Bad Brokers

According to FINRA, J.P. Morgan Securities LLC was censured and fined $3,000,000 for failing to accurately report short interest positions to FINRA.

Short interest data is important market information that helps investors and regulators understand the level of bearish sentiment and potential shor...

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According to FINRA, J.P. Morgan Securities LLC was censured and fined $3,000,000 for failing to accurately report short interest positions to FINRA.

Short interest data is important market information that helps investors and regulators understand the level of bearish sentiment and potential short-selling activity in particular securities. Accurate reporting is essential for market transparency.

The firm's inaccurate reporting resulted from multiple causes. In some instances, the firm overreported short interest positions by incorrectly reporting certain customers' positions on a net basis rather than gross basis, incorrectly including positions from stock loan activity, and including transactions related to incorrectly identified external transfers. The firm also overreported positions related to dividend reinvestment activity.

In other instances, the firm underreported short interest by incorrectly excluding positions in Canadian and Latin American securities, excluding positions in over-the-counter foreign securities that were dually listed, and excluding positions in an affiliate's omnibus account.

FINRA found that prior to 2020, the firm did not have a process to periodically review whether accounts were properly included or excluded for short interest reporting purposes. This supervisory gap allowed the reporting errors to persist.

The firm has remediated these issues and implemented appropriate processes. This case demonstrates the complexity of short interest reporting and the importance of firms maintaining comprehensive supervisory systems to ensure accurate regulatory reporting across all types of positions and accounts.

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According to FINRA, Virtu Americas LLC was censured and fined $750,000 for overstating its advertised trade volume on Bloomberg and Thomson Reuters, two major subscription-based providers of market data.

The firm configured its systems to automatically advertise trading volume throughout the day ...

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According to FINRA, Virtu Americas LLC was censured and fined $750,000 for overstating its advertised trade volume on Bloomberg and Thomson Reuters, two major subscription-based providers of market data.

The firm configured its systems to automatically advertise trading volume throughout the day and relied on an end-of-day process to reconcile differences between intra-day advertised volume and executed volume. However, due to changes the firm made to its Bloomberg messaging format, trade volume cancellation messages could not be processed by Bloomberg. As a result, both the volume intended to be cancelled and the replacement volume were advertised.

Additionally, an error in the firm's transaction coding process caused the firm to erroneously advertise certain journaled transactions that were not eligible for advertisement.

Overall, the firm overstated its advertised trade volume in approximately 110,500 instances by approximately 17.1 billion shares.

FINRA found that the firm's supervisory system was not reasonably designed to ensure compliance. When the firm changed its trade advertisement messaging format, it did not reasonably test whether its end-of-day data was accurately communicated to Bloomberg. The firm had no supervisory reviews to monitor the accuracy of its advertised trade volume as actually published.

Accurate trade volume information is important for investors making trading decisions and for overall market transparency. Overstated volume can mislead market participants about liquidity and trading interest in particular securities.

The firm has revised its supervisory procedures and implemented daily reports comparing advertised volumes against 20-day average daily trading volumes to detect potential anomalies.

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According to FINRA, Builder Advisor Group, LLC was censured and fined $30,000 for failing to establish and implement procedures to identify and verify the identities of beneficial owners of its legal entity customers.

The firm failed to obtain certifications for the accuracy of beneficial owner i...

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According to FINRA, Builder Advisor Group, LLC was censured and fined $30,000 for failing to establish and implement procedures to identify and verify the identities of beneficial owners of its legal entity customers.

The firm failed to obtain certifications for the accuracy of beneficial owner information as required when onboarding new legal entity clients. The firm also failed to record the non-documentary methods it used to verify the identities of some beneficial owners.

Beneficial ownership rules require broker-dealers to identify and verify the identity of individuals who own 25 percent or more of a legal entity customer, as well as an individual who controls the legal entity. These rules are designed to prevent the use of shell companies and other legal entities to conceal the identities of those behind potentially illicit financial activity.

FINRA also found that the firm failed to conduct required independent testing of its anti-money laundering (AML) compliance program. Independent testing is a critical component of an effective AML program, helping to identify weaknesses and ensure that controls are functioning as intended.

This case serves as a reminder that all broker-dealers, regardless of size, must maintain robust AML programs that include proper beneficial ownership procedures and regular independent testing. These requirements help protect the financial system from money laundering and terrorist financing activities.

Investors can take some comfort knowing that regulators actively enforce these requirements to help ensure the integrity of financial markets.

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According to FINRA, Jefferies LLC was censured and fined $250,000 for failing to maintain a supervisory system reasonably designed to achieve compliance with Regulation M under the Securities Exchange Act and related notification rules.

Regulation M is designed to preserve the integrity of the se...

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According to FINRA, Jefferies LLC was censured and fined $250,000 for failing to maintain a supervisory system reasonably designed to achieve compliance with Regulation M under the Securities Exchange Act and related notification rules.

