Bad Brokers

According to FINRA, Merrill Lynch, Pierce, Fenner & Smith Incorporated was censured and fined $1,200,000 for failing to produce timely and complete document productions in connection with FINRA investigations of two brokers.

The firm was found in violation of its obligation to cooperate with regu...

Read More

According to FINRA, Merrill Lynch, Pierce, Fenner & Smith Incorporated was censured and fined $1,200,000 for failing to produce timely and complete document productions in connection with FINRA investigations of two brokers.

The firm was found in violation of its obligation to cooperate with regulatory investigations. In the first matter, three customers alleged in separate arbitrations that a broker engaged in unauthorized and excessive trading, unsuitable recommendations, and other sales practice violations. The firm settled with these customers. FINRA issued a request seeking telephone records, meeting notes, and account opening documents. The firm failed to produce or timely produce responsive telephone records because its vendor had destroyed documents older than three years pursuant to the vendor's deletion policy. The firm also failed to timely produce all meeting notes and account opening documents. Over two years after FINRA's initial request, the firm made a final production that included new responsive documents material to FINRA's investigation.

In the second matter, a customer alleged a broker participated in failed investments away from the firm, and the firm settled with the customer. FINRA requested emails related to potential selling away and supervisory review records. The firm produced responsive emails nearly two years after FINRA's initial request showing the broker was facilitating customer outside investments in projects not approved by the firm. After FINRA raised concerns about omissions, the firm produced additional records, including emails flagged by the firm's supervisory system containing red flags for potential misconduct.

These delays materially impeded FINRA's investigations. Firms are required to maintain and produce documents to regulators in a timely manner, and retention policies must comply with regulatory requirements. Investors should understand that regulatory investigations protect market integrity by holding brokers and firms accountable for misconduct. When firms fail to produce documents promptly, it delays or undermines these important investigations. This case emphasizes that firms must maintain adequate document retention systems and respond completely and promptly to regulatory requests.

Show Less

According to FINRA, Tor Brokerage LLC was censured and fined $10,000 for failing to supervise and record approximately $4 million in private securities transactions on its books and records.

The firm was found in violation of its supervisory and recordkeeping obligations regarding private securit...

Read More

According to FINRA, Tor Brokerage LLC was censured and fined $10,000 for failing to supervise and record approximately $4 million in private securities transactions on its books and records.

The firm was found in violation of its supervisory and recordkeeping obligations regarding private securities transactions. Two registered representatives associated with Tor Brokerage participated in the sale of membership interests in a limited liability company that was a part owner of the firm. The representatives also held membership interests in and were executives of the company. The representatives disclosed their employment with the company upon associating with the firm and received compensation of $5,000 per month plus a portion of any profits distributed.

The firm was aware of its representatives' participation in the private securities transactions, that they were receiving compensation from the company, and that they owned membership interests in the company. However, the firm erroneously concluded that the representatives were not receiving "selling compensation" in connection with the private securities transactions. Based on this flawed analysis, the firm did not supervise the transactions or record them on its books and records, and failed to reasonably enforce its own written supervisory procedures.

Private securities transactions, sometimes called "selling away," occur when registered representatives participate in securities transactions outside their firm's regular business. FINRA rules require representatives to provide prior written notice to their firm before participating in any private securities transaction, and if selling compensation will be received, the firm must approve the participation and supervise the transaction. The firm must also record approved transactions on its books and records. A lower fine was imposed after considering the firm's revenue and financial resources. Investors should be cautious about investments offered by their financial advisor outside of their firm, as these may lack proper supervision and investor protections. Always verify that your advisor's firm has approved and is supervising any outside investment opportunities.

Show Less

According to FINRA, GBM International, Inc. was censured and fined $250,000 for failing to establish and implement an anti-money laundering (AML) program that could be reasonably expected to detect and cause the reporting of suspicious activity.

The firm was found in violation of AML program requ...

