FINRA fined a large broker-dealer $2.75 Million for failing to include customer complaints on Forms U4 and U5 and for neglecting to file Suspicious Activity Reports for cyber-related events. FINRA examined a small sample of customer complaints and found that the firm should have reported more than 22% of its customer complaints on Forms U4 and U5. Extrapolating the small sample that FINRA reviewed, the firm should have reported nearly 300 customer complaints over the 2013-2016 period. The firm erroneously construed the filing requirement by declining to report customer complaints unless the customer expressly requested more than $5000 in compensation. FINRA also faults the firm for providing inaccurate guidance to supervisory personnel and thereby failing to file more than 400 SARs to report cyber intrusions or attempts.
FINRA requires firms to heighten supervision over bad brokers. To ensure compliance, FINRA needs to make sure that Forms U4 and U5 include all customer complaints and other reportable activity. Compli-pros should err on the side of reporting notwithstanding the objections of producers and their supervisors.
The SEC barred a broker from the industry and deferred to FINRA for fines and restitution arising from allegations that the broker recommended unsuitable in-and-out trading strategies and churned customer accounts. The SEC asserts that the broker did not disclose to his nondiscretionary clients that the recommended strategies, even if successful, were likely to exceed the commissions paid to him on the frequent trading. The SEC also claims that the broker placed trades without client consent. The broker, who had a disciplinary history, worked at 5 different firms over his 18-year career. The SEC worked with FINRA and the Montana securities regulator to bring the action. An SEC official warned, “We’re intensifying our focus on unscrupulous brokers and their harmful practices.”
The regulators have prioritized the prosecution of bad brokers. Earlier this year, FINRA advised firms to heighten supervision of brokers with a disciplinary history. This case shows the inter-regulatory cooperation to find and rid the industry of these bad apples. Also, compli-pros should note that “non-discretionary” accounts are not a compliance silver bullet.
The Massachusetts Securities Division has filed a complaint against a broker and his firm for allowing the continued website publication of misleading disciplinary information. The broker’s website claimed that he “NEVER” (sic) had a complaint made against him. Although this statement may have been accurate when the website went live in 2008, several customers filed and settled complaints between 2011 and 2018. The MSD faults the firm for failing to flag the misleading website language even though it conducted 4 branch audits during the period and had actual knowledge of the complaints. The MSD criticized policies and procedures that failed to require the firm to “regularly review content after publication.”
OUR TAKE: Earlier this year, FINRA admonished member firms to heighten supervision of brokers with a disciplinary history. The states – including Massachusetts – can jump into the enforcement fray to ensure that the home office properly monitors the branch offices.
The SEC fined a large broker-dealer/investment adviser $3.6 Million because its inadequate compliance and supervisory program failed to stop a broker from stealing from clients. The broker, currently facing criminal charges, exploited a weakness in the firm’s control systems that allowed third party disbursements up to $100,000 per day based on representations that the broker received oral instructions. According to the SEC, the broker misappropriated $7 Million from four advisory accounts. Although the firm did have policies and procedures that included ad hoc manual supervisory reviews, the firm did not require authorization letters, call back clients to verify instructions, or record calls.
OUR TAKE: A motivated miscreant will find the weaknesses in your compliance and supervisory system. To avoid this type of theft, a firm should prohibit any third party money movement without the review of a supervisor or compli-pro.
FINRA has outlined recommended heightened supervisory procedures for brokers with a history of past misconduct. FINRA suggests that firms should (i) designate a principal with supervision responsibility; (ii) provide specific training to the bad broker; (iii) require written acknowledgements; and (iv) conduct periodic reviews of the plan’s effectiveness. FINRA also describes certain characteristics of an effective heightened supervisory plan: physical proximity of the supervisor to the broker, ongoing contacts and reviews, frequent monitoring, and expediting customer complaints. FINRA has also proposed rules that would subject member firms that hire bad brokers to additional FINRA monitoring and reporting.
