Bad Brokers

According to FINRA, SoFi Securities LLC was censured and fined $1,100,000 for creating and rolling out a cash management brokerage account that was vulnerable to fraud, allowing third parties to steal from customers of other institutions.

The firm approved the opening of approximately 800 account...

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According to FINRA, SoFi Securities LLC was censured and fined $1,100,000 for creating and rolling out a cash management brokerage account that was vulnerable to fraud, allowing third parties to steal from customers of other institutions.

The firm approved the opening of approximately 800 accounts that third parties then used to transfer approximately $8.6 million from customer accounts at other financial institutions without authorization. Of this amount, approximately $2.5 million was actually withdrawn by these third parties before the fraud was discovered. While all injured parties were ultimately reimbursed, the scope of the fraud revealed serious deficiencies in the firm's account opening process.

The findings revealed that SoFi failed to establish and maintain a Customer Identification Program (CIP) reasonably designed to verify customers' identities. The firm's largely automated account approval process did not include reasonable review of potential red flags associated with applicants, making it vulnerable to fraud perpetrated by third parties using fictitious or stolen identities. Additionally, SoFi's Identity Theft Prevention Program (ITPP) was not reasonably designed to detect, prevent, and mitigate identity theft. The firm failed to identify cash management brokerage accounts as covered accounts in its written ITPP and failed to implement reasonable programs to respond to red flags of identity theft.

This case highlights the critical importance of robust identity verification processes in the digital age. As financial services move increasingly online, firms must implement sophisticated controls to verify that applicants are who they claim to be. Automated processes, while efficient, must include adequate safeguards to detect suspicious patterns and prevent fraud. Investors should be aware that while this particular fraud was remediated, identity theft and account takeover remain significant risks, and they should monitor all their financial accounts regularly for unauthorized activity.

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According to FINRA, M1 Finance LLC was censured and fined $400,000 for violations of Regulation SHO rules governing short sales and order marking.

The firm incorrectly treated all sales as long, effecting sell orders that required compliance with Regulation SHO Rule 203(b)(1) without obtaining th...

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According to FINRA, M1 Finance LLC was censured and fined $400,000 for violations of Regulation SHO rules governing short sales and order marking.

The firm incorrectly treated all sales as long, effecting sell orders that required compliance with Regulation SHO Rule 203(b)(1) without obtaining the required locate for short sales. M1 Finance violated Rule 200(g) by incorrectly marking sell orders as long sales when the orders should have either been split into separate orders (one marked long and one marked short) or marked as a single short order. The firm also incorrectly marked sell orders as executed in an agent capacity when portions of the orders actually represented shares purchased for the firm's inventory account executed in a principal capacity. Similarly, buy orders at the end of trading windows were incorrectly marked as agent when portions were executed in a principal capacity. These marking errors resulted in inaccurate order memoranda and books and records.

Beyond the technical violations, FINRA found that M1 Finance failed to establish and maintain a supervisory system reasonably designed to achieve compliance with Regulation SHO's locate and order marking requirements. While the firm's written supervisory procedures required a principal to conduct daily reviews of transactions for compliance, the procedures provided no guidance on how these reviews should be conducted—they didn't identify who was responsible, how many trades to review, what to monitor for, or what materials to use. After implementing procedures addressing order marking requirements, the firm still failed to implement any systems, surveillance, or reviews to monitor compliance.

This case illustrates that technical compliance requirements exist for important reasons—they ensure market integrity and transparency. Firms using automated trading systems must implement robust controls and supervision to ensure their systems comply with regulatory requirements. Investors rely on accurate trade reporting and proper handling of short sales to ensure fair and orderly markets.

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According to FINRA, Mizuho Securities USA LLC was censured and fined $250,000 for preparing institutional customer confirmations containing inaccurate or incomplete information and for failing to establish adequate supervisory procedures.

FINRA had previously warned Mizuho that large numbers of i...

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According to FINRA, Mizuho Securities USA LLC was censured and fined $250,000 for preparing institutional customer confirmations containing inaccurate or incomplete information and for failing to establish adequate supervisory procedures.

FINRA had previously warned Mizuho that large numbers of its customer confirmations included inaccurate information and that its written supervisory procedures regarding customer confirmations were not reasonable because they did not include any supervisory review for accuracy. Despite being on notice of these deficiencies, the firm continued to include the same types of inaccurate information in trade confirmations.

In response to FINRA's prior warning, the firm implemented a review of a sample of customer confirmations, but this review was not initially memorialized in the firm's written procedures. When the firm observed multiple confirmations with issues during this sampling review, it failed to investigate these red flags. The situation worsened when the firm stopped performing the sampling review due to a coding issue and only discovered it had stopped reviewing confirmations during a FINRA cycle examination. To remediate the problem, Mizuho reinstated the sampling review and properly documented it in its written supervisory procedures.