Read More

According to FINRA, GBM International, Inc. was censured and fined $250,000 for failing to establish and implement an anti-money laundering (AML) program that could be reasonably expected to detect and cause the reporting of suspicious activity.

The firm was found in violation of AML program requirements. While GBM International had written AML procedures requiring monitoring for red flags of suspicious activity, the firm failed to implement those measures in practice. The procedures indicated that when the firm detected red flags, it would investigate further and take appropriate steps, including gathering additional information, contacting the government, freezing the account, or filing a Suspicious Activity Report (SAR). However, in certain instances, the firm did not implement these measures, resulting in failure to reasonably investigate numerous instances of suspicious activity.

The firm opened four accounts deemed high-risk by domestic and international AML agencies. Two accounts had the same beneficial owner despite being opened in the names of different entities, both incorporated in high-risk locations. Both accounts had wire activity that appeared on the firm's daily reports, but the firm failed to reasonably investigate the purpose of the transactions or assess whether the activity was suspicious. Another account triggered several red flags highlighted in the firm's AML procedures, and transactions often appeared on two of the firm's reports. Again, the firm failed to reasonably investigate to determine the purpose and assess whether the transactions were suspicious.

Anti-money laundering programs are critical to preventing criminals from using the financial system to launder proceeds of illegal activities or finance terrorism. Red flags such as transactions involving high-risk jurisdictions, unusual wire patterns, and beneficial owners of multiple entities require careful scrutiny. Investors should understand that robust AML compliance protects the integrity of financial markets and prevents firms from being used as vehicles for financial crime. This case demonstrates that having written AML procedures is insufficient—firms must actually implement them and investigate red flags when they arise.

Show Less

According to FINRA, SunTrust Robinson Humphrey, Inc., now known as Truist Securities, Inc., was censured and fined $150,000 for failing to establish and maintain a supervisory system reasonably designed to review correspondence and internal communications.

The firm was found in violation of its o...

Read More

According to FINRA, SunTrust Robinson Humphrey, Inc., now known as Truist Securities, Inc., was censured and fined $150,000 for failing to establish and maintain a supervisory system reasonably designed to review correspondence and internal communications.

The firm was found in violation of its obligation to review electronic communications. First, the firm failed to review certain emails flagged for review by its automated system. The firm's email review system had a filter setting that limited the length of time flagged emails remained in the review set—emails not reviewed within two weeks dropped out of the supervisory review queue entirely. After becoming aware of this issue, the firm expanded the filter to three months, and later adopted a new system that prevented emails from dropping out of the review set.

Second, the firm failed to review certain Bloomberg email messages of associated persons. The firm failed to ensure that newly onboarded employees' Bloomberg email addresses were properly linked to the email review system, resulting in the firm failing to review messages from Bloomberg accounts of associated persons. The firm's written supervisory procedures required regular reviews for new Bloomberg addresses and submission of technology tickets to link Bloomberg accounts to employee profiles. However, the firm did not consistently implement this procedure, failing to include Bloomberg email addresses in the information technology profiles during the onboarding process.

After discovering instances of this failure, the firm did not implement new procedures until almost two years later. The firm eventually implemented a weekly reconciliation of email account information from Bloomberg to its email review system. Email review is a critical supervisory tool that helps firms detect misconduct, customer complaints, and regulatory violations. When firms fail to capture and review business communications, problematic conduct can go undetected. Investors should understand that proper email surveillance is an important protection against unsuitable recommendations, misrepresentations, and other forms of misconduct.

Show Less

According to FINRA, Intesa Sanpaolo IMI Securities Corp. was censured and fined $650,000 for multiple failures related to anti-money laundering compliance, due diligence of foreign financial institutions, and electronic communications surveillance.

The firm was found in violation of several requi...

Read More

According to FINRA, Intesa Sanpaolo IMI Securities Corp. was censured and fined $650,000 for multiple failures related to anti-money laundering compliance, due diligence of foreign financial institutions, and electronic communications surveillance.

