Bad Brokers

According to FINRA, International Research Securities, Inc. was censured and fined $10,000 for conducting a securities business while failing to maintain its required minimum net capital and for filing inaccurate financial reports.

The firm received an Economic Injury Disaster Loan (EIDL) of $1,6...

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According to FINRA, International Research Securities, Inc. was censured and fined $10,000 for conducting a securities business while failing to maintain its required minimum net capital and for filing inaccurate financial reports.

The firm received an Economic Injury Disaster Loan (EIDL) of $1,636,300 from the Small Business Administration. The firm used most of the proceeds to purchase mutual funds and improperly subtracted the value of those mutual funds from its total aggregate indebtedness calculation. This error caused the firm to incorrectly calculate its minimum net capital requirement.

As a result, the firm's net capital fell below the required minimum and remained deficient for over five months. During this period, the firm conducted securities business on 112 days, violating Section 15(c) of the Securities Exchange Act.

The firm maintained inaccurate books and records, including aggregate indebtedness, minimum required net capital, and excess net capital computations. It filed an inaccurate FOCUS report that misstated the firm's aggregate indebtedness, required minimum net capital, and excess net capital. The firm failed to file a Net Cap Deficiency Notice until over a month after the deficiency began, and that notice contained material inaccuracies. An accurate notice was not filed until over five months after the deficiency started. Additionally, the firm failed to file an Early Warning Notice for over three months after net capital fell below 120 percent of the required minimum.

This case illustrates the technical but critical importance of proper net capital calculations and timely regulatory notifications. Investors rely on broker-dealers maintaining adequate financial resources to conduct business safely and honor their obligations.

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According to FINRA, Brokers International Financial Services, LLC was censured, fined $30,000, and required to remediate its supervisory system and conduct a comprehensive review of outside brokerage accounts to detect potential violations including insider trading and frontrunning.

The firm fail...

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According to FINRA, Brokers International Financial Services, LLC was censured, fined $30,000, and required to remediate its supervisory system and conduct a comprehensive review of outside brokerage accounts to detect potential violations including insider trading and frontrunning.

The firm failed to establish and maintain a supervisory system reasonably designed to supervise outside brokerage accounts disclosed by its registered representatives. The firm's written procedures did not identify steps to verify that the firm actually received and reviewed duplicate statements for each outside account. The procedures also failed to specify how supervisors should review statements for red flags of potential violations, how often reviews should occur, and how reviews should be documented.

By failing to review statements from all outside accounts, the firm could not detect warning signs of potential misconduct. The firm limited its review to a manual process conducted by supervisors, which was unreasonable given the volume of monthly statements. The manual review process also did not facilitate identification of patterns of activity over time or across accounts, making it difficult to spot concerning trading behaviors.

FINRA ordered the firm to certify completion of remediation and to conduct a comprehensive review of all available records related to outside brokerage accounts during the relevant period. If the review identifies customers harmed by any misconduct, the firm must pay restitution with interest.

This case emphasizes the importance of robust supervisory systems for monitoring registered representative activities in outside accounts. Such accounts can present opportunities for misconduct including insider trading, frontrunning, and other prohibited practices. Investors should understand that their brokers' outside trading activities are subject to firm supervision and regulatory oversight.

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According to FINRA, O'Neil Securities Incorporated was censured and fined $30,000 for failing to properly record on its books and supervise two private securities transactions, and for failing to timely update Forms U4 to disclose outside business activities.

A firm representative submitted reque...

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According to FINRA, O'Neil Securities Incorporated was censured and fined $30,000 for failing to properly record on its books and supervise two private securities transactions, and for failing to timely update Forms U4 to disclose outside business activities.

A firm representative submitted requests to participate in two private offerings involving real property investments, which the firm approved. The representative solicited 12 individuals for the first offering, raising $800,000, and 13 individuals for the second offering, raising $1,300,000. The representative received compensation for these activities.

Despite approving the transactions, the firm failed to record them on its books and records or reasonably supervise them. The firm did not document its approval of the first transaction until 14 months after approval, and did not document its analysis of the second transaction until two months after it had closed. Additionally, the firm's written supervisory procedures did not require principals to review materials relating to private securities transactions, including offering memoranda, investor questionnaires, and subscription agreements.

