Bad Brokers

According to FINRA, Joseph Stone Capital L.L.C. was censured and fined $35,000 for failing to establish and maintain adequate supervisory procedures under FINRA Rule 3170, commonly known as the Taping Rule.

The Garden City, New York firm's special written procedures had several deficiencies. They...

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According to FINRA, Joseph Stone Capital L.L.C. was censured and fined $35,000 for failing to establish and maintain adequate supervisory procedures under FINRA Rule 3170, commonly known as the Taping Rule.

The Garden City, New York firm's special written procedures had several deficiencies. They provided no timeframe for principals to complete supervisory reviews of recorded calls. While the procedures directed principals to pay "attention" to potential sales practice concerns, they offered no guidance on what steps to take when concerns were identified.

The firm also failed in certain instances to record all telephone conversations between registered representatives and customers as required. Further, while the firm's procedures allowed representatives to use cell phones for business, they were not reasonably designed to ensure all such calls were recorded. The firm also failed to retain all call recordings for the required three-year period.

The Taping Rule applies to firms that hire a significant number of registered persons from "disciplined firms"—those that have been expelled or had significant disciplinary issues. The rule requires these firms to record telephone conversations with customers and implement heightened supervision. The purpose is to provide additional oversight when a firm has a higher concentration of representatives whose prior employers had compliance problems.

While Joseph Stone Capital is no longer subject to the Taping Rule, it continued voluntary compliance for six months after the requirement ended. However, the violations during the relevant period demonstrate the importance of having clear, actionable supervisory procedures—not just general directives.

For investors, this case highlights the regulatory mechanisms designed to provide extra protection when dealing with certain broker-dealers. The recording requirements help ensure accountability and provide evidence if disputes arise about what was communicated during sales calls.

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According to FINRA, MD Global Partners, LLC was censured and fined $40,000 for willfully violating Regulation Best Interest (Reg BI) and failing to make timely private placement filings.

The New York firm's Reg BI violations were particularly notable because they continued for more than two years...

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According to FINRA, MD Global Partners, LLC was censured and fined $40,000 for willfully violating Regulation Best Interest (Reg BI) and failing to make timely private placement filings.

The New York firm's Reg BI violations were particularly notable because they continued for more than two years after the regulation took effect. Despite being aware of Reg BI's June 30, 2020 implementation date, the firm's written supervisory procedures contained no provisions related to Reg BI compliance until December 2022.

Even after updating its procedures, the firm failed to detail the supervisory steps principals should undertake to ensure Reg BI compliance, including how frequently reviews should occur or how they should be documented.

Reg BI requires broker-dealers to act in the best interest of retail customers when making recommendations. This includes providing full disclosure of material facts, exercising reasonable care to ensure recommendations are in customers' best interests, and addressing conflicts of interest. Without proper procedures, a firm cannot reasonably supervise whether its representatives are meeting these obligations.

The firm also failed to timely file required documents with FINRA for private placement offerings. Instead of filing within the required 15 calendar days of first sale, the firm's filings ranged from one month to almost a year and a half late, with one offering never filed at all.

Additionally, for five consecutive years, the firm failed to prepare required annual compliance reports and certifications of its compliance and supervisory processes.

For investors, this case underscores that Reg BI creates enforceable obligations, and regulators are taking action against firms that fail to implement proper compliance systems. When firms lack adequate Reg BI procedures, customers may not receive the full protections the regulation was designed to provide.

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According to FINRA, Sonenshine & Company LLC was censured and fined $20,000 for failing to establish adequate anti-money laundering (AML) compliance procedures, particularly regarding responses to Financial Crimes Enforcement Network (FinCEN) requests.

The New York firm's written AML procedures f...

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According to FINRA, Sonenshine & Company LLC was censured and fined $20,000 for failing to establish adequate anti-money laundering (AML) compliance procedures, particularly regarding responses to Financial Crimes Enforcement Network (FinCEN) requests.

The New York firm's written AML procedures failed to provide any guidance on how to search firm records in response to FinCEN requests, known as 314(a) requests. These requests help law enforcement identify accounts and transactions associated with terrorism and money laundering. The procedures also established no process for monitoring whether the firm timely reviewed and responded to these requests.

The compliance failures were not new issues—FINRA had warned the firm about these deficiencies back in 2017. Despite this warning, the firm did not review or respond to any FinCEN requests from March 2021 through August 2021. The firm only became aware of these failures when FINRA identified them in 2021.