OUR TAKE: FINRA wants to make it difficult on firms that hire brokers with a disciplinary record by imposing additional regulatory, monitoring and reporting requirements.
The SEC has launched an online search took that includes a database of all individuals who have settled, defaulted, or contested an SEC enforcement action that resulted in a final judgement or order in federal court or an administrative proceeding. The new system called SALI – SEC Action Lookup for Individuals – includes any respondent/defendant and not just investment professionals. The current database extends back to 2014, although the SEC intends to expand the database.
OUR TAKE: The SALI database closes an information gap that made it cumbersome for investors to investigate charges against unregistered individuals. The system also facilitates research of wrongdoing by investment pros. This continues the regulators’ expressed goal of weeding out bad actors from the securities industry.
The SEC charged a broker-dealer with failing to supervise because its Written Supervisory Procedures failed to adequately detail how firm employees should respond to regulatory red flags. The SEC asserts that the firm failed to supervise a broker that charged with participating in a penny stock pump-and-dump scheme. The SEC maintains that the firm uncovered multiple red flags including a supervisor’s report, customer emails, arbitrations, and FINRA examinations. However, the SEC alleges, the firm’s WSP’s did not specify who should investigate or how such investigations should proceed. The firm did conduct two “flawed investigations” that failed to document its findings or detail a remedy. The Director of the SEC’s New York Regional Office advised broker-dealers that this case “sends a clear message that we will not tolerate broker-dealers that fail to exercise appropriate supervision over employees.”
OUR TAKE: We predicted that the regulators would hold brokers accountable for the bad actions of their registered reps. WSPs should follow the 5 Ws Rule: Who is responsible? What is to be done? Why are you doing it? When is it due? Where should it be presented?
The SEC barred a broker from the industry for recommending an unsuitable in-and-out trading strategy that generated significant commissions. The SEC asserts that, given the costs, returns, and customers, the defendant had no reasonable basis to determine that a high volume trading strategy was suitable. According to the SEC, the broker should have known better because he attended firm-wide compliance training that addressed the importance of reasonable basis suitability.
OUR TAKE: Compli-pros should take comfort that the compliance training helped insulate the firm from liability against the rogue actions of this employee. Also, firm leaders should note that the SEC will prosecute individuals that violate the securities laws as part of its effort to root out bad actors.
The SEC has charged a broker and his customer for conspiring to conceal alleged kickbacks in exchange for preferred IPO and secondary offering allocations. According to the SEC, the defendants agreed that the customer would kick back 24% of his trading profits. The defendants attempted to conceal the scheme by laundering the payments through multiple bank withdrawals of less than $10,000. The SEC maintains that the broker and the client repeatedly lied on compliance certifications about conflicts of interest and payments, which were required by the firms’ policies and procedures that specifically prohibited any type of conflict, allocation or payment scheme.
OUR TAKE: The SEC properly targets the persons that benefited from the scheme, rather than the firms that had adopted relevant policies and procedures and required specific certifications. It is also noteworthy that the SEC charged the enriched client and not just the broker. We believe this case shows the SEC’s continued focus on holding individuals, and not just organizations, accountable for bad behavior.
FINRA fined a large bank-affiliated broker-dealer $1.25 Million for failing to conduct adequate background checks on over 8,000 associated persons over an 8-year period. The broker-dealer relied on its bank affiliate to conduct screening of its non-registered associated persons but the bank only screened for bank disqualifying criteria, not the broader categories of disqualification pursuant to Section 3(a)(39) of the Exchange Act and FINRA rules. Also, the firm completely failed to fingerprint over 2000 employees prior to employment. Four employees were retained despite statutory disqualifications. FINRA’s EVP of Enforcement warned, “Firms have a clear responsibility to appropriately screen all employees for past criminal or regulatory events that can disqualify individuals from associating with member firms, even in a non-registered capacity.”
OUR TAKE: FINRA has previously warned that it would review how firms screen for brokers with disciplinary records. The regulator wants to put pressure on the industry to drive out the bad brokers.