The firm also failed to timely update the Forms U4 of three registered representatives to disclose non-securities related outside business activities that did not involve firm customers. The representatives timely disclosed their activities to the firm upon hiring, but the firm did not update their Forms U4 until after FINRA identified the deficiencies during an examination. The firm's procedures failed to identify the individual responsible for updating Forms U4 with outside business activity disclosures.

This case demonstrates the importance of proper recordkeeping and supervision of private securities transactions, as well as timely regulatory disclosures. Investors participating in private offerings through registered representatives should verify the transactions are properly documented and approved by the firm.

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According to FINRA, Crews & Associates, Inc. was censured, fined $50,000, and required to remediate its supervisory system regarding municipal bond transactions with affiliated entities.

The firm violated MSRB Rules G-18 and G-17 by selling municipal bonds to an affiliated bank while charging mar...

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According to FINRA, Crews & Associates, Inc. was censured, fined $50,000, and required to remediate its supervisory system regarding municipal bond transactions with affiliated entities.

The firm violated MSRB Rules G-18 and G-17 by selling municipal bonds to an affiliated bank while charging markups, despite an agreement prohibiting such markups. The firm had agreed with its affiliate not to sell secondary market bonds with a markup. To implement this arrangement, the firm created two trading accounts: one for bonds intended for the affiliate (without markups) and a general inventory account (with markups) for other customers.

The firm's former head trader circumvented this arrangement by interposing third-party broker-dealers in 94 transactions. The trader allocated bonds to general inventory, added a markup, and then indirectly sold the bonds to the firm's affiliate bank through intermediaries. The affiliate bank paid $918,476 in aggregate markups and fees that it would not have paid under the agreed-upon arrangement.

The firm failed to implement a reasonable supervisory system to address the conflict of interest in this selling arrangement and to monitor for potential violations. The firm did not discover these indirect sales through third-party intermediaries until later, and its written procedures did not address the conflict presented when allocating bonds between the affiliate-related account and general inventory.

After discovering the transactions, the firm permitted the trader to resign and reimbursed its affiliate $918,476. This case illustrates the importance of supervisory controls to prevent circumvention of policies designed to manage conflicts of interest. Municipal bond investors should understand that markups and trading costs can significantly impact investment returns, and firms have obligations regarding fair pricing under MSRB rules.

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According to FINRA, MML Investors Services, LLC was censured and fined $250,000 for failing to timely amend associated persons' Forms U4 and U5 to report disclosable events.

The firm failed to timely report customer complaints and arbitrations, complaint dispositions, criminal charges, bankruptci...

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According to FINRA, MML Investors Services, LLC was censured and fined $250,000 for failing to timely amend associated persons' Forms U4 and U5 to report disclosable events.

The firm failed to timely report customer complaints and arbitrations, complaint dispositions, criminal charges, bankruptcies, internal reviews and investigations, and regulatory actions. Disclosure delays ranged from three days to over 1,100 days after the firm received notice of reportable events.

FINRA found the firm's procedures were not reasonable to ensure effective communication among the firm's departments concerning events that may warrant disclosure. The firm's system for updating previously reported customer complaints and arbitrations led to over a dozen late filings. The firm relied partly on a shared email address where employees could provide updates regarding complaint and arbitration dispositions to the regulatory reporting team. This system depended on employees in other departments to timely communicate updates, and the regulatory reporting team would run searches to identify relevant updates. However, this process was not memorialized in procedures and lacked a set cadence for searches.

The firm has since recognized these deficiencies and revised its supervisory system. It implemented a new third-party vendor system designed to improve interdepartmental communication of reportable events.

This case demonstrates the importance of timely regulatory disclosures, which are critical for transparency in the securities industry. Public disclosure of disciplinary events, customer complaints, and other regulatory matters helps investors make informed decisions when selecting financial professionals. Investors should regularly check FINRA BrokerCheck to review their financial advisor's disclosure history and verify that all reportable events are properly disclosed.

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According to FINRA, DMK Advisor Group, Inc. was censured and fined $35,000 for willfully violating Section 17(a)(1) of the Securities Exchange Act and Rule 17a-14 regarding Customer Relationship Summary (Form CRS) requirements, and for failing to establish adequate supervisory procedures for Regulat...

