Bad Brokers

According to FINRA, BOK Financial Securities, Inc. was censured and fined $110,000 for inaccurately reporting transactions to the Trade Reporting and Compliance Engine (TRACE).

The firm failed to include the required No Remuneration (NR) indicator on TRACE reports for transactions in TRACE-eligib...

Read More

According to FINRA, BOK Financial Securities, Inc. was censured and fined $110,000 for inaccurately reporting transactions to the Trade Reporting and Compliance Engine (TRACE).

The firm failed to include the required No Remuneration (NR) indicator on TRACE reports for transactions in TRACE-eligible securities where no mark-up, mark-down, or commission was charged. Firm traders failed to manually enter the correct field in the firm's TRACE reporting system, leading to systematic reporting errors.

FINRA also found that BOK Financial failed to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with FINRA Rule 6730(d). While the firm's written supervisory procedures provided for supervisory reviews of TRACE reporting, none of the reviews addressed the accurate reporting of the NR Indicator. The firm did not perform any reviews to determine whether traders accurately reported this indicator, even though manual entry carried inherent risk of human error.

Following FINRA's inquiry, the firm automated the inclusion of the NR Indicator and implemented daily and quarterly review sampling of TRACE reports. The firm also revised its written supervisory procedures to reflect these new reviews.

Accurate trade reporting is essential for market transparency and regulatory oversight. The TRACE system helps regulators and investors understand trading activity in fixed-income securities. When firms fail to report accurately, it undermines the integrity of market data that investors and regulators rely upon.

This case illustrates the importance of firms implementing automated controls where possible and conducting regular reviews to catch reporting errors before they become systemic problems.

Show Less

According to FINRA, LifeSci Capital, LLC was censured and fined $900,000 for receiving unreasonable underwriting compensation in a special purpose acquisition company (SPAC) IPO and making inaccurate disclosures to investors and regulators.

The firm participated in an IPO for a SPAC where the off...

Read More

According to FINRA, LifeSci Capital, LLC was censured and fined $900,000 for receiving unreasonable underwriting compensation in a special purpose acquisition company (SPAC) IPO and making inaccurate disclosures to investors and regulators.

The firm participated in an IPO for a SPAC where the offering was declared effective by the SEC with underwriting terms that materially differed from those approved by FINRA. The firm inaccurately described its underwriting compensation in offering documents and FINRA filings in several ways.

First, although the prospectus stated that warrants would expire five years after the effective date, the private warrant agreement actually permitted holders to exercise them for a longer period. Second, while filings stated that securities received as underwriting compensation were subject to a 360-day lock-up, neither the warrant agreement nor any other agreements actually provided for such a lock-up.

FINRA also found that the firm failed to make required filings with FINRA in connection with the SPAC offering and two other public offerings. The firm failed to file documents required by FINRA Rules and failed to timely file required documents on six occasions, with delays ranging from less than one month to more than seven months.

The firm's supervisory failures were significant. LifeSci Capital had no procedures to determine the fairness of underwriting compensation or to discuss filing requirements. The firm did not implement any supervisory review to monitor its underwriting compensation or its filings with FINRA, and failed to assign supervisory responsibility for compliance with FINRA Rule 5110 to any individual.

Investors in SPACs should understand that underwriting compensation and lock-up provisions are important factors in evaluating these offerings. Accurate disclosure of these terms is essential for making informed investment decisions.

Show Less

According to FINRA, Union Capital Company was censured and ordered to pay $28,237.85 in restitution to customers for failing to establish proper supervision over recommendations of leveraged and inverse exchange-traded funds and mutual funds (Non-Traditional Funds).

The firm's written supervisory...

Read More

According to FINRA, Union Capital Company was censured and ordered to pay $28,237.85 in restitution to customers for failing to establish proper supervision over recommendations of leveraged and inverse exchange-traded funds and mutual funds (Non-Traditional Funds).

The firm's written supervisory procedures did not state whether representatives were permitted to recommend Non-Traditional Funds or under what circumstances these products should or should not be recommended. The procedures provided no guidance to supervisors on how to identify and address potentially unsuitable Non-Traditional Fund recommendations.

