Bad Brokers

According to FINRA, Colorado Financial Service Corporation (CRD #104343), based in Centennial, Colorado, was censured, fined $50,000, and required to certify that it had remediated the issues and implemented a reasonably designed AML program. The firm consented to these sanctions without admitting o...

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According to FINRA, Colorado Financial Service Corporation (CRD #104343), based in Centennial, Colorado, was censured, fined $50,000, and required to certify that it had remediated the issues and implemented a reasonably designed AML program. The firm consented to these sanctions without admitting or denying the findings. FINRA found that the firm's anti-money laundering (AML) procedures were not reasonably designed to detect and report suspicious transactions, including potentially manipulative activity such as prearranged trading. Although the firm's AML procedures stated that it would manually monitor a sufficient amount of account activity to identify unusual patterns, the procedures failed to specify the frequency of monitoring, what constituted a "sufficient amount" of activity to review, or what the firm considered suspicious or unusual. The procedures also referenced the use of exception reports that would track transaction size, location, type, and other factors, but the firm did not actually use any exception report designed to monitor for suspicious activity. Instead, the firm relied exclusively on a daily manual review of its trade blotter, which lacked sufficient information to identify suspicious transactions, such as order entry time, market trading volume, cross-account trading patterns, or potentially prearranged trading between accounts. These deficiencies had real consequences. FINRA found that the firm failed to detect or investigate red flags of suspicious trading in a low-priced, thinly traded security. Two customers executed corresponding buy and sell orders in a security at identical share amounts and prices on multiple occasions, and in one instance placed corresponding orders within two minutes of each other. The same two customers' trading activity accounted for up to 85 percent of the total daily market trading volume in the security. Even when the firm's clearing firm raised concerns about this activity, the firm failed to take any reasonable steps to investigate. For investors, this case demonstrates why robust AML surveillance is critical. Prearranged trading and manipulative activity in thinly traded securities can harm other investors by distorting prices and creating a false impression of market activity. Firms must have systems capable of detecting such patterns rather than relying on manual reviews that lack the necessary data to identify suspicious behavior.

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According to FINRA, Pershing LLC (CRD #7560), based in Jersey City, New Jersey, was censured and fined $150,000 for trade reporting failures. The firm consented to these sanctions without admitting or denying the findings. FINRA found that Pershing failed to properly report the Non-Transaction Based...

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According to FINRA, Pershing LLC (CRD #7560), based in Jersey City, New Jersey, was censured and fined $150,000 for trade reporting failures. The firm consented to these sanctions without admitting or denying the findings. FINRA found that Pershing failed to properly report the Non-Transaction Based Compensation (NTBC) indicator for certain municipal securities transactions. The firm's electronic reporting system did not account for the fact that it did not accept compensation for transactions with two affiliates. As a result, the firm erroneously reported these affiliate transactions without the applicable NTBC indicator, which is required under MSRB Rule G-14(b). FINRA also found that Pershing failed to report the No Remuneration (NR) indicator to the Trade Reporting and Compliance Engine (TRACE) for certain transactions in TRACE-eligible securities. These transactions did not include a commission, mark-up, or mark-down, but the firm's reporting logic failed to account for affiliate transactions where no transaction-based compensation was charged. The NR indicator is required under FINRA Rule 6730(d) to accurately reflect the nature of the transaction. Additionally, FINRA found that the firm's supervisory system was not reasonably designed to ensure compliance with these reporting requirements. The firm lacked supervisory reviews and written procedures for verifying the accuracy of the NTBC indicator in municipal securities reports. Similarly, the firm's written procedures for TRACE reporting did not include any reviews related to the accurate reporting of the NR indicator. Pershing has since addressed these issues by implementing monthly reviews of randomly selected trades to confirm the accuracy of both the NTBC indicator for MSRB reports and the NR indicator for TRACE-eligible securities transactions. These review processes are now documented in the firm's written supervisory procedures. For investors, accurate trade reporting is fundamental to market transparency and fair pricing. When firms fail to properly report compensation indicators, it can obscure the true cost of transactions and make it more difficult for regulators and market participants to identify potential pricing issues. This case reinforces the importance of firms maintaining robust systems to ensure the accuracy of their trade reporting obligations.

