Bad Brokers

According to FINRA, Banyan Securities, LLC has been censured and fined $15,000 for significant failures in its anti-money laundering (AML) compliance program.

The firm was found in violation of federal regulations requiring independent testing of AML programs. Specifically, Banyan Securities fail...

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According to FINRA, Banyan Securities, LLC has been censured and fined $15,000 for significant failures in its anti-money laundering (AML) compliance program.

The firm was found in violation of federal regulations requiring independent testing of AML programs. Specifically, Banyan Securities failed to conduct any independent testing of its AML program from at least 2018 through the present—a period spanning approximately seven years. Additionally, the firm's written AML program did not include any procedures providing for independent testing for compliance from February 2022 through the present.

Anti-money laundering programs are a critical component of financial industry regulation. The Bank Secrecy Act requires broker-dealers to establish and implement AML programs that include, among other things, independent testing for compliance. This testing must be conducted by member firm personnel or by a qualified outside party on at least an annual basis.

As part of the settlement, Banyan Securities is required to certify in writing that it has conducted an independent test and revised its written AML program to require independent AML testing each calendar year.

What Investors Can Learn: This case highlights the importance of regulatory compliance infrastructure at brokerage firms. Investors should be aware that AML programs exist to protect them and the financial system from illicit activities, including fraud and money laundering. When choosing a broker-dealer, investors may want to inquire about the firm's compliance history and whether it maintains robust internal controls.

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According to FINRA, Curvature Securities LLC has been censured and fined $50,000 for failing to accurately calculate its required customer reserve on 32 occasions.

The firm's calculation errors resulted in 27 hindsight deficiencies ranging from $20,906 to $6,846,329. These deficiencies occurred b...

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According to FINRA, Curvature Securities LLC has been censured and fined $50,000 for failing to accurately calculate its required customer reserve on 32 occasions.

The firm's calculation errors resulted in 27 hindsight deficiencies ranging from $20,906 to $6,846,329. These deficiencies occurred because the firm inadvertently omitted the short market values of securities in its customers' cash and margin accounts, along with related withholding taxes, when making its weekly customer reserve calculation.

The root cause of this error was the firm's mistaken reliance on a data source that excluded customers' short market values of securities. The SEC's Customer Protection Rule (Rule 15c3-3) requires broker-dealers to maintain a reserve of funds or qualified securities in a special reserve bank account for the exclusive benefit of customers. This rule exists to ensure that customer assets are protected in the event of a broker-dealer failure.

As a result of these calculation errors, the firm also created and maintained inaccurate books and records and filed Financial and Operational Combined Uniform Single (FOCUS) reports that inaccurately reflected the firm's customer reserve obligation.

To the firm's credit, it took prompt remedial steps once the error was identified, switching to a comprehensive data source for its customer reserve computation and resolving the hindsight deficiencies.

What Investors Can Learn: Customer reserve requirements are a fundamental protection for investors. This case demonstrates how technical errors in back-office operations can have significant regulatory implications. Investors benefit from these rules because they help ensure broker-dealers maintain adequate funds to protect customer assets.

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According to FINRA, Sentinel Brokers Company, Inc. has been censured and fined $25,000 for failing to make and preserve accurate books and records and for filing inaccurate FOCUS reports.

The case centered on the firm's treatment of $1,364,412 received from affiliates. An affiliate transferred $1...

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According to FINRA, Sentinel Brokers Company, Inc. has been censured and fined $25,000 for failing to make and preserve accurate books and records and for filing inaccurate FOCUS reports.

The case centered on the firm's treatment of $1,364,412 received from affiliates. An affiliate transferred $1,000,000 to the firm and later made additional transfers totaling $364,412. The firm treated these funds as ownership equity in its net capital calculations and FOCUS reports, despite referring to the funds as loan proceeds in other documents and lacking contemporaneous documentation demonstrating that the funds were ownership equity rather than loan proceeds.

Subsequently, the firm amended its Certificate of Incorporation to allow additional preferred stock issuance and issued fourteen shares of preferred stock to a second affiliate in exchange for the previously received funds. However, FINRA found the firm should not have treated the funds as ownership equity without contemporaneous documentation supporting that treatment.

During the period before proper documentation existed, the firm conducted a securities business while failing to maintain its required net capital, filed five inaccurate FOCUS reports, and failed to file required notices of its net capital deficiencies with FINRA and the SEC.

What Investors Can Learn: Net capital requirements exist to ensure broker-dealers have sufficient liquid assets to meet their obligations to customers. When firms improperly classify funds, it can mask their true financial condition. Investors should understand that regulators scrutinize how firms account for their capital to ensure adequate customer protection.

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According to FINRA, Stonecrest Capital Markets, Inc. has been censured and fined $45,000 for failing to properly report transactions to FINRA's Trade Reporting and Compliance Engine (TRACE).

The firm failed to report 58 transactions in TRACE-eligible securitized products, 30 transactions in corpo...

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According to FINRA, Stonecrest Capital Markets, Inc. has been censured and fined $45,000 for failing to properly report transactions to FINRA's Trade Reporting and Compliance Engine (TRACE).