Additionally, the firm failed to conduct annual independent testing of its AML compliance program. Again, FINRA had warned the firm about this requirement in 2017. Despite this, the firm's written procedures only required testing every two years until December 2023, and the firm failed to conduct any AML testing in at least 2020 and 2022.

AML compliance is a fundamental obligation for all financial institutions. These programs help prevent the financial system from being used for money laundering, terrorist financing, and other illicit purposes. When firms fail to respond to law enforcement information requests, they potentially allow suspicious activity to continue undetected.

For investors, while AML compliance may seem like a back-office function, it reflects a firm's overall commitment to regulatory compliance and ethical operations. Repeated failures to address known deficiencies raise broader questions about a firm's compliance culture.

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According to FINRA, J.P. Morgan Securities LLC was censured and fined $650,000 (with $150,384 payable to FINRA) for filing untimely and inaccurate notifications related to securities distributions under Regulation M.

The New York firm's violations involved restricted period and trading notificati...

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According to FINRA, J.P. Morgan Securities LLC was censured and fined $650,000 (with $150,384 payable to FINRA) for filing untimely and inaccurate notifications related to securities distributions under Regulation M.

The New York firm's violations involved restricted period and trading notifications filed with FINRA in connection with securities offerings. These notifications are required under FINRA Rule 5190 to help FINRA monitor compliance with Regulation M, which prohibits manipulation in connection with securities offerings.

The inaccurate notifications failed to identify all distribution participants, did not properly identify participants as FINRA members, or included incorrect CRD numbers for member firms. The firm also filed untimely notifications for certain distributions where marketing periods were shorter than the applicable restricted periods.

The firm's supervisory system lacked reasonable controls to ensure notifications were timely filed and accurate. The firm relied solely on automated features of its deal management system to prevent inaccuracies, without conducting manual reviews. The firm also lacked reasonable procedures to verify that amended notifications were filed when distribution participants joined after the initial filing.

Regulation M exists to prevent manipulation around securities offerings by restricting certain trading activities during distribution periods. The notification requirements help regulators monitor these restrictions. When notifications are late or inaccurate, it hampers FINRA's ability to detect potential manipulation.

The firm has since corrected CRD inaccuracies in its deal management system, updated procedures to require amended notifications when participants join after initial filing, and revised procedures to confirm notifications are reviewed for both timeliness and accuracy.

This case demonstrates that even large, sophisticated firms must maintain robust compliance systems, and regulators will assess significant penalties for systemic failures regardless of firm size.

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According to FINRA, American Trust Investment Services, Inc. was censured, fined $100,000, and ordered to pay $166,000 in restitution for multiple supervisory failures including inadequate oversight of speculative bond sales and selling unregistered securities.

The Whiting, Indiana firm failed to...

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According to FINRA, American Trust Investment Services, Inc. was censured, fined $100,000, and ordered to pay $166,000 in restitution for multiple supervisory failures including inadequate oversight of speculative bond sales and selling unregistered securities.

The Whiting, Indiana firm failed to reasonably supervise sales of speculative, risky, and illiquid corporate bonds for compliance with Regulation Best Interest. After customers invested in these bonds, the issuing company defaulted on its obligations and subsequently filed for bankruptcy.

Three of the firm's representatives recommended these bonds to customers including seniors, retirees, and a non-profit entity. The firm lacked reasonable processes to assess whether representatives were making recommendations in compliance with Reg BI's Care Obligation or suitability requirements.

The firm also sold unregistered securities without applicable exemptions. It participated in Rule 506(b) private placement offerings—which prohibit general solicitation—without establishing pre-existing, substantive relationships with offerees. This resulted in approximately $6 million in sales that constituted unregistered distributions.

Additional deficiencies included inadequate procedures for background investigations of new registrants, failure to properly review outside business activities, and incomplete office inspections despite SEC warnings about inspection deficiencies in 2020.

The firm's written procedures generally discussed Reg BI only in general terms without prescribing actual compliance procedures or establishing controls to prevent violations.

For investors, this case highlights several important protections. Reg BI requires brokers to act in your best interest, particularly important when complex or risky products are recommended. Private placement exemptions have specific requirements that protect the investing public, and firms must verify eligibility before offering securities under these exemptions.