This case demonstrates the importance of accurate trade confirmations and the need for firms to respond appropriately to regulatory warnings. Customer confirmations serve as critical records of securities transactions, and inaccuracies can lead to disputes, regulatory issues, and undermine customer confidence. When a regulator identifies deficiencies and provides specific guidance, firms must take prompt and effective action to remediate the issues, not simply continue with inadequate practices. The fact that automated processes failed without the firm's knowledge also highlights the need for ongoing monitoring of supervisory systems to ensure they remain operational and effective.

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According to FINRA, Oppenheimer & Co. Inc. was censured and fined $500,000 for failing to reasonably supervise transactions that its registered representatives placed directly with product sponsors on behalf of firm customers.

The firm failed to take steps reasonably designed to ensure that direc...

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According to FINRA, Oppenheimer & Co. Inc. was censured and fined $500,000 for failing to reasonably supervise transactions that its registered representatives placed directly with product sponsors on behalf of firm customers.

The firm failed to take steps reasonably designed to ensure that direct business transactions appeared on the firm's daily trade blotter. This critical oversight meant that transactions, including dividend reinvestments, did not run through the firm's exception reports used to identify potential sales practice violations, including potentially unsuitable transactions. Additionally, Oppenheimer failed to ensure it collected complete information for customers' investment profiles—such as ages, investment time horizons, and liquidity needs—that was relevant for making suitability determinations.

After identifying these deficiencies, Oppenheimer revised its written supervisory procedures to prohibit direct transactions with mutual fund companies unless a corresponding account has been established at the firm. The firm also instituted procedures to verify that each direct business mutual fund transaction is housed in a firm account or, if not, to require representatives to promptly obtain a new account application and open an account for the customer. Progressive discipline measures were established for representatives who failed to obtain new account applications.

The firm conducted a retrospective review of its direct business transactions during the relevant period, identifying transactions that had failed to appear on the trade blotter and reviewing them according to the parameters of the firm's exception reporting system. However, the suitability of certain transactions could not be determined because the firm was unable to collect complete information about customers' investment profiles that would have been relevant at the time of purchase.

This case highlights the importance of comprehensive supervisory systems that capture all customer transactions, regardless of how they are executed. "Held away" assets and direct transactions can create blind spots in a firm's supervision if not properly monitored. Investors should understand that their broker has a duty to supervise all recommendations, and should question whether transactions executed outside normal channels are receiving appropriate supervisory oversight.

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According to FINRA, Merrill Lynch, Pierce, Fenner & Smith Incorporated was censured and fined $825,000 for failing to reasonably supervise the execution timeliness of customer orders and the accuracy of order memoranda.

FINRA found that Merrill Lynch's supervisory system was not reasonably design...

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According to FINRA, Merrill Lynch, Pierce, Fenner & Smith Incorporated was censured and fined $825,000 for failing to reasonably supervise the execution timeliness of customer orders and the accuracy of order memoranda.

FINRA found that Merrill Lynch's supervisory system was not reasonably designed because the firm only reviewed execution timeliness from the time orders were routed to a market center through final execution. The firm failed to conduct supervisory review of how long its electronic order systems took to process and route orders to a market center. By omitting the electronic order systems' handling time from order receipt to route time, Merrill Lynch failed to reasonably supervise whether it made every effort to execute marketable customer orders fully and promptly as required.

Additionally, the firm failed to reasonably supervise the accuracy of memoranda for electronic orders. Merrill Lynch's supervisory system was not reasonably designed to achieve compliance with SEC and FINRA recordkeeping requirements because the firm did not conduct supervisory reviews to ensure the accuracy of information recorded on its order memoranda for retail brokerage equity orders received electronically.

This case illustrates that even large, sophisticated firms can have gaps in their supervisory systems, particularly when it comes to the handling of electronic orders. Order handling time matters to customers because delays can result in worse execution prices, especially in fast-moving markets. Accurate order records are essential for reconstructing trades, resolving disputes, and demonstrating regulatory compliance. The fact that Merrill Lynch only monitored part of the order handling process meant that significant delays could occur in the firm's internal systems without being subject to supervisory review. Investors should be aware that they are entitled to prompt execution of their orders and accurate records of all order details.

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According to FINRA, Buckman, Buckman & Reid, Inc. was censured and fined $15,000 for conducting a securities business while failing to maintain its required minimum net capital.

The firm's board of directors voted to grant restricted shares as a bonus to the firm's three managing directors. The v...

