Bad Brokers

According to FINRA, Flow Traders U.S. Institutional Trading LLC was censured and fined $75,000 for inaccurately reporting transactions to TRACE without the required No Remuneration (NR) indicator and for inadequate supervision of its TRACE reporting obligations.

The firm executed numerous transac...

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According to FINRA, Flow Traders U.S. Institutional Trading LLC was censured and fined $75,000 for inaccurately reporting transactions to TRACE without the required No Remuneration (NR) indicator and for inadequate supervision of its TRACE reporting obligations.

The firm executed numerous transactions in TRACE-eligible securities without charging a mark-up, mark-down, or commission to customers. FINRA rules require that such transactions be reported to TRACE with an NR indicator, which provides transparency to the market that the firm did not receive compensation for the trade. Although the firm recorded the NR indicator for these transactions in its internal systems, a coding error prevented the indicator from being included when reports were submitted to TRACE. The firm subsequently remediated this error after discovering the problem.

The violations revealed serious supervisory deficiencies at Flow Traders. The firm failed to establish and maintain written supervisory procedures reasonably designed to ensure compliance with TRACE reporting requirements. Specifically, the firm failed to conduct reasonable supervisory reviews of the accuracy of its NR indicator reporting. The firm's written procedures required monthly reviews of TRACE report cards, but these procedures did not address the NR indicator or