The firm was found in violation of several requirements. First, the firm failed to establish an AML program reasonably designed to detect, monitor, and report suspicious activity relating to low-priced securities transactions. Initially, the firm had no systems to monitor equity trading for suspicious activity. Although it later implemented monitoring systems, these were not reasonably designed to detect red flags typically associated with low-priced securities, such as pump-and-dump schemes. The firm's written AML procedures did not accurately reflect actual monitoring procedures, failed to discuss significant red flags associated with low-priced securities trading, and incorrectly instructed employees to send SARs to a third-party site no longer in use.

Second, the firm failed to timely address AML deficiencies identified in internal audits. Despite audit recommendations to update written procedures and enhance the AML program, and a subsequent audit rating AML risk as "high," the firm failed to implement recommended changes for an extended period. Third, the firm failed to establish due diligence policies and controls for foreign financial institutions (FFIs). The firm did not obtain required information about anticipated trading activity for many FFI customers and did not complete formal risk assessments of FFI customers in high-risk jurisdictions, as repeatedly recommended by internal auditors. The firm failed to implement controls targeted to specific risks posed by FFI accounts and did not periodically review FFI account activity.

Fourth, the firm failed to perform supervisory reviews of electronic communications. The firm's vendor surveillance platform did not capture certain employees' communications due to the firm's failure to enable functions or add employees to the review protocol. The firm had no reconciliation system to ensure all employee communications were reviewed. Investors should understand that comprehensive AML and surveillance programs protect market integrity and investor protection.

Show Less

According to FINRA, Barclays Capital Inc. was censured, fined $100,000, and ordered to pay disgorgement of $218,803.52 in ill-gotten gains for over-tendering shares in a company because it miscalculated its long position.

The firm was found in violation of Rule 14e-4 of the Securities Exchange Ac...

Read More

According to FINRA, Barclays Capital Inc. was censured, fined $100,000, and ordered to pay disgorgement of $218,803.52 in ill-gotten gains for over-tendering shares in a company because it miscalculated its long position.

The firm was found in violation of Rule 14e-4 of the Securities Exchange Act of 1934, which prohibits tender offer participants from tendering more shares than they own (over-tendering). When tendering shares, Barclays manually calculated its long position using several different systems. The firm miscalculated its long position because it missed a short position housed in another system, used an incorrect final tender price when calculating share calls required to be deducted from the long position, and miscalculated grandfathered calls, giving the firm credit for shares it should not have included. As a result, the firm received $218,803.52 in ill-gotten gains from over-tendering.

Additionally, the firm failed to have a supervisory system reasonably designed to achieve compliance with Rule 14e-4. While Barclays had certain procedures for calculating and reviewing net long positions, these procedures were primarily operational and did not include a supervisory review regarding compliance with Rule 14e-4. Rule 14e-4 serves important investor protection purposes by preventing manipulation of tender offers and ensuring fair treatment of all shareholders. Over-tendering can distort tender offer prices and disadvantage other shareholders seeking to tender their shares.

Tender offers occur when an entity offers to purchase shares directly from shareholders, typically at a premium to the current market price, often in connection with acquisition attempts. The rule against over-tendering prevents firms from gaining an unfair advantage by submitting more shares than they actually own. This case demonstrates the importance of firms implementing adequate supervisory systems that include both operational controls and supervisory review to ensure compliance with securities laws. Firms must maintain accurate position records across all systems to prevent inadvertent violations.

Show Less

According to FINRA, Cabrera Capital Markets, LLC was censured and fined $50,000 for failing to disclose required information on customer trade confirmations and for failing to reasonably supervise for compliance with trade confirmation rules.

The firm was found in violation of Section 10(b) of th...