Regulation M is designed to preserve the integrity of the securities markets by prohibiting activities that could artificially influence the market for securities being distributed. During a distribution, there are restricted periods during which distribution participants are prohibited from bidding for or purchasing covered securities.

The firm's written supervisory procedures did not reasonably describe steps to achieve compliance with Regulation M, such as conducting supervisory reviews to verify whether an offering qualified as a distribution, ensuring restricted periods were accurate, verifying the accuracy of restricted period notifications, or confirming that the firm did not engage in impermissible trading or bidding activity during restricted periods.

As a result of not conducting these supervisory reviews, the firm did not identify whether it purchased shares in covered securities during their restricted periods.

The firm later took steps to revise its supervisory system and procedures to address these deficiencies.

Regulation M violations can undermine the fairness of securities offerings by allowing artificial price manipulation. Investors participating in offerings have a right to expect that the offering price reflects genuine market forces rather than artificial manipulation by distribution participants.

This case illustrates the importance of firms maintaining comprehensive compliance programs that address all aspects of their business activities, including participation in securities distributions.

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According to FINRA, Interactive Brokers, LLC was censured and fined $2,250,000 for failing to detect customers with cash accounts who engaged in free-riding in options and issued options.

Free-riding occurs when customers buy and sell securities before paying for them, essentially using the proce...

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According to FINRA, Interactive Brokers, LLC was censured and fined $2,250,000 for failing to detect customers with cash accounts who engaged in free-riding in options and issued options.

Free-riding occurs when customers buy and sell securities before paying for them, essentially using the proceeds from a sale to pay for a prior purchase. When free-riding is detected, firms are required to impose a 90-day freeze on the account, during which the customer must pay in full for any securities purchases at the time of the trade.

The firm relied on automated surveillance to monitor customer cash accounts for free-riding. However, the firm inadvertently failed to program its surveillance system to monitor for free-riding in options and issued options. As a result, the firm did not identify free-riding transactions in options and did not impose the required 90-day freezes or require payment in full for subsequent purchases.

FINRA found that the firm's internal description of its surveillance system stated that cash accounts would be monitored for free-riding, but the list of securities products subject to surveillance failed to include options. The firm also failed to conduct any audit or testing of its free-riding automated surveillance system.

The firm's written supervisory procedures lacked provisions relating to the requirement to impose 90-day freezes on customer cash accounts that engage in free-riding.

The firm has updated its surveillance programming to include options, issued cash up front restriction notices to affected customers, and revised its procedures.

This case demonstrates the importance of comprehensive testing of automated surveillance systems to ensure they cover all relevant products and scenarios.

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According to FINRA, UBS Financial Services Inc. was censured and fined $1,100,000 for sending millions of trade confirmations to customers that failed to accurately disclose whether the price shown was an average price.

Trade confirmations are important documents that provide customers with the t...

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According to FINRA, UBS Financial Services Inc. was censured and fined $1,100,000 for sending millions of trade confirmations to customers that failed to accurately disclose whether the price shown was an average price.

Trade confirmations are important documents that provide customers with the terms of their transactions. Accurate disclosure of whether a price is an average price (resulting from multiple executions) or a single execution price is important information for customers to understand how their orders were filled.

The firm's confirmations disclosed that each trade processed through its Trade Allocation and Processing System (TAPS) account was executed in more than one transaction with an average price. However, the firm also used the TAPS account to process block orders, some of which were effected in one execution at a single price. For these single-execution trades, the confirmations incorrectly stated that the trade was executed in more than one transaction at an average price.

These disclosure failures continued for more than 10 years after FINRA notified the firm about the inaccurate disclosures. While the firm eventually worked with a third-party vendor to address the issue, the firm had no supervisory system to review whether average price disclosures were correctly included or omitted. The firm reviewed a weekly sample of confirmations for accuracy of other elements but did not review average price disclosures.

This case highlights the importance of firms promptly addressing identified compliance issues and maintaining ongoing supervisory reviews to ensure accurate customer disclosures.

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According to FINRA, Barclays Capital Inc. was censured and fined $1,000,000 for failing to establish and maintain a supervisory system reasonably designed to achieve compliance with net capital rules.

Net capital requirements ensure that broker-dealers maintain sufficient liquid assets to meet th...

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According to FINRA, Barclays Capital Inc. was censured and fined $1,000,000 for failing to establish and maintain a supervisory system reasonably designed to achieve compliance with net capital rules.

Net capital requirements ensure that broker-dealers maintain sufficient liquid assets to meet their obligations to customers and counterparties. Accurate calculation of net capital is fundamental to the financial integrity of securities firms.

The firm's written procedures did not describe how to identify firm commitment underwritings and distinguish them from best efforts offerings. The firm erroneously treated offerings as firm commitment only when it had not secured investors to purchase the securities. When investors had committed to purchasing securities at the time of signing the underwriting agreement, the firm incorrectly treated these as best-efforts offerings and excluded them from net capital computations.