As a result of these supervisory failures, the firm failed to detect and address several occasions where representatives recommended that customers buy Non-Traditional Funds without a reasonable basis. Some affected customers were seniors with moderate risk tolerance who were particularly ill-suited for these complex products.

Non-Traditional Funds that reset daily were held in customer accounts for extended periods ranging from 14 to 407 days. These products are designed for short-term trading and can produce unexpected results when held for longer periods, especially in volatile markets. The affected customers suffered $28,237.85 in total net realized losses.

Due to the firm's financial status, FINRA did not impose a monetary fine but required the firm to remediate the issues and implement a reasonably designed supervisory system.

Investors should understand that leveraged and inverse ETFs and mutual funds are complex products that may not be suitable for buy-and-hold strategies. These products are designed to achieve their stated objectives on a daily basis, and their performance over longer periods can differ significantly from expectations. Before investing in Non-Traditional Funds, investors should ensure they understand how these products work and whether they are appropriate for their investment timeline and risk tolerance.

Show Less

According to FINRA, SG Americas Securities, LLC was censured and fined $950,000 for failing to fingerprint and screen approximately 2,000 non-registered associated persons employed by affiliates of the firm, as required by Exchange Act Rule 17f-2.

The firm was required to fingerprint non-register...

Read More

According to FINRA, SG Americas Securities, LLC was censured and fined $950,000 for failing to fingerprint and screen approximately 2,000 non-registered associated persons employed by affiliates of the firm, as required by Exchange Act Rule 17f-2.

The firm was required to fingerprint non-registered associated persons and review fingerprint results to screen for statutory disqualification. While these individuals were subject to background checks as part of the firm's screening process, the process did not include the collection of fingerprints and review of fingerprint results.

After FINRA initiated its investigation, the firm began remediation efforts. However, the firm was unable to fingerprint 990 individuals because they were no longer associated with the firm or its affiliates. The firm could not determine whether any of these formerly associated individuals were subject to statutory disqualification based on fingerprint results.

Ultimately, the firm completed its remediation efforts and did not identify any individuals subject to statutory disqualification. The firm also commenced fingerprinting individuals employed by affiliates in other locations.

FINRA found that the firm failed to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with fingerprinting requirements. The firm lacked written procedures requiring fingerprinting of non-registered associated persons employed by affiliates.

The fingerprinting requirement exists to protect investors by ensuring that individuals with disqualifying events in their background are not permitted to work in positions where they could harm investors. This case demonstrates the importance of firms maintaining comprehensive compliance programs that extend to all associated persons, including those employed by affiliates.

Show Less

According to FINRA, Cambria Capital, LLC was censured and ordered to pay $48,435.76 in restitution to customers for charging unfair commissions and failing to detect excessive trading in customer accounts.

The firm charged a commission of $75 or more per transaction regardless of the principal va...

Read More

According to FINRA, Cambria Capital, LLC was censured and ordered to pay $48,435.76 in restitution to customers for charging unfair commissions and failing to detect excessive trading in customer accounts.

The firm charged a commission of $75 or more per transaction regardless of the principal value of the trade. On 255 transactions, commissions ranged from over five percent to 77 percent of the transaction's principal value. The amount of commissions charged that exceeded five percent equaled $3,155.37.

The firm's written supervisory procedures failed to describe the steps principals should take to achieve compliance with fair pricing requirements. The procedures did not specify what factors to consider when determining commission fairness or how to document reviews. While principals manually reviewed the daily trade blotter for potentially unfair commissions, the blotter did not show the percentage commission charged on each trade.

FINRA also found the firm failed to establish proper supervision over excessive trading. The firm's procedures provided no guidance on calculating turnover rates or cost-to-equity ratios. The firm's clearing firm made exception reports available that flagged accounts for high turnover and high commission-to-equity ratios, but Cambria Capital did not access or review these reports.

As a result, the firm failed to identify two retail customer accounts that were excessively traded, generating $41,768 in total trading costs including $31,214 in commissions.

Additionally, the firm failed to detect unsuitable recommendations of non-traditional and volatility-linked exchange-traded products, resulting in $3,512.33 in customer losses.