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According to FINRA, Buckman, Buckman & Reid, Inc. was censured and fined $15,000 for conducting a securities business while failing to maintain its required minimum net capital.

The firm's board of directors voted to grant restricted shares as a bonus to the firm's three managing directors. The value of these shares was $497,596, which created a compensation liability. However, the firm mistakenly failed to record this as a compensation expense and failed to include the value of the resulting liability when calculating its aggregate indebtedness. This error caused the firm to inaccurately calculate both its required minimum net capital and excess net capital. As a result, the firm's net capital fell below the required minimum amount and remained below the required minimum for approximately seven months, during which time the firm conducted securities business on 150 days.

The firm also failed to file with FINRA and the SEC the required notices regarding its net capital deficiencies. Additionally, Buckman, Buckman & Reid failed to make and preserve accurate records of aggregate indebtedness and net capital, and filed inaccurate Financial and Operational Combined Uniform Single (FOCUS) reports. The firm's FOCUS reports inaccurately stated the firm's aggregate indebtedness, minimum required net capital, and/or excess net capital.

Net capital requirements exist to ensure that broker-dealers maintain sufficient liquid assets to meet their obligations to customers and other creditors. When a firm operates below its minimum net capital requirement, it poses risks to customers whose securities and funds are held by the firm. The requirement to promptly notify regulators of net capital deficiencies allows regulators to take action to protect customers before a firm's financial condition deteriorates further. This case demonstrates how accounting errors, even if unintentional, can lead to serious violations when they affect a firm's net capital position. Investors should understand that their broker-dealer's financial stability is monitored through these net capital requirements.

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According to FINRA, Arive Capital Markets was censured, fined $300,000, and ordered to pay $594,928.74 in restitution to customers for supervisory failures related to excessive trading and telemarketing rule violations.

The firm failed to establish and maintain a supervisory system reasonably des...

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According to FINRA, Arive Capital Markets was censured, fined $300,000, and ordered to pay $594,928.74 in restitution to customers for supervisory failures related to excessive trading and telemarketing rule violations.

The firm failed to establish and maintain a supervisory system reasonably designed to achieve compliance with FINRA suitability requirements as they pertain to excessive trading. Arive failed to reasonably identify or address red flags of excessive trading in customer accounts, including those of senior customers, causing customers to pay a total of $639,809.57 in commissions, costs, and margin interest. The customers relied on their representatives' advice and routinely followed their recommendations, giving the representatives de facto control over the accounts.

In addition to the excessive trading violations, Arive routinely violated FINRA's telemarketing rules. Firm representatives placed thousands of telemarketing calls to phone numbers on the national do-not-call registry and the firm's own do-not-call list without a qualified exception. The firm also violated telemarketing call time-of-day restrictions.

This case highlights multiple areas where firms must maintain vigilant supervision. Excessive trading, also known as "churning," occurs when a broker executes trades primarily to generate commissions rather than to benefit the customer. It is particularly harmful because it erodes customer accounts through unnecessary commissions and transaction costs while exposing customers to unnecessary market risk. The involvement of senior customers makes these violations especially troubling, as older investors may be more vulnerable to aggressive sales tactics and less able to recover from losses.

The telemarketing violations demonstrate disregard for basic compliance requirements designed to protect consumers from unwanted solicitations. Investors should be cautious of brokers who recommend frequent trading, especially if the trades don't align with the customer's investment objectives. High commission costs relative to account value can be a warning sign of excessive trading.

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According to FINRA, Beta Capital Securities LLC (doing business as Creand Securities) was censured and fined $115,000 for failing to accurately calculate its customer reserve requirement and maintain a sufficient balance in its reserve account.

The firm erroneously designated certain customer acc...

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According to FINRA, Beta Capital Securities LLC (doing business as Creand Securities) was censured and fined $115,000 for failing to accurately calculate its customer reserve requirement and maintain a sufficient balance in its reserve account.

The firm erroneously designated certain customer accounts as non-customer accounts for purposes of the reserve formula. As a result, customer credit balances and customer debit balances were treated as non-customer credits and debits. This caused Beta Capital to miscalculate its customer reserve requirement when preparing five month-end FOCUS reports. The hindsight deficiencies resulting from the firm's miscalculation ranged from approximately $1.3 million to $13.4 million and totaled approximately $27.8 million.

The firm also filed inaccurate FOCUS reports and maintained inaccurate books and records. Almost all of the FOCUS reports understated the firm's reserve requirement. Additionally, FINRA found that Beta Capital failed to establish and maintain a supervisory system reasonably designed to achieve compliance with Exchange Act Rule 15c3-3's customer reserve requirement. When the firm converted to self-clearing, it had no supervisory systems relating to the coding of accounts as customer or non-customer, the inclusion of accounts in the customer trial balance and reserve formula, or the reconciliation of customer credit and debit balances. The firm also did not conduct supervisory reviews to ensure accounts were properly designated. Since the firm's supervisory review of account coding merely compared assigned codes to account information on file, it could not identify potential inaccuracies in designating accounts.