The firm failed to report 58 transactions in TRACE-eligible securitized products, 30 transactions in corporate bonds, and eight transactions in agency debt. Although the firm initially reported these transactions, the TRACE system rejected them, and despite receiving reject messages, the firm did not re-report the transactions. These unreported transactions constituted approximately four percent of the firm's TRACE-eligible transactions during the relevant period.

Additionally, the firm submitted 35 inaccurate reports to TRACE, including 24 transactions with inaccurate capacity, six with inaccurate trade prices, four with inaccurate settlement dates, and one with inaccurate transaction size and trade date.

FINRA also found the firm's supervisory system was not reasonably designed to achieve compliance with TRACE reporting rules. The firm failed to reasonably investigate red flags relating to its TRACE reporting, and its written supervisory procedures did not provide guidance on how supervisors should review TRACE reporting for timeliness or accuracy.

What Investors Can Learn: TRACE reporting provides transparency in the fixed-income markets by making transaction information publicly available. This transparency helps investors receive fair prices. When firms fail to report accurately, it undermines market integrity and price discovery.

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According to FINRA, GTS Securities LLC has been censured and fined $150,000 for publishing inaccurate monthly execution quality reports required under SEC Regulation NMS Rule 605.

Due to multiple coding errors, over 80 percent of the approximately 25,000 orders the firm included in its reports di...

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According to FINRA, GTS Securities LLC has been censured and fined $150,000 for publishing inaccurate monthly execution quality reports required under SEC Regulation NMS Rule 605.

Due to multiple coding errors, over 80 percent of the approximately 25,000 orders the firm included in its reports did not meet the definition of covered order and should not have been included. The coding errors also caused the firm to report inaccurate share quantities in time-to-execution groupings and inaccurate average realized spreads.

Rule 605 requires market centers to publish monthly reports containing standardized information about order execution quality, including effective spreads and execution speed. These reports help investors and broker-dealers evaluate execution quality when deciding where to route orders.

FINRA identified these inaccuracies during an examination. A month later, the firm began using a third-party vendor to prepare its Rule 605 reports and subsequently published corrected versions of 23 reports.

The firm also failed to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with Rule 605. Specifically, the firm had no supervisory reviews or written procedures to ensure only covered orders were included in reports and no reasonable reviews to determine whether statistical data was being accurately calculated.

What Investors Can Learn: Execution quality statistics help investors understand how well their orders are being handled. When these reports are inaccurate, investors cannot make informed decisions about order routing. This case underscores the importance of accurate market transparency data.

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According to FINRA, Cova Capital Partners LLC has been censured and fined $30,000 for willfully violating Regulation Best Interest (Reg BI) in connection with its sale of three private placement offerings to retail customers.

The firm was found in violation of Reg BI's Care Obligation by recommen...

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According to FINRA, Cova Capital Partners LLC has been censured and fined $30,000 for willfully violating Regulation Best Interest (Reg BI) in connection with its sale of three private placement offerings to retail customers.

The firm was found in violation of Reg BI's Care Obligation by recommending private placements without conducting sufficient due diligence. Before selling pre-initial public offering (pre-IPO) shares of a company, the firm failed to take reasonable steps to confirm that the issuer actually possessed rights to the shares being sold. Despite knowing that the issuer applied markups to the pre-IPO shares, the firm did not determine the amount of these markups.

Subsequently, the SEC filed a lawsuit against the issuer alleging fraud, including undisclosed excessive markups and not having enough pre-IPO shares to satisfy sales to investors. A federal court entered a preliminary injunction and appointed a receiver. The U.S. Attorney's Office later filed criminal charges against principals of the issuer, including fraud and conspiracy counts.

For two additional offerings, the firm failed to reasonably investigate the issuer's management (missing that one CEO was previously subject to regulatory actions for illegal robocalls to seniors) and failed to investigate SEC charges against individuals associated with another fund from which the issuer claimed to source shares.

The firm also violated Reg BI's Compliance Obligation by failing to establish adequate written policies and procedures for due diligence on private placements.

What Investors Can Learn: This case demonstrates the critical importance of due diligence before recommending investments. Investors purchasing private placements should ask their brokers what investigation was performed on the issuer and be cautious of pre-IPO share offerings.

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According to FINRA, Merrill Lynch, Pierce, Fenner & Smith Incorporated has been censured and fined $275,000 for accepting market orders for equity new issues prior to the commencement of secondary market trading.

FINRA Rule 5131(d)(4) prohibits broker-dealers from accepting market orders for new ...

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According to FINRA, Merrill Lynch, Pierce, Fenner & Smith Incorporated has been censured and fined $275,000 for accepting market orders for equity new issues prior to the commencement of secondary market trading.

FINRA Rule 5131(d)(4) prohibits broker-dealers from accepting market orders for new equity issues before secondary market trading begins. This rule exists to protect investors from the volatility and price uncertainty that can occur when a new issue first begins trading.

The firm was found to have accepted the material terms of market orders before trading in the secondary market commenced, then executed those orders after the market opened. The firm's representatives received the material terms of these orders prior to the start of trading and routed them for execution once secondary market trading began.