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According to FINRA, SpeedRoute LLC was censured and fined $300,000 (with $75,000 payable to FINRA) for failing to establish adequate risk management controls for market access and for anti-money laundering compliance deficiencies.

The Jersey City, New Jersey firm's market access control failures ...

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According to FINRA, SpeedRoute LLC was censured and fined $300,000 (with $75,000 payable to FINRA) for failing to establish adequate risk management controls for market access and for anti-money laundering compliance deficiencies.

The Jersey City, New Jersey firm's market access control failures included inadequate credit controls—the firm did not consider each new client's financial condition when setting initial credit limits. Instead, it compared proposed limits against limits for existing clients without reasonable rationale or documentation supporting its methodology.

The firm also failed to maintain reasonable controls for erroneous orders, maximum order rates, and duplicate order rates. For surveillance of potentially manipulative trading including wash sales, layering, and spoofing, the firm used unreasonably designed parameters. For example, layering surveillance only generated alerts for seven or more potentially layered orders, though layering can be accomplished with fewer.

The firm's surveillance review was severely under-resourced. Despite thousands of monthly alerts, only one employee was assigned to review them while also handling other compliance duties. This resulted in delays of weeks or months in reviewing alerts, with some reviews never completed. The firm also used unreasonably narrow sampling methods.

The firm's AML program was not tailored to detect suspicious activity in low-priced securities, despite servicing accounts that traded such securities. When the firm decided to stop trading low-priced OTC securities, it inadvertently continued accepting such orders and failed to monitor the trading for suspicious activity.

A reduced fine was imposed after considering the firm's limited ability to pay.

This case illustrates the specialized compliance obligations for firms providing market access, including robust controls to prevent erroneous or manipulative trading.

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According to FINRA, Regulus Financial Group, LLC was censured and fined $20,000 for willfully failing to disclose required disciplinary history information in its customer relationship summary (Form CRS).

The Kentwood, Michigan firm was found to have omitted its own and its control affiliate's di...

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According to FINRA, Regulus Financial Group, LLC was censured and fined $20,000 for willfully failing to disclose required disciplinary history information in its customer relationship summary (Form CRS).

The Kentwood, Michigan firm was found to have omitted its own and its control affiliate's disciplinary history from the Form CRS it filed and delivered to customers. Form CRS is a document designed to help retail investors understand the nature of their relationship with a broker-dealer or investment adviser.

After the firm filed its initial Form CRS and an amended version, FINRA cautioned it that the responses regarding legal or disciplinary history were incomplete or misleading. Despite this warning, the firm filed two additional amended Forms CRS that still failed to properly disclose its disciplinary history.

Instead of responding "Yes" to the question about legal or disciplinary history, the firm erroneously stated on both forms: "Yes, although the firm does not, some of our financial professionals do have a legal or disciplinary history." This statement was misleading because the firm itself had reportable history.

Subsequently, a firm control affiliate agreed to sanctions creating additional disclosable history. The firm also had other legal or disciplinary matters requiring disclosure on its Form BD. However, the firm failed to file an amended Form CRS reflecting this history until later prompted.

Form CRS is an important investor protection tool. The legal and disciplinary history question helps investors understand whether there have been past problems that might be relevant to their decision to do business with a firm. When firms fail to accurately disclose this information, investors cannot make fully informed choices.

Investors can access Form CRS and disciplinary history for any broker-dealer through FINRA BrokerCheck at brokercheck.finra.org.

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According to FINRA, TradeUp Securities, Inc. was censured and fined $700,000, and US Tiger Securities, Inc. was censured and fined $250,000 for failing to develop and implement reasonably designed anti-money laundering programs.

Both New York firms serviced foreign financial institution omnibus a...

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According to FINRA, TradeUp Securities, Inc. was censured and fined $700,000, and US Tiger Securities, Inc. was censured and fined $250,000 for failing to develop and implement reasonably designed anti-money laundering programs.

Both New York firms serviced foreign financial institution omnibus accounts that transacted in thinly traded low-priced securities—a business model requiring heightened AML vigilance due to the elevated risk of manipulation and suspicious activity.

US Tiger relied on manual review of daily trade blotters and reports that failed to identify patterns for review of potentially suspicious activity. Exception reports designed to identify wash trades and spoofing generated significant false positives and were not regularly reviewed. The firm also failed to routinely review incoming securities and money movements, creating gaps in detection of suspicious deposits of low-priced securities.