Read More

According to FINRA, Cabrera Capital Markets, LLC was censured and fined $50,000 for failing to disclose required information on customer trade confirmations and for failing to reasonably supervise for compliance with trade confirmation rules.

The firm was found in violation of Section 10(b) of the Exchange Act, Rule 10b-10 thereunder, and FINRA Rule 2232. Specifically, Cabrera failed to disclose to institutional customers certain information on written trade confirmations as required by regulations. The firm failed to disclose markups and markdowns on principal transactions in preferred securities at or before completion of the transactions. Additionally, the firm incorrectly identified single executions as average price or block transactions on customer trade confirmations.

Furthermore, the firm failed to reasonably supervise for compliance with trade confirmation rules. Cabrera lacked written supervisory procedures regarding customer trade confirmations and failed to enforce a supervisory system reasonably designed to achieve compliance with applicable rules. Trade confirmations are important disclosure documents that provide customers with essential information about their securities transactions, including the capacity in which the firm acted (principal or agent), the price, any markups or markdowns, and commissions charged.

Rule 10b-10 requires broker-dealers to provide customers with written confirmation at or before completion of each transaction, disclosing specific information. Proper disclosure of markups and markdowns is particularly important because it allows customers to understand the full cost of their transactions and assess whether they received fair pricing. When firms act as principals, buying securities for their own account and selling to customers (or vice versa), they must disclose any markups or markdowns. Investors should carefully review trade confirmations to ensure they understand all costs associated with their transactions. This case underscores the importance of firms maintaining adequate written procedures and supervisory systems to ensure compliance with trade confirmation requirements.

Show Less

According to FINRA, RBC Capital Markets, LLC was censured and fined $2,600,000 for failing to report, and inaccurately reporting, over-the-counter (OTC) options positions to the Large Options Positions Reporting System (LOPR).

The firm was found in violation of LOPR reporting requirements. These ...

Read More

According to FINRA, RBC Capital Markets, LLC was censured and fined $2,600,000 for failing to report, and inaccurately reporting, over-the-counter (OTC) options positions to the Large Options Positions Reporting System (LOPR).

The firm was found in violation of LOPR reporting requirements. These violations were caused by errors in the reporting logic of RBC's internal risk system used to compile and submit OTC LOPR reports, and the errors remained undetected for years. The firm failed to establish and maintain a supervisory system reasonably designed to comply with its LOPR reporting obligations. While RBC used supervisory systems to detect inaccurate LOPR reports, those systems were not designed to detect, and did not detect, instances where the firm failed to report OTC options positions to the LOPR. The firm also had no system to review whether contract quantities were reported accurately.

Additionally, the firm's written supervisory procedures identified principals responsible for conducting supervisory reviews of LOPR reports but did not provide guidance or set forth a process for how these principals should detect instances of non-reporting or confirm accuracy of reported contract quantities. The Large Options Positions Reporting System is an important regulatory tool that helps detect potential manipulative activity, excessive speculation, and concentration of risk in options markets. Member firms must report positions that meet certain thresholds to enable regulators to monitor market activity and identify potential problems.

The firm ultimately implemented multiple new surveillance reports and procedures to determine whether reportable OTC positions had been reported accurately. This case demonstrates the importance of firms not only having reporting systems but also testing those systems regularly to ensure they function correctly. Supervisory procedures must provide clear guidance to principals on how to verify compliance with reporting obligations. Investors benefit from accurate regulatory reporting because it helps regulators monitor market stability and detect manipulation or excessive risk-taking that could harm market integrity.

Show Less

According to FINRA, Triad Advisors LLC was censured, fined $195,000, and ordered to pay $510,256.57 in restitution to customers for failing to reasonably supervise representatives' recommendations of alternative mutual funds.

The firm was found in violation of its supervisory obligations regardin...

Read More

According to FINRA, Triad Advisors LLC was censured, fined $195,000, and ordered to pay $510,256.57 in restitution to customers for failing to reasonably supervise representatives' recommendations of alternative mutual funds.

