillo generated about $20,000 in commissions on the RL account.
In July 2008, the Complaint alleges that Murillo made thirteen purchases amounting to $443,431 and thirteen sales amounting to $487,728, resulting in some $25,000 in commissions.
On or about August 22, 2008, RL complained to Aura that Murillo had failed to follow his instructions. In response to the complaint, Aura froze RL's account, which was then valued at about $40,000, and thereafter fell to $822 by December 2008.
From May 2008 through August 2008, 90% of Murillo's commissions were generated from the $59,000 charged to RL. During that same time, the annualized turnover in RL's account was nearly 64. Separately, FINRA determined that on an annualized basis, the costs of maintaining RL's account (commissions, margin interest, and fees) versus the account's average monthly equity was over 290%. All trades at issue were determined to have been solicited byf Murillo.
Consequently, FINRA charged that Murillo had recommended and executed an excessive volume of trading that was unsuitable in violation of then effective NASD Conduct Rule 2310 and IM-2310-2, and also constituted a separate violaiont of NASD Conduct Rule 2110. Moreover, the unsuitable, excessive use of margin was deemed to constitute additional violations of Rules 2110 and 2310.
On June 20, 2011, without admitting or denying the Complaint's allegations, Murillo submitted an Offer of Settlement that FINRA accepted. FINRA Department of Enforcement, Complainant, v. Miguel Murillo, Respondent (Offer of Settlement, FINRA Disciplinary Proceeding 2008014728701, June 20, 2011).
FINRA imposed a 20-business-day suspension from association with any FINRA member firm and ordered that Murillo pay partial restitution of $35,000 to RL. In light of Murillo's financial status, FINRA did not impose a monetary fine.
FINRA v. Murillo presents a fairly common problem confronting many foreign investors (or US residents lacking English competency) and brokerage firms seeking to open accounts for such clients. It would seem an almost universal maxim that you should never, ever sign any document that you don't understand. However, notwithstanding the wisdom of that prohibition, folks still pull out their pen and sign on the dotted line. Sometimes it's simply vanity; other times, a broker may have translated the document for the client (often legitimately but not always).
For brokerage firms, accepting clients lacking English competency raises many challenges. If the brokerage firm knows (or should know) that a customer has difficulty communicating in English, then questions may be raised by regulators or plaintiffs' attorneys as to why the firm communicated with the client only in English. Such concerns are exacerbated when written communications transpire between the client and the stockbroker (in either direction) because the brokerage firm's supervisors may not have competency to translate such exchanges.
Brokerage firms utilize a number of strategies when confronted with this foreign language issue. Larger firms may maintain a library of forms in several languages, and may have a large, diverse supervisory staff to properly supervise in the language at issue.
For smaller firms, an independent third-party translation company may be retained to either communicate directly with the proposed client or to prepare conforming documents. In such a situation, it is advisable to have the translation company prepare a comprehensive letter to the brokerage firm confirming the accuracy of the translation and specifically confirming that the translated copy contains a paragraph informing the customer that he/she has an obligation to review all confirmations, statements and communications and to retain an independent translator at his/her own expense. It is similarly advisable to have the translation company confirm that it advised the customer that complaints should be directed to a designated individual/office other than the stockbroker.
Some brokerage firms will decline to open an account for a proposed client who lacks sufficient English skills to reasonably follow account activity. Alternatively, a brokerage firm may charge a fee to translate documents but the better practice would be to refer the client to an independent third-party.
Regulators are likely to take a dim view of the supervisory policies and practices of a brokerage firm that accepts accounts from individuals lacking English competency but fails to implement reasonable steps to ensure its ability to react to complaints from such customers or to oversee the account activity.
SIDE BAR: Here's an interesting variation on the foreign language theme.
Without accepting or denying FINRA's findings, LPL Financial LLC recently submitted an Acceptance, Waiver and Consent that FINRA accepted to settle charges that LPL had failed to reasonable supervise certain foreign language communications. As a result of the settlement, LPL was censured and fined $25,000. In the Matter of LPL Financial LLC (AWC/2010021545201/June 8, 2011)
Specifically, FINRA alleged that LPL had approved a representative's written request to conduct a live call-in finance- and investment-related radio show to be broadcast in Farsi; and, thereafter, over a period of five years from March 2005 to March 2010, there were about 520 broadcasted shows hosted by two LPL representatives.
Among LPL's supervisory policies pertaining to public appearances by representatives, it was required that the first three radio shows be submitted to the firm's advertising compliance department as soon as they had aired. It was contemplated that LPL's advertising compliance department would contact representatives quarterly to request copies of specific shows during a randomly chosen date range for review. FINRA determined that LPL failed to request or review copies or transcripts of the broadcasts.