The customer reserve requirement, often called the "reserve formula," is a critical investor protection rule that requires broker-dealers to segregate customer cash and securities in a reserve account. This protects customers' assets from being used for the firm's own purposes and ensures funds are available to meet customer claims. Miscalculating this requirement by millions of dollars creates serious risks that customer assets might not be adequately protected. This case shows the importance of proper systems and controls when firms take on self-clearing functions.

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According to FINRA, Paulson Investment Company LLC was censured and fined $100,000 for failing to file or timely file required documents and information regarding public takedown offerings of securities following an initial shelf offering.

The firm failed to disclose underwriting compensation as ...

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According to FINRA, Paulson Investment Company LLC was censured and fined $100,000 for failing to file or timely file required documents and information regarding public takedown offerings of securities following an initial shelf offering.

The firm failed to disclose underwriting compensation as required. Prior to acting as a placement agent for takedown offerings, Paulson had served as private placement agent for the issuer in private offerings, receiving compensation in the form of commissions and warrants. Although the prospectus supplements for the takedown offerings incorporated by reference previously filed Forms 8-K that included the number of private warrants the firm received in the 180 days preceding the registration statements, Paulson did not disclose those warrants as underwriting compensation in the underwriting or distribution arrangements section of the prospectus supplements as required by FINRA Rule 5110.

FINRA also found that the firm failed to establish and maintain a supervisory system and written supervisory procedures reasonably designed to achieve compliance with filing and disclosure requirements. Paulson's procedures did not designate a supervisor responsible for verifying that all filings and disclosures required by Rule 5110 were made consistent with that rule and did not include details or guidance regarding how compliance reviews should be conducted. The firm also lacked any supervisory controls or systems reasonably designed to satisfy its obligations to timely and completely file required documents and information with FINRA and to disclose all underwriting compensation in offering documents.

This case illustrates the importance of complete and accurate disclosure in securities offerings. FINRA Rule 5110 requires detailed disclosure of all underwriting compensation to ensure that investors and regulators can evaluate whether compensation arrangements create conflicts of interest or otherwise affect the offering. Warrants received as compensation are particularly important to disclose because they give the underwriter or placement agent a continuing stake in the issuer's performance. The failure to designate clear supervisory responsibility for these compliance obligations demonstrates a lack of attention to public offering requirements. Investors rely on offering documents to understand who is being compensated and how, which helps them assess potential conflicts of interest.

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According to FINRA, BofA Securities, Inc. was censured and fined $90,080 for filing untimely and inaccurate restricted period and trading notifications with FINRA under Rule 5190.

The firm's inaccurate notifications either failed to identify all distribution participants in the distributions or f...

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According to FINRA, BofA Securities, Inc. was censured and fined $90,080 for filing untimely and inaccurate restricted period and trading notifications with FINRA under Rule 5190.

The firm's inaccurate notifications either failed to identify all distribution participants in the distributions or failed to properly identify distribution participants as FINRA members. BofA Securities submitted restricted period notifications without verifying that the list of final participants was correct and failed to file amended notifications when distribution participants joined after an initial restricted period notification was filed. Instead of filing amendments, the firm supplied the list of final participants only in the trading notification.

FINRA also found that BofA Securities failed to establish and maintain a supervisory system reasonably designed to achieve compliance with FINRA Rule 5190 notification requirements regarding timeliness and accuracy. The firm lacked a reasonable supervisory system to ensure that restricted period notifications were timely filed for certain distributions with marketing periods shorter than the length of the applicable restricted periods. Instead, the firm relied on internal "launch emails" to determine when to file notifications. The firm's written supervisory procedures did not provide sufficient guidance on when notifications needed to be submitted or how they should be reviewed. BofA Securities also lacked any supervisory system to review the accuracy of notifications, including any system for reviewing whether distribution participants were FINRA members, and lacked reasonable systems to verify that it filed amended notifications reflecting additions of distribution participants.

Regulation M's restricted period and notification requirements are designed to prevent market manipulation during securities distributions by restricting certain trading activities. Accurate and timely notifications enable FINRA to effectively monitor compliance with these restrictions and protect market integrity. When firms fail to properly identify all distribution participants or file timely notifications, it undermines the regulatory framework designed to ensure fair and orderly markets during distributions. This case demonstrates that even routine regulatory filings require adequate supervisory attention and controls.

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