FINRA Sales Practice Violations

Brokerage Firm Violations of FINRA Rules

UBS Financial Services of Puerto Rico, Santander Securities, Popular Securities, Oriental Financial and Merrill Lynch (“brokerage firms”) are member firms of the Financial Industry Regulatory Authority (FINRA). FINRA is charged with the responsibility to resolve disputes between Puerto Rico investors and brokerage firms concerning the sale of non-traded, closed-end Puerto Rico Bond Funds and Puerto Rico Municipal Bonds. FINRA has established rules and regulations for the standards of care required for the handling of Puerto Rico customer accounts. Klayman & Toskes, P.A. and the Carlo Law Offices (“law firms”), represent Puerto Rico residents in arbitration claims for damages against brokerage firms and its financial advisors for violations of FINRA sales practice rules and regulations.

The law firms assert claims on behalf of clients that, brokerage firms and its financial advisors failed to comply with FINRA sales practice rules and regulations concerning investments in non-traded, closed-end Puerto Rico Bond Funds and Puerto Rico Municipal Bonds. The law firms’ claims on behalf of clients allege that brokerage firm misconduct resulted in legal causes of action for damages for many of the following FINRA sales practice violations:

Unsuitable Investment Advice

Brokerage firms are responsible to recommend a particular investment and/or investment strategy that is suitable for Puerto Rico investors. The suitability of an investment is based on many factors including an investor’s age, employment status, tax status, education, investment experience, investment objectives and risk tolerance. Investment losses in non-traded, closed-end Puerto Rico Bond Funds and Puerto Rico Municipal Bonds that are the result of unsuitable investment advice can be a cause of action in a FINRA arbitration claim for damages. Read more.

Conflicts of Interest

Brokerage firms are responsible for the sales and marketing of non-traded, closed-end Puerto Rico Bond Funds invested in Puerto Rico municipal bonds. Brokerage firms have an affirmative duty to identify and disclose any potential conflicts of interest to their retail customers. In particular, potential conflicts of interest include any activities related to the generation of revenues by brokerage firms and its financial advisors that are charged to their customers. FINRA rules designed to reduce the effects of any conflicts of interest rely upon full disclosure of conflicts of interest to customers as an important tool. The law firms assert that brokerage firms failed to disclose all the relevant facts and these failures resulted in damages to Puerto Rico investors. Read more.

Misrepresentation or Omission of Material Facts

Brokerage firms involved in the underwriting, syndication, asset management, and retail distribution of non-traded, closed-end Puerto Rico Bond Funds and Puerto Rico Municipal Bonds are required to make full disclosure of all material information related to retail customers. Brokerage firms that fail to disclose all of the material facts related to any recommended investment may be held liable for losses sustained. The law firms alleged in claims for damages that material information was not disclosed including, but is not limited to, all costs and risks associated with investments in non-traded, closed-end Puerto Rico Bond Funds. Read more.

Concentration in Puerto Rico Municipal Bonds

Brokerage firms and its financial advisors recommended that Puerto Rico investors maintain concentrated investments in non-traded, closed-end Puerto Rico Bond Funds and Puerto Rico Municipal Bonds. These recommendations resulted in poorly diversified portfolios that subjected Puerto Rico investors to risks of individual Puerto Rico bond issuer default and the Puerto Rico economy. Investment losses in the UBS Puerto Rico Family of Funds that are the result of a recommended concentration in non-traded, closed-end Puerto Rico Bond Funds and Puerto Rico Municipal Bonds may be a cause of action in a FINRA arbitration claim for damages. Read more.

Bank Loans and Margin Calls

Brokerage firms recommended the use of bank loans and brokerage account margin through subsidiary banks or bank affiliates. The use of borrowed funds increases the risks associated with any investment strategy, and must be clearly understood by customers and fully explained by brokerage firms and its financial advisors. After review of documents and client interviews, the law firms conclude that in many instances, brokerage firms failed to disclose the risks associated with bank loans and brokerage account margin to its customers. Furthermore, brokerage firms failed to adequately explain that during market declines, account equity declines rapidly. In most instances, Puerto Rico investors were unable to meet margin calls which require additional deposits of cash or the sale of securities at a significant loss. The recommended use of bank loans and brokerage account margin that resulted in substantial losses may be a cause of action in a FINRA arbitration claim for damages. Read more.

Excessive Markups/Markdowns

Brokerage firms are required to refrain from excessive markups and markdowns for the purchase or sale of municipal bonds. Brokerage firms must deal fairly with all persons and must not engage in any deceptive, dishonest, or unfair practice. After review of documents and client interviews, the law firms conclude that in many instances, brokerage firms failed to provide Puerto Rico customers with accurate information concerning markups/markdowns, credit quality and economic information related to recommended municipal bonds which is required to fully assess the risks of the municipal bonds. Read more.

Failure to Supervise

Brokerage firms are responsible for the supervision of all the activities of its financial advisors related to the investment management, sales and marketing of non-traded, closed-end Puerto Rico Bond Funds and Puerto Rico Municipal Bonds. The failure of a brokerage firm to adequately supervise the activities of financial advisors is a violation of FINRA sales practice rules and regulations which may be a cause of action in a FINRA arbitration claim for damages. Read more.

Breach of Fiduciary Duty

Puerto Rico investors relied on brokerage firms for more than trade execution, they rely upon financial advice. When Puerto Rico investors rely upon the direction and advice from brokerage firms and its financial advisors, a fiduciary relationship is created. A fiduciary relationship requires that brokerage firms have an obligation to place the investor’s best interest before that of the firm. The subordination of financial advisors’ self-interests requires the utmost diligence when making investment recommendations. Investment losses that are the result of brokerage firms and their financial advisors’ breach of their fiduciary duty can be a cause of action in a FINRA arbitration claim for damages. Read more.

Negligence

Brokerage firms and their financial advisors are considered negligent when they fail to adhere to securities industry standards for the handling of customer accounts by not act as a reasonable and prudent financial advisor would have acted, and as a result of the negligent act or omission, the customer sustains investment losses. Brokerage firms make representations to the investing public concerning their financial expertise and the ability to manage investment accounts through media relations, advertising and publications. Investors are considered reasonable for the trust they place in brokerage firms when they laud their financial expertise. Read more.

Why Pursue a FINRA Securities Arbitration Claim?

According to FINRA, unsuitable investment advice, concentration in Puerto Rico bonds, failure to supervise the activities of financial advisors, and fraudulent misrepresentations and omissions of material facts are among the claims that are available to investors against brokerage firms and their financial advisors in a securities arbitration claim filed with FINRA.

Klayman & Toskes, P.A. and the Carlo Law Offices are dedicated to the rights of Puerto Rico investors. Our legal team can help you determine what steps can be taken to protect your investor rights. Puerto Rico investors who suffered losses as a result of FINRA sales practice violations committed by brokerage firms and its financial advisors may be able recover their losses in a FINRA arbitration claim.

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For more information on how to start a claim, or to find out if you have a meritorious cause of action, please contact our law firm, toll free, at (787) 268-6444, for a free consultation.

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