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According to FINRA, Dalmore Group LLC (CRD #136352), based in Woodmere, New York, was censured, fined $375,000, and required to certify remediation of the identified issues. The firm consented to these sanctions without admitting or denying the findings. FINRA found multiple serious compliance failu...

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According to FINRA, Dalmore Group LLC (CRD #136352), based in Woodmere, New York, was censured, fined $375,000, and required to certify remediation of the identified issues. The firm consented to these sanctions without admitting or denying the findings. FINRA found multiple serious compliance failures at the firm. First, Dalmore Group failed to establish and maintain a supervisory system reasonably designed to comply with its suitability and best interest obligations in connection with private placement sales. For some offerings, the firm had no checklist or record of investigation, or had checklists completed by the issuer without any supervisory review by the firm. The firm's written supervisory procedures did not reference Regulation Best Interest (Reg BI) until eight months after it took effect. Second, the firm failed to establish a system reasonably designed to prevent the misuse of material, non-public information. The firm did not regularly distribute its restricted list to representatives and failed to keep the list current. Third, the firm failed to fingerprint non-registered associated persons who were not exempt from fingerprinting requirements. Fourth, the firm failed to report outside business activities (OBAs) for six representatives on their Forms U4 and untimely updated four other representatives' disclosures. Fifth, the firm violated FINRA's communications standards through websites and a video series that featured exaggerated and promissory statements about investment offerings. Sixth, FINRA found that Dalmore willfully violated Section 10(b) of the Exchange Act and Rule 10b-9 by failing to set a date by which a private placement offering's minimum raise contingency had to be met, and by approving investments for disbursement while falling $2 million or more short of the contingency. Finally, the firm failed to provide timely, complete, and accurate responses to FINRA's requests for information, omitting individuals and providing inaccurate job titles for foreign non-registered associated persons. For investors, this case illustrates the risks that can arise when a firm has widespread compliance deficiencies. Proper due diligence on private placements, accurate disclosures, and transparent communications are essential safeguards that protect investors from potential fraud and unsuitable investments.

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According to FINRA, TradeUP Securities, Inc. (CRD #18483), based in New York, New York, was censured and fined $300,000 for failing to report its short interest positions to FINRA. The firm consented to these sanctions without admitting or denying the findings. FINRA found that when TradeUP Securiti...

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According to FINRA, TradeUP Securities, Inc. (CRD #18483), based in New York, New York, was censured and fined $300,000 for failing to report its short interest positions to FINRA. The firm consented to these sanctions without admitting or denying the findings. FINRA found that when TradeUP Securities began self-clearing customer short sales in July 2021, it failed to report its short interest data to FINRA. This reporting gap continued for nearly two years until May 2023, when the firm finally began reporting after receiving an inquiry from FINRA. The firm had been under the mistaken belief that its third-party back-office vendor was reporting the short interest data on the firm's behalf. Short interest reporting is a critical component of market transparency, required under FINRA Rule 4560. Short interest data, which reflects the total number of shares that have been sold short and not yet covered, provides important information for regulators and market participants about market sentiment and potential risks. When a firm fails to report this data, it creates a gap in the information available to the market. FINRA also found that TradeUP Securities failed to establish and maintain a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with its short interest reporting obligations. The firm had no procedures in place to confirm that its short interest data was actually being reported to FINRA. Additionally, the firm's WSPs did not address its obligation to report short position data under FINRA Rule 4560. Following FINRA's inquiry, TradeUP Securities implemented procedures designed to ensure the accuracy and timely submission of short interest reporting and amended its WSPs to address these requirements. For investors, this case underscores the importance of accurate and timely short interest reporting. Short interest data helps investors assess market conditions and potential volatility. When firms fail to report this information, investors are deprived of data that could inform their investment decisions. This case also highlights the risks of relying on third-party vendors for regulatory obligations without verifying that the reporting is actually being completed.

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According to FINRA, Wedbush Securities Inc. (CRD #877), based in Los Angeles, California, was censured, fined $50,000, and ordered to pay $77,736.33 plus interest in restitution to customers. The firm consented to these sanctions without admitting or denying the findings. FINRA found that the firm f...

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According to FINRA, Wedbush Securities Inc. (CRD #877), based in Los Angeles, California, was censured, fined $50,000, and ordered to pay $77,736.33 plus interest in restitution to customers. The firm consented to these sanctions without admitting or denying the findings. FINRA found that the firm failed to reasonably supervise recommendations to purchase variable rate structured products (VRSPs) made to its customers. VRSPs are complex financial instruments that carry substantial risks, including the potential to earn little or zero interest for years and subject investors to a risk of loss of principal. Despite these risks, the firm's representatives recommended that customers with either low or moderate risk tolerances purchase VRSPs. Such recommendations were found to be unsuitable for these customers given their investment profiles. The firm did not obtain disclosure forms from these customers and did not otherwise take steps reasonably designed to supervise whether the VRSP recommendations were consistent with their investment profiles. Collectively, these customers suffered realized losses of $34,576.33 after accounting for income earned while holding the VRSPs. FINRA also found that the firm's representatives unsuitably recommended that other customers invest in VRSPs at levels that resulted in unsuitable concentration. Each of these customers held VRSP positions equal to at least 25 percent of his or her liquid net worth. The firm had no exception report or other supervisory process concerning concentration in structured products and did not conduct reasonable supervisory reviews to evaluate whether the VRSP recommendations and concentration levels were suitable. These customers collectively paid $43,160.00 in sales charges for VRSP purchases but did not suffer realized losses. Wedbush Securities has since established revised written supervisory procedures and additional supervisory controls concerning structured products. For investors, this case is a reminder that complex products like VRSPs are not appropriate for everyone. Conservative investors with low or moderate risk tolerances should be cautious about structured products. Additionally, having a disproportionate share of your portfolio concentrated in any single product type can create undue risk, regardless of the product's characteristics.

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According to FINRA, Wedbush Securities Inc. (CRD #877), based in Los Angeles, California, was censured and fined $425,000 for violations of Rules 605 and 606 of Regulation NMS under the Securities Exchange Act. The firm consented to these sanctions without admitting or denying the findings. FINRA fo...

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According to FINRA, Wedbush Securities Inc. (CRD #877), based in Los Angeles, California, was censured and fined $425,000 for violations of Rules 605 and 606 of Regulation NMS under the Securities Exchange Act. The firm consented to these sanctions without admitting or denying the findings. FINRA found that the firm published Rule 606 reports that excluded equity and options orders in NMS securities due to data integrity issues, resulting in inaccurate percentages of non-directed orders. The reports also failed to provide an accurate list of the firm's execution venues for options orders and omitted required information about those venues. One broker-dealer was misidentified as an execution venue, and the reports failed to disclose material aspects of the firm's relationships with execution venues, including payment for order flow arrangements. The firm also failed to make its Rule 606 reports available within the required timeframe and failed to notify customers annually about the availability of these reports. FINRA further found that the firm published inaccurate Rule 605 reports regarding its execution of covered orders. As a market center receiving covered orders, the firm published monthly reports that inaccurately stated it had zero covered orders. When the firm discovered and attempted to correct these inaccuracies, the republished reports were also inaccurate because they included orders that were not covered under Rule 605 due to special handling instructions. The firm's supervisory system was found to be inadequate for ensuring compliance with Rules 605 and 606. The firm had no system to supervise its Rule 606 reports or the third-party vendors that prepared them, no processes to review report accuracy, and failed to update its WSPs for nearly two years after the SEC's 2018 regulations requiring more detailed disclosures. For investors, Rules 605 and 606 are essential transparency measures that allow customers and regulators to evaluate the quality of order execution and understand where orders are routed. When firms publish inaccurate reports, investors are unable to make informed decisions about where and how their orders are being handled, which can directly impact the prices they receive.

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According to FINRA, BofA Securities, Inc. (CRD #283942), based in New York, New York, was censured and fined $60,000 in a joint action that also involved Merrill Lynch, Pierce, Fenner & Smith Incorporated. The firm consented to these sanctions without admitting or denying the findings. FINRA found t...

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According to FINRA, BofA Securities, Inc. (CRD #283942), based in New York, New York, was censured and fined $60,000 in a joint action that also involved Merrill Lynch, Pierce, Fenner & Smith Incorporated. The firm consented to these sanctions without admitting or denying the findings. FINRA found that BofA Securities failed to timely file amendments for its registered representatives' Forms U4 to update the representatives' outside business activities (OBAs) and to reflect changes in the representatives' business addresses. The Form U4, or Uniform Application for Securities Industry Registration or Transfer, is a critical disclosure document that provides regulators and the public with information about securities professionals, including their business activities and addresses. Timely updating of this form is a regulatory requirement under FINRA rules. After discovering these filing failures, the firm began and later completed filing the late amendments. However, the underlying problem was systemic. FINRA found that BofA Securities failed to establish and maintain a supervisory system reasonably designed to ensure timely filing of Form U4 amendments. BofA Securities and Merrill Lynch share common supervisory systems and procedures relating to the filing of Form U4 amendments, and neither firm had any system in place to verify that such amendments were timely filed. The lack of a verification system meant that late filings could go undetected until discovered through other means. For investors, the timely and accurate filing of Form U4 amendments is more than a bureaucratic requirement. These filings ensure that regulators and the public have access to current information about the financial professionals handling their investments. Outside business activities, in particular, are important disclosures because they can reveal potential conflicts of interest. When a firm fails to timely report changes in OBAs or business addresses, it can deprive investors of information they need to make informed decisions about their financial advisors. This case demonstrates that even large, well-established firms can have gaps in their compliance systems that result in regulatory violations.

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According to FINRA, Merrill Lynch, Pierce, Fenner & Smith Incorporated (CRD #7691), based in New York, New York, was censured and fined $215,000 in a joint action that also involved BofA Securities, Inc. The firm consented to these sanctions without admitting or denying the findings. FINRA found tha...

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According to FINRA, Merrill Lynch, Pierce, Fenner & Smith Incorporated (CRD #7691), based in New York, New York, was censured and fined $215,000 in a joint action that also involved BofA Securities, Inc. The firm consented to these sanctions without admitting or denying the findings. FINRA found that Merrill Lynch failed to timely file amendments for its registered representatives' Forms U4 to update the representatives' outside business activities (OBAs) and to reflect changes in the representatives' business addresses. The Form U4 is the Uniform Application for Securities Industry Registration or Transfer, a key disclosure document that provides regulators and the investing public with current information about registered securities professionals, including their outside business activities and contact information. Timely updating of this form is required by FINRA rules and is essential for maintaining the integrity of the regulatory disclosure system. After discovering these filing failures, the firm began and completed filing the late amendments. However, FINRA found that the failures were the result of a systemic problem. Merrill Lynch and BofA Securities share common supervisory systems and procedures for filing Form U4 amendments, and neither firm had any system in place to verify that amendments were timely filed. Without a verification mechanism, late filings could accumulate undetected. The significance of this case lies in the scale and systemic nature of the violations. Merrill Lynch is one of the largest and most well-known brokerage firms in the United States, and the $215,000 fine reflects the scope of the filing deficiencies. FINRA imposes these requirements to ensure that the Central Registration Depository (CRD) system, which the public can access through FINRA BrokerCheck, contains accurate and up-to-date information about financial professionals. For investors, this case highlights the importance of using tools like FINRA BrokerCheck to research financial advisors. However, it also illustrates that even the information in BrokerCheck is only as reliable as the data that firms submit. Untimely filings can create gaps in the information available to investors, particularly regarding outside business activities that may present conflicts of interest. Investors should ask their advisors directly about any outside activities or recent changes.

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According to FINRA, Independent Financial Group, LLC (CRD #7717), based in San Diego, California, was censured, fined $500,000, and required to certify remediation. All affected customers have already received or are expected to receive full restitution through a separate agreement. The firm consent...

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According to FINRA, Independent Financial Group, LLC (CRD #7717), based in San Diego, California, was censured, fined $500,000, and required to certify remediation. All affected customers have already received or are expected to receive full restitution through a separate agreement. The firm consented to these sanctions without admitting or denying the findings. FINRA found that Independent Financial Group failed to establish, maintain, and enforce a supervisory system reasonably designed to supervise excessive trading and assure compliance with Regulation Best Interest (Reg BI). The firm also failed to reasonably supervise a registered representative who excessively traded five customers' accounts, most of whom were elderly. The firm's written supervisory procedures assigned compliance staff to review an Excessive Trading Report, but instead, staff reviewed a different internal excessive trade alert system that had deficiencies the firm was unaware of. The procedures failed to provide guidance on how to conduct reviews, when to take action, or how to use metrics such as cost-to-equity ratios or turnover rates to identify excessive trading. Compliance staff frequently closed alerts without further investigation. A senior supervisor instructed supervisory personnel to assess each alert only as it pertained to the specific trade generating it, rather than looking at patterns of trading across transactions. The firm provided no guidance to supervisors on what factors might suggest excessive trading or what steps to take if identified. The representative's excessive trading caused customers to pay more than $2.2 million in total trading costs and incur approximately $2.2 million in realized losses, inclusive of commissions. FINRA also found that the firm failed to timely and completely respond to requests for documents and information. The firm's initial production omitted Excessive Trading Reports and certain alerts that had disappeared from the system. For investors, particularly elderly individuals, this case underscores the devastating impact excessive trading can have on investment accounts. Churning, or excessive trading, generates commissions for the advisor while eroding the customer's portfolio. Investors should monitor their account statements for frequent trading and high commission costs relative to their portfolio size.

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According to FINRA, Park Avenue Securities LLC (CRD #46173), based in New York, New York, was censured and fined $125,000 for supervisory failures related to mutual fund share class recommendations to retirement plan customers. The firm consented to these sanctions without admitting or denying the f...

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According to FINRA, Park Avenue Securities LLC (CRD #46173), based in New York, New York, was censured and fined $125,000 for supervisory failures related to mutual fund share class recommendations to retirement plan customers. The firm consented to these sanctions without admitting or denying the findings. FINRA found that the firm's supervisory system and written supervisory procedures (WSPs) were not reasonably designed to achieve compliance with FINRA Rule 2111 or the Care Obligation of Regulation Best Interest (Reg BI) as they pertain to mutual fund share class recommendations for retirement plan customers. Specifically, when retirement plan customers did not qualify for a Class A sales charge waiver, the firm's WSPs failed to describe the steps for evaluating whether recommending Class A or Class C shares was in the customer's best interest when the customer was eligible to purchase Class R shares. Class R shares are specifically designed for retirement plan accounts and often carry lower fees than Class A or Class C shares. The firm did not assess whether it would have been better for certain retirement plan customers to purchase Class R shares and did not provide supervisors with the guidance or information necessary to make this assessment. As a result of these supervisory weaknesses, the firm failed to identify retirement plan customers who purchased Class A or C shares when they were eligible to purchase, and would have benefited from purchasing, Class R shares. These purchases caused customers to incur $91,344.52 in either additional operating fees for Class C shares or front-end sales charges for Class A shares. The firm has already paid this amount in restitution. By failing to establish and enforce WSPs reasonably designed to comply with Reg BI, the firm also violated Reg BI's Compliance Obligation. The firm has since revised its supervisory system and its supervision of mutual fund share class recommendations for retirement plan customers. For investors in retirement plans, this case highlights the importance of understanding mutual fund share classes. Different share classes of the same fund can have significantly different fee structures, and the right share class can meaningfully impact long-term returns. Investors should ask their advisors about all available share classes.

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