As a result, the firm misclassified certain firm commitment offerings as best-efforts offerings and failed to take required open contractual commitment charges in its net capital computations. This caused the firm's FOCUS reports and books and records to overstate net capital by amounts ranging from approximately $44 million to $949 million.

Although the firm incorrectly calculated its net capital, it maintained sufficient excess net capital to engage in securities business and participate in the firm commitment offerings during the relevant period.

The firm has updated its written procedures to provide for accurate identification of firm commitment offerings and related capital charges.

This case illustrates the importance of accurate net capital calculations and the need for firms to maintain clear procedures for distinguishing between different types of securities offerings.

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According to FINRA, Citigroup Global Markets Inc. was censured and fined $100,000 for permitting three associated persons to engage in activities requiring qualification as municipal securities representatives when they were not properly registered.

The three associated persons co-authored 470 mu...

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According to FINRA, Citigroup Global Markets Inc. was censured and fined $100,000 for permitting three associated persons to engage in activities requiring qualification as municipal securities representatives when they were not properly registered.

The three associated persons co-authored 470 municipal securities research reports with qualified municipal securities representatives, even though they were not registered in the required capacity. One of the associated persons authored an additional four reports without a qualified co-author.

Municipal Securities Rulemaking Board (MSRB) Rules G-2 and G-3 require that individuals engaging in municipal securities activities be properly qualified and registered. These requirements exist to ensure that individuals advising on or analyzing municipal securities have demonstrated the knowledge and competence required to perform these functions.

The firm discovered the violation when a new supervisor observed that these associated persons were not registered as municipal securities representatives. The firm then conducted a review of its municipal research licensing practices and suspended publication of municipal bond research reports until the entire municipal research team had taken and passed the required Series 52 examination.

This case serves as a reminder that firms must maintain accurate records of employee registrations and ensure that individuals are properly qualified before engaging in activities that require specific licenses. Investors rely on research reports being prepared by qualified professionals who have demonstrated their knowledge of the relevant securities and regulations.

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According to FINRA, Roger Peter Daly was barred from association with any FINRA member firm in all capacities after refusing to appear for on-the-record testimony requested by FINRA.

FINRA sought Daly's testimony in connection with its investigation into his entry and full cancellation of certain...

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According to FINRA, Roger Peter Daly was barred from association with any FINRA member firm in all capacities after refusing to appear for on-the-record testimony requested by FINRA.

FINRA sought Daly's testimony in connection with its investigation into his entry and full cancellation of certain orders in U.S. Treasury securities. By refusing to cooperate with FINRA's investigation, Daly prevented regulators from fully investigating the matter.

FINRA Rule 8210 requires associated persons to cooperate with FINRA investigations, including appearing for testimony when requested. This requirement is fundamental to FINRA's ability to protect investors and maintain market integrity. When individuals refuse to cooperate, they face serious consequences including being barred from the securities industry.

A bar from the securities industry is one of the most serious sanctions FINRA can impose. It means that Daly can no longer work in any capacity for any FINRA member firm. Investors should be aware that they can check the registration status and disciplinary history of financial professionals through FINRA's BrokerCheck service.

This case demonstrates the importance FINRA places on cooperation with investigations. When individuals refuse to provide testimony, it raises questions about what they may be trying to hide and prevents regulators from protecting investors from potential misconduct.

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According to FINRA, Stephen Philip King was barred from association with any FINRA member firm in all capacities after refusing to appear for on-the-record testimony requested by FINRA.

FINRA sought King's testimony in connection with its investigation into his supervision of recommendations by r...

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According to FINRA, Stephen Philip King was barred from association with any FINRA member firm in all capacities after refusing to appear for on-the-record testimony requested by FINRA.

FINRA sought King's testimony in connection with its investigation into his supervision of recommendations by registered representatives of his member firm that customers invest in low-priced securities. Low-priced securities, sometimes called penny stocks, can present significant risks to investors and require appropriate supervision to ensure recommendations are suitable.

By refusing to cooperate with FINRA's investigation, King prevented regulators from fully investigating the matter and determining whether customers were harmed by inadequate supervision of penny stock recommendations.

FINRA Rule 8210 requires associated persons to cooperate with FINRA investigations. This cooperation requirement is essential to FINRA's investor protection mission. Without the ability to compel testimony, regulators would be unable to effectively investigate potential misconduct.

The bar from the securities industry means that King can no longer work in any capacity for any FINRA member firm. Investors can verify the registration status and disciplinary history of their financial professionals through FINRA's BrokerCheck service.

Investors should be particularly cautious when recommended low-priced securities, as these investments often involve significant risks including limited liquidity, lack of publicly available information, and susceptibility to manipulation.

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