No fine was imposed due to the firm's financial resources and its filing to terminate registration with FINRA.

Investors should be aware of the commissions they pay and question any fees that seem disproportionate to their trade size.

Show Less

According to FINRA, Insigneo Securities, LLC was censured and fined $85,000 for failing to reasonably supervise a registered representative's participation in private securities transactions and for TRACE reporting violations.

The firm discovered that a representative participated in private secu...

Read More

According to FINRA, Insigneo Securities, LLC was censured and fined $85,000 for failing to reasonably supervise a registered representative's participation in private securities transactions and for TRACE reporting violations.

The firm discovered that a representative participated in private securities transactions by recommending that customers invest in a private placement offering not approved by the firm. Rather than taking appropriate corrective action, the firm implemented a conditional exception that applied only to that representative, permitting him to sell private placements through an unaffiliated investment advisor without providing the detailed information required by FINRA Rule 3280.

The representative sold securities in six private placements away from the firm totaling $9.75 million to 25 investors, eight of whom were also firm customers, without providing advance notice. The firm did not conduct contemporaneous review of the offerings or determine whether the representative received selling compensation requiring the transactions to be recorded on the firm's books.

The representative was ultimately barred from the securities industry after resigning from the firm.

FINRA also found that the firm overreported, failed to report, and inaccurately reported almost 10,000 executed customer transactions to TRACE. These errors constituted approximately 24 percent of the TRACE reports the firm submitted during the relevant period.

Private securities transactions present significant risks because they occur outside the normal supervisory framework of a broker-dealer. Investors should be cautious when representatives recommend investments that are not offered through their firm's normal channels, and should verify that proper disclosures have been made.

Show Less

According to FINRA, Seaport Global Securities LLC was censured and fined $125,000 for failing to establish and maintain a supervisory system for its options desk's practice of canceling (busting) and re-executing (adjusting) manual options trades.

The firm initially had no supervisory systems or ...

Read More

According to FINRA, Seaport Global Securities LLC was censured and fined $125,000 for failing to establish and maintain a supervisory system for its options desk's practice of canceling (busting) and re-executing (adjusting) manual options trades.

The firm initially had no supervisory systems or written procedures for reviewing manual options trades that were busted and adjusted by its options trading desk. On four occasions, the firm's options traders directed floor brokers to bust and adjust manual options trades either at the counterparty's request or due to firm errors. In each case, the adjustments resulted in prices less favorable to the firm's customers than when the trades were originally executed.

The firm performed no supervisory review of these requests to ensure compliance with applicable FINRA rules or to determine whether customers should be compensated. During the investigation, the firm offered full restitution totaling $111,400 plus interest to the affected customers.

When the firm eventually implemented updated procedures requiring traders to seek approval and notify compliance when requesting to bust and adjust a trade, the procedures still provided no guidance on the circumstances under which such requests were permitted. The firm also lacked systems to address customer compensation when a bust and adjust would result in a worse price for the customer.

FINRA also found that the firm failed to make and keep accurate order memoranda for the busted and adjusted trades. The firm documented only the terms of the re-executed transactions, not the original orders, and recorded inaccurate order entry and receipt times.

Investors should understand that trade adjustments can affect their execution prices. Proper documentation and supervision of these practices are essential to protect customer interests.

Show Less

According to FINRA, UBS Financial Services Inc. was censured, fined $500,000, ordered to pay $343,914.66 in restitution, and required to disgorge $2,645,537 in commissions for failing to properly supervise short-term trading of syndicate preferred stocks.

The firm failed to establish a supervisor...

Read More

According to FINRA, UBS Financial Services Inc. was censured, fined $500,000, ordered to pay $343,914.66 in restitution, and required to disgorge $2,645,537 in commissions for failing to properly supervise short-term trading of syndicate preferred stocks.

The firm failed to establish a supervisory system reasonably designed to assess whether representatives recommended unsuitable short-term trades of syndicate preferred stocks to retail customers. The firm had no written procedures providing guidance specific to the suitability of holding periods for syndicate preferred stock purchases, and procedures did not identify any concerns with short-term trading of these positions.