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According to FINRA, DMK Advisor Group, Inc. was censured and fined $35,000 for willfully violating Section 17(a)(1) of the Securities Exchange Act and Rule 17a-14 regarding Customer Relationship Summary (Form CRS) requirements, and for failing to establish adequate supervisory procedures for Regulation Best Interest (Reg BI).

The firm failed to establish and maintain written supervisory procedures for complying with Form CRS requirements. Its procedures did not prescribe how the firm should file, deliver, and update Form CRS. The firm failed to timely deliver Form CRS to approximately 25 percent of its retail customers. While the firm arranged for its clearing firm to deliver Form CRS to customers with clearing firm accounts, it failed to deliver the form to customers who did direct business with the firm and did not have clearing firm accounts. After FINRA identified this issue, the firm subsequently delivered Form CRS to affected customers and updated its procedures.

The firm also failed to establish adequate supervisory procedures for Reg BI compliance. Its written procedures provided only general background information about Reg BI's purpose but did not address the Care or Conflict of Interest Obligations. The procedures did not describe how to prevent, detect, or promptly correct Reg BI violations or otherwise achieve compliance. The firm has since updated its procedures regarding Reg BI.

This case illustrates the importance of implementing comprehensive compliance systems for new regulatory requirements. Form CRS is designed to provide retail investors with clear, concise information about the relationships and services a firm offers. Reg BI establishes a best interest standard for broker-dealers when making recommendations to retail customers. Investors should ensure they receive and review Form CRS from their financial services providers.

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According to FINRA, American Wealth Management, Inc. was censured, fined $35,000, and required to review and remediate its Form CRS to ensure compliance with disclosure requirements.

The firm willfully violated Section 17(a)(1) of the Securities Exchange Act and Exchange Act Rule 17a-14 by omitti...

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According to FINRA, American Wealth Management, Inc. was censured, fined $35,000, and required to review and remediate its Form CRS to ensure compliance with disclosure requirements.

The firm willfully violated Section 17(a)(1) of the Securities Exchange Act and Exchange Act Rule 17a-14 by omitting required information from its Customer Relationship Summary (Form CRS). The firm failed to respond "Yes" to the question concerning legal or disciplinary history, even though the firm and six registered representatives had prior legal or disciplinary history. Before filing its Form CRS, the firm had already disclosed five disciplinary actions on its Form BD, and all such filings were reflected in FINRA's Central Registration Depository and BrokerCheck.

The firm also omitted other required information from Form CRS, including specific headings and disclosures about potential conflicts of interest. It failed to include the required conversation starter, "How might your conflicts of interest affect me, and how will you address them?" The firm later updated its Form CRS to include required language about conflicts of interest and the conversation starter.

Additionally, the firm failed to adequately explain how its representatives are compensated, instead only describing certain types of compensation representatives do not receive. Following FINRA's investigation, the firm updated its Form CRS to respond "Yes" to the legal or disciplinary history question.

This case demonstrates the importance of accurate and complete disclosure on Form CRS. This document is designed to provide retail investors with key information about the firm's services, fees, conflicts of interest, legal history, and other important matters in a standardized, easy-to-understand format. Investors should carefully review Form CRS and use FINRA BrokerCheck to verify a firm's disciplinary history before establishing a business relationship.

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According to FINRA, Axos Invest LLC was censured and fined $75,000 for willfully violating Section 17(a)(1) of the Securities Exchange Act by filing and delivering to customers two versions of its Form CRS containing inaccurate information about legal or disciplinary history.

The firm falsely res...

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According to FINRA, Axos Invest LLC was censured and fined $75,000 for willfully violating Section 17(a)(1) of the Securities Exchange Act by filing and delivering to customers two versions of its Form CRS containing inaccurate information about legal or disciplinary history.

The firm falsely responded "No" to the question concerning legal or disciplinary history on both its initial and amended Form CRS. At the time the firm filed its initial Form CRS, a control affiliate and one registered representative had prior legal or disciplinary history. When the firm filed its amended Form CRS, the affiliate and two registered representatives had such history.

The control affiliate had been subject to 13 disciplinary actions with findings for serious violations including: failing to file Suspicious Activity Reports relating to low-priced securities deposits and sales; failing to develop and implement an adequate anti-money laundering program; failing to provide customers with margin interest rate disclosures; and failing to comply with Regulation SHO's close-out requirements for short sales. The firm had already disclosed the affiliate's disciplinary history on its Form BD before filing Form CRS.