The firm was found in violation of its supervisory obligations regarding complex investment products. Triad did not have a reasonably designed supervisory system for recommendations of alternative mutual funds. The firm had no system or procedures to determine whether a new mutual fund constituted a complex product or was an alternative mutual fund before representatives sold it, such that heightened due diligence might be appropriate. Instead, when reviewing and approving new funds, the firm subjected them to the same standards as traditional mutual funds, which did not evaluate the potential risks and rewards associated with the alternative strategies these funds employed. The firm did not conduct any due diligence of mutual funds added to its platform by its clearing firm.

Additionally, Triad did not provide reasonable guidance or training to representatives regarding the risks and features of alternative mutual funds and did not have written supervisory procedures advising principals how to supervise recommendations of these products. The firm utilized an electronic trade review system to assist with supervision, but failed to consider whether the system's rules for traditional mutual funds were reasonable for alternative mutual funds with more complex strategies. The firm did not tailor the system's parameters to address particular risks and characteristics of alternative mutual funds. As a result, alternative mutual fund transactions were generally not identified for additional suitability review.

Furthermore, Triad failed to obtain and record private placement customers' account information in the firm's books and records. The firm's procedures required OSJ branch offices to submit new account forms and documentation for alternative investments to the home office, but the firm allowed one OSJ branch to offer alternative mutual fund private offerings without enforcing these procedures. Alternative mutual funds employ non-traditional strategies such as short-selling, leverage, and derivatives, making them more complex and potentially riskier than traditional mutual funds. Investors should ensure they understand these products' unique risks before investing.

Show Less

According to FINRA, FSC Securities Corporation, Royal Alliance Associates, Inc., and Sagepoint Financial, Inc. were censured and ordered to pay restitution totaling $412,824.91 to customers for failing to establish and maintain supervisory systems reasonably designed to supervise 529 plan share-clas...

Read More

According to FINRA, FSC Securities Corporation, Royal Alliance Associates, Inc., and Sagepoint Financial, Inc. were censured and ordered to pay restitution totaling $412,824.91 to customers for failing to establish and maintain supervisory systems reasonably designed to supervise 529 plan share-class recommendations. No fines were imposed in recognition of the firms' extraordinary cooperation through voluntary participation in FINRA's 529 Plan Share Class Initiative.

The firms were found in violation of supervisory requirements related to 529 college savings plans. The firms' supervisory systems for 529 plans did not reasonably address share-class suitability and did not detect share-class recommendations inconsistent with the time horizon for 529 plan investments. The firms' written supervisory procedures for 529 plans did not specifically address the relationship between account beneficiary age, the number of years until funds would be needed for qualified higher education expenses, and 529 plan share-class suitability. Instead, procedures directed representatives to consider general factors like investment objectives and associated costs, including mutual fund load expenses.

The firms' transaction review systems did not include rules to identify 529 plan share-class recommendations that appeared inconsistent with the age of the account beneficiary or the account's stated time horizon. Although the firms improved their transaction review systems by adding a rule to detect share-class recommendations inconsistent with the stated time horizon, the investment profile information available to the system did not include account beneficiary age data. Accordingly, the systems could not detect stated time horizons conflicting with beneficiary age or share-class recommendations inconsistent with the time horizon suggested by beneficiary age. As a result, the firms failed to identify Class C share recommendations inconsistent with the share-class recommendations suggested by the beneficiary's age.

Section 529 plans are tax-advantaged savings plans designed to help families save for college education expenses. Like mutual funds, 529 plans offer different share classes with different fee structures. Class C shares typically have higher ongoing expenses and are generally suitable for shorter time horizons. For young beneficiaries with long time horizons until college, Class A shares with front-end loads but lower ongoing expenses are often more suitable. Investors should ensure 529 plan share class recommendations align with their beneficiary's age and time until college.

Show Less