TradeUp similarly relied on inadequate manual blotter reviews that couldn't identify suspicious patterns across accounts or multiple days. Available exception reports generated false positives and couldn't flag escalating buy order patterns. TradeUp developed in-house reports that provided inaccurate information due to coding errors, further hampering detection capabilities.

Both firms also failed to establish adequate due diligence programs for foreign financial institution correspondent accounts. US Tiger incorrectly stated in procedures that it had no such accounts while designating accounts that had received AML warnings from regulators as "low-risk." TradeUp failed to conduct proper due diligence on accounts that included other foreign financial institutions, offshore banks, money service businesses, and politically exposed persons.

Additionally, both firms failed to retain and review business communications on an electronic messaging platform, with automatic deletion removing communications before the required retention period.

This case highlights the critical importance of AML programs tailored to a firm's actual business activities.

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According to FINRA, Interactive Brokers LLC was censured and fined $400,000 for failing to accurately report customer complaints to FINRA and for other disclosure failures.

The Greenwich, Connecticut firm did not establish and maintain adequate systems to comply with FINRA Rule 4530(d), which req...

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According to FINRA, Interactive Brokers LLC was censured and fined $400,000 for failing to accurately report customer complaints to FINRA and for other disclosure failures.

The Greenwich, Connecticut firm did not establish and maintain adequate systems to comply with FINRA Rule 4530(d), which requires member firms to report statistical and summary information about written customer complaints. The firm's procedures provided inadequate guidance to client service representatives on identifying and reporting complaints, referenced incorrect FINRA rules, and training materials used too narrow a definition of reportable grievances.

Due to human error, the firm also failed to report findings by regulatory bodies that it had violated securities laws and regulations, and failed to report an action involving a customer claim settlement exceeding $25,000. The firm additionally failed to promptly file copies of civil complaints and arbitration claims as required.

The firm later self-reported these failures to FINRA and subsequently made the required filings.

Interactive Brokers also failed to amend its Form BD to disclose actions by foreign financial regulatory authorities finding violations by the firm's foreign control affiliates. The firm self-reported this failure and ultimately filed an amended Form BD.

Customer complaint reporting serves important regulatory functions. It helps FINRA identify patterns of potential misconduct, both at individual firms and industry-wide. When firms under-report complaints, it can delay regulatory intervention and potentially allow problematic practices to continue.

For investors, this case is a reminder that FINRA maintains comprehensive databases of customer complaints and regulatory actions. Before selecting a broker-dealer, investors should review the firm's history on FINRA BrokerCheck, which includes information about regulatory events and customer disputes.

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According to FINRA, Ben Jen of Bedminster, New Jersey and Raymond Damien Rohne of Croton-on-Hudson, New York were each barred from association with any FINRA member in all capacities for failing to cooperate with a FINRA investigation.

FINRA was investigating an allegedly failed sale of shares in...

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According to FINRA, Ben Jen of Bedminster, New Jersey and Raymond Damien Rohne of Croton-on-Hudson, New York were each barred from association with any FINRA member in all capacities for failing to cooperate with a FINRA investigation.

FINRA was investigating an allegedly failed sale of shares in a private space exploration company. Jen was found in violation for failing to fully provide all documents and information requested by FINRA. While he produced some responsive documents, his response was incomplete.

Specifically, Jen produced many emails without attachments, including signed agreements related to securities transactions, and other emails were incomplete. He produced no electronic DocuSign envelopes despite having previously used them to sign agreements related to securities transactions. During a call with FINRA, Jen acknowledged possessing additional documents and received multiple extensions to provide them, but never completed his production.

Rohne was found in violation for failing to appear for on-the-record testimony requested by FINRA in connection with the same investigation into his potential misconduct.

Cooperation with FINRA investigations is a fundamental obligation of all registered persons and member firms. FINRA Rule 8210 requires associated persons to provide information and documents requested during investigations and to appear for testimony when requested. Failure to comply with these requests can result in a bar from the securities industry.

For investors, industry bars are significant sanctions that permanently prevent individuals from working in the securities industry. When someone is barred for failing to cooperate with an investigation, it means FINRA was unable to complete its inquiry into the underlying conduct, which may have involved harm to investors.

Investors can verify whether their broker has been barred through FINRA BrokerCheck.

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