Stockbroker Theft & Conversion: FINRA Rules, Misconceptions, and Defense Strategies

Accusations of stockbroker theft and conversion can be career-threatening. While FINRA regulations protect investors, many brokers face false allegations stemming from client disputes, misunderstandings, or complex financial transactions.

This guide explains:

• (a) FINRA rules on fund management
• (b) Common misconceptions about broker conduct
• (c) Real-life case examples
• (d) Best practices for defending yourself against false accusations

Understanding FINRA Rules 2150 & 2010

What the Rules State

• FINRA Rule 2150(a): No associated person may make improper use of a customer’s funds or securities.
• FINRA Rule 2010: Brokers must observe high standards of commercial honor and just principles of trade.

Conversion is the intentional and unauthorized exercise of ownership over property without entitlement. Under these rules:

• Brokers cannot use client funds for personal purposes.
• Brokers may share accounts only with written authorization from both client and firm.
• Brokers may share profits or losses only under permitted conditions, such as immediate family relationships.

Misconceptions About Broker Conduct

Misconception: All shared accounts between brokers and clients are fraudulent.

Reality: Many shared accounts are legal, especially for family or estate planning.

Misconception: Any broker-initiated fund transfer is misappropriation.

Reality: Many transfers follow client instructions, but disputes may later mischaracterize them as theft.

Case Study: Misuse Allegations in a Shared Account

Broker Matthew Clason faced accusations of misappropriating $600,000 from a shared account with an older investor. He argued:

• The client consented to the shared account.
• Transfers were part of agreed strategies.
• Transactions complied with regulations but were later misconstrued.

Key Takeaway: Always document client authorizations and maintain written records.

FINRA Rule 3240: Borrowing Money from Clients

Borrowing isn’t always prohibited. Rule 3240 (formerly NASD Rule 2370) allows loans if:

1. The firm has written procedures allowing it.
2. The loan meets one of five conditions:
   • Immediate family relationship
   • Customer is a financial institution
   • Both parties are registered with the same firm
   • Personal relationship exists beyond the broker-client relationship
   • Business relationship exists independent of brokerage

Even then, brokers must obtain prior written firm approval. A violation also breaches Rule 2010.

Defending Against Loan-Related Allegation

To protect yourself:

• Disclose all loan arrangements in writing.
• Keep detailed proof that the loan was voluntary.
• Ensure the client signs written acknowledgment of loan terms.

How Brokers Are Wrongly Accused of Misconduct

Many allegations stem from disputes, not fraud. Common scenarios include:

1. Misunderstood Fund Transfers

Client disputes a broker-facilitated transfer.

Defense: Provide client approval documentation.

2. Disputed Investment Performance

Losses on risky investments spark complaints.

Defense: Produce signed risk disclosures.

3. Unfair Ponzi Scheme Allegations

Delayed payouts raise suspicions of fraud.

Defense: Show transparent financial records and solvency.

4. False Claims of Unauthorized Withdrawals

Client denies approving withdrawals.

Defense: Provide call logs, emails, or signed instructions.

Best Practices to Protect Yourself

• Maintain Clear Documentation – Record all client communications and approvals.
• Use Compliance-Approved Processes – Process all transactions through official firm channels.
• Require Written Acknowledgments – Have clients sign off on significant transactions.
• Separate Personal & Client Finances – Avoid conflicts of interest.
• Stay Current on FINRA Regulations – Attend compliance training regularly.

What to Do If You Are Accused of Stockbroker Theft

1: Consult a Securities Attorney – Hire counsel experienced in FINRA and SEC disputes.

2: Gather Evidence – Collect agreements, emails, and transaction records.

3: Use FINRA Arbitration or Mediation – Many disputes resolve outside court.

4: Communicate with Your Firm – Firms often provide compliance support to strengthen your defense.

Protecting Your Career as a Financial Professional

Stockbrokers often face allegations of theft or conversion due to misinterpretations. By:

• Maintaining meticulous documentation
• Following compliance protocols
• Seeking immediate legal advice
• …brokers can defend their professional reputations and careers.

Accused of misconduct? Contact a securities attorney today to protect your future.

FAQs About Stockbroker Theft and Conversion

1. What is stockbroker conversion?

Conversion occurs when a broker improperly uses or misappropriates client funds or securities without authorization.

2. Does every shared account violate FINRA rules?

No. Shared accounts may be legal if properly documented and authorized in writing.

3. Can brokers borrow money from clients?

Yes, under FINRA Rule 3240, but only with firm approval and if one of the five rule-based conditions applies.

4. How can a broker defend against false allegations?

By producing documentation such as signed client approvals, risk disclosures, and transaction records.

5. What happens if FINRA finds a violation?

Penalties range from fines and suspensions to permanent bans. Legal representation is essential.

6. Why is documentation so important in defense?

Written records provide proof of client consent and compliance with regulations, protecting brokers in disputes.

For more on broker-dealer regulations, visit the FINRA Rulebook.