The violation stemmed from the firm's failure to establish, maintain, and enforce a reasonably designed supervisory system. The firm's controls and written supervisory procedures inaccurately defined "acceptance" as the time the order was routed for execution, rather than when the material terms were received. This allowed representatives to accept order details before trading commenced without reasonable controls to reject such orders.

As part of the settlement, the firm is required to certify that it has remediated the identified issues and implemented a reasonably designed supervisory system.

What Investors Can Learn: Rules governing IPO trading exist to protect investors from heightened risks during the initial pricing period. Investors should understand that market orders for new issues can result in unexpected prices due to volatility in early trading.

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According to FINRA, MarketAxess Corporation has been censured and fined $180,000 for making inaccurate and untimely reports to both TRACE and the Municipal Securities Rulemaking Board's Real-time Transaction System (RTRS).

The firm reported corporate bond and U.S. Treasury transactions to TRACE w...

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According to FINRA, MarketAxess Corporation has been censured and fined $180,000 for making inaccurate and untimely reports to both TRACE and the Municipal Securities Rulemaking Board's Real-time Transaction System (RTRS).

The firm reported corporate bond and U.S. Treasury transactions to TRACE with inaccurate execution times. Some corporate bond transactions were also reported more than 15 minutes after execution, violating timeliness requirements. These errors occurred due to a technological issue that the firm eventually resolved. However, the pattern of late reporting without exceptional circumstances constituted a violation.

For municipal securities, the firm reported inaccurate times of trade to RTRS due to an incorrect interpretation of what constitutes the "time of trade." Some of these transactions were also reported late.

The firm also failed to establish and maintain a supervisory system reasonably designed to achieve compliance with TRACE and MSRB reporting obligations. Even after implementing automated surveillance and manual reviews of alerts, the firm continued to report certain municipal bond transactions with inaccurate times of trade because of its ongoing misinterpretation of reporting requirements.

What Investors Can Learn: Accurate and timely trade reporting is essential for market transparency. When investors can see real-time transaction data, they can better evaluate whether they are receiving fair prices. Reporting delays and inaccuracies undermine this transparency and can affect pricing in subsequent trades.

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According to FINRA, Young America Capital, LLC has been censured and fined $50,000 for failing to develop and implement a written anti-money laundering (AML) program reasonably designed to achieve compliance with Bank Secrecy Act requirements.

Despite receiving a warning from the SEC in 2020, the...

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According to FINRA, Young America Capital, LLC has been censured and fined $50,000 for failing to develop and implement a written anti-money laundering (AML) program reasonably designed to achieve compliance with Bank Secrecy Act requirements.

Despite receiving a warning from the SEC in 2020, the firm's written supervisory procedures continued to erroneously state that it had no responsibility to monitor for or report suspicious activity because it does not hold retail brokerage accounts. This interpretation was incorrect—all broker-dealers have AML obligations regardless of their business model.

The firm's procedures failed to provide guidance on detecting or monitoring suspicious transactions, how to conduct or document reviews of identified red flags, and lacked red flags tailored to its investment banking and merger and acquisition advisory business. Even after receiving FINRA examination exceptions and recommendations from annual AML independent testing, the firm's procedures still do not contain red flags tailored to its business.

Additionally, the firm failed to provide reasonable AML training to its registered representatives. The training was not tailored to the firm's business model and instead focused on suspicious transactions in retail brokerage accounts—which the firm does not hold.

What Investors Can Learn: AML programs protect the financial system from being used for money laundering, terrorist financing, and other illicit purposes. Even firms that focus on investment banking rather than retail brokerage must maintain robust AML programs. This case shows that regulators expect firms to tailor their compliance programs to their actual business activities.

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According to FINRA, Tifin Private Markets LLC has been censured and fined $30,000 for conducting a securities business without maintaining the required minimum net capital.

The firm did not properly accrue expenses for data services obtained from a vendor as the services were provided, resulting ...

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According to FINRA, Tifin Private Markets LLC has been censured and fined $30,000 for conducting a securities business without maintaining the required minimum net capital.

The firm did not properly accrue expenses for data services obtained from a vendor as the services were provided, resulting in understated liabilities. This led to net capital deficiencies ranging from $7,587 to $154,830 during one period.

During a subsequent period from August through October 2022, while conducting a securities business, the firm failed to accurately accrue expenses for data services—only accruing a portion of actual expenses incurred. The firm also failed to accrue monthly expenses for consulting fees from another vendor. These failures resulted in understated liabilities and net capital deficiencies ranging from $194,151 to $298,850.

Due to these accrual failures, the firm maintained an inaccurate general ledger, made inaccurate net capital calculations, and filed five monthly FOCUS reports containing these inaccuracies.

Net capital rules require broker-dealers to maintain sufficient liquid assets to promptly satisfy customer claims and other liabilities. When firms understate their liabilities, they may appear to have more capital than they actually do, potentially masking financial weakness.

What Investors Can Learn: Net capital requirements exist to protect customers by ensuring broker-dealers can meet their financial obligations. This case illustrates how seemingly routine accounting issues—failing to properly accrue expenses—can lead to significant regulatory violations and potentially mask a firm's true financial condition.

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