The firm's electronic surveillance system had parameters that were unduly narrow, resulting in a failure to review a substantial amount of short-term syndicate preferred stock trading. Only 40 preferred stock positions appeared on the firm's reports. Even when short-term trades appeared on reports, the firm did not take reasonable action to investigate potentially unsuitable trades.

Representatives or representative teams recommended syndicate preferred stock purchases that were then sold within 180 days or less, resulting in realized losses for customers even after including income earned on the positions. The firm earned $2,645,537 in selling concessions from the syndicate purchases and at least $343,914 in sales commissions from the subsequent sales.

This case illustrates a potential conflict of interest in syndicate preferred stock trading. The firm captured commissions on both ends of transactions while customers experienced losses. Investors should be cautious of frequent trading recommendations in preferred stocks, which are generally designed to be longer-term income investments rather than short-term trading vehicles.

Show Less

According to FINRA, LPL Financial LLC was censured and fined $900,000 for submitting approximately 5,800 blue sheets to FINRA that inaccurately reported transaction information. The firm is also settling a separate SEC action with a $900,000 civil penalty.

Blue sheets are electronic reports that ...

Read More

According to FINRA, LPL Financial LLC was censured and fined $900,000 for submitting approximately 5,800 blue sheets to FINRA that inaccurately reported transaction information. The firm is also settling a separate SEC action with a $900,000 civil penalty.

Blue sheets are electronic reports that broker-dealers submit to regulators containing detailed information about securities transactions. These reports are critical tools for detecting potential insider trading, market manipulation, and other suspicious trading activity.

FINRA found that collectively, LPL Financial failed to include required transactions or transaction information, or included incorrect information, for approximately 205,000 transactions. The firm omitted responsive transactions from certain blue sheets, incorrectly reported customer addresses, states, and employer information for certain trades, and incorrectly reported execution times for trades allocated to customer accounts.

The firm initially disclosed four types of errors to FINRA, but the remainder were discovered during FINRA's investigation with the assistance of a third-party consultant. All twelve error types were caused by software coding issues and human errors, including some embedded in vendor blue sheet reporting applications.

These reporting errors impaired FINRA's ability to conduct effective market surveillance and identify potential misconduct. Accurate blue sheet reporting is fundamental to the integrity of securities market oversight.

The firm ultimately remediated the errors and amended and resubmitted the impacted blue sheets. This case demonstrates the importance of firms conducting thorough testing of their reporting systems and maintaining robust quality controls over regulatory submissions.

Show Less

According to FINRA, Wells Fargo Clearing Services, LLC was censured and fined $900,000 for submitting approximately 22,000 blue sheets to FINRA that inaccurately reported transaction information.

The firm initially disclosed three software coding errors that caused misreporting of the exchange wh...

Read More

According to FINRA, Wells Fargo Clearing Services, LLC was censured and fined $900,000 for submitting approximately 22,000 blue sheets to FINRA that inaccurately reported transaction information.

The firm initially disclosed three software coding errors that caused misreporting of the exchange where trades were executed and misidentification of registered representatives for trades. FINRA subsequently discovered that the firm reported customer names and addresses as "Privacy Protected" on certain blue sheets instead of reporting actual customer information.

The firm then reviewed its prior blue sheet submissions and reported additional errors caused by software coding issues. The inaccurate information included incorrect exchange information for additional trades, taxpayer identification indicators, average price indicators, order execution times for dividend reinvestments, buy/sell codes for options transactions, and state and zip code information.

Collectively, the firm failed to include required transactions or transaction information, or included incorrect information, for approximately 5.5 million transactions.

Blue sheets are essential regulatory tools that help FINRA and other regulators detect insider trading, market manipulation, and other fraudulent activity. When firms submit inaccurate blue sheet data, it can impair regulatory investigations and potentially allow misconduct to go undetected.

This case highlights the challenges firms face in maintaining accurate regulatory reporting systems and the importance of ongoing monitoring and testing of these systems. Investors benefit when regulatory systems work effectively to detect and deter market misconduct.

Show Less