Additionally, regulatory disclosures reflecting registered representatives' legal or disciplinary history had been made by or were available to the firm in FINRA's Central Registration Depository and BrokerCheck before the firm filed these Forms CRS.

Following FINRA's investigation, the firm updated its Form CRS to respond "Yes" to the question concerning legal or disciplinary history. This case underscores the importance of accurate regulatory disclosures. Form CRS is specifically designed to provide retail investors with clear information about a firm's background, including disciplinary history, so they can make informed decisions. Investors should verify information in Form CRS against FINRA BrokerCheck records.

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According to FINRA, Harpeth Securities, LLC was censured and fined $35,000 for willfully violating Regulation Best Interest (Reg BI) by failing to establish written policies and procedures and a supervisory system reasonably designed to achieve compliance.

The firm acted as a placement agent for ...

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According to FINRA, Harpeth Securities, LLC was censured and fined $35,000 for willfully violating Regulation Best Interest (Reg BI) by failing to establish written policies and procedures and a supervisory system reasonably designed to achieve compliance.

The firm acted as a placement agent for two private placements, recommending them to approximately 490 retail investors. Despite the firm's awareness of Reg BI's implementation date, the firm's written policies and procedures contained no provisions relating to Reg BI. The firm failed to establish a supervisory system reasonably designed to achieve compliance with Reg BI's requirements, including the Care Obligation and Conflict of Interest Obligation.

The firm also failed to establish a supervisory system for compliance with Form CRS obligations. The firm's written supervisory procedures contained no provisions relating to Form CRS requirements. The firm only established written policies and procedures relating to Reg BI and Form CRS after FINRA initiated its investigation.

Reg BI establishes a best interest standard of conduct for broker-dealers and their associated persons when making recommendations to retail customers. It requires firms to act in the best interest of retail customers at the time a recommendation is made, without placing the firm's or associated person's interests ahead of the customer's interests. The regulation includes specific obligations related to disclosure, care, conflict of interest, and compliance.

This case demonstrates that firms cannot simply ignore new regulatory requirements. Even when serving as placement agents for private offerings to retail investors, firms must have adequate supervisory systems to ensure compliance with Reg BI and Form CRS requirements. Investors working with broker-dealers should understand they are entitled to best interest treatment under Reg BI when receiving investment recommendations.

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According to FINRA, Highlander Capital Group, Inc. was censured and fined $5,000 for willfully violating Section 17(a)(1) of the Securities Exchange Act by filing and delivering to customers a Form CRS with inaccurate information. A lower fine was imposed after considering the firm's revenue and fin...

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According to FINRA, Highlander Capital Group, Inc. was censured and fined $5,000 for willfully violating Section 17(a)(1) of the Securities Exchange Act by filing and delivering to customers a Form CRS with inaccurate information. A lower fine was imposed after considering the firm's revenue and financial resources.

The firm falsely represented on its Form CRS that neither it nor its associated persons had any legal or disciplinary history. In fact, the firm and two of its registered representatives had prior legal or disciplinary history. The firm had disclosed six disciplinary actions on its Form BD before filing Form CRS, and those disclosures were reflected in FINRA's Central Registration Depository and BrokerCheck. The firm also had knowledge of its registered representatives' legal or disciplinary history.

Despite having disclosed disciplinary actions on its Form BD and despite its knowledge of registered representatives' legal or disciplinary history, the firm falsely responded "No" to the Form CRS question concerning legal or disciplinary history. Following FINRA's investigation, the firm updated its Form CRS to respond "Yes" to the question concerning legal or disciplinary history.

Form CRS was designed to provide retail investors with a simple, easy-to-understand summary of key information about a broker-dealer or investment adviser. The form requires disclosure of legal or disciplinary history so investors can make informed decisions when selecting financial professionals.

This case illustrates that even smaller firms with limited resources must ensure accurate regulatory disclosures. The false representation about disciplinary history deprived retail investors of material information they are entitled to receive. Investors should always verify the information provided in Form CRS by checking FINRA BrokerCheck and the SEC's Investment Adviser Public Disclosure database to confirm a firm's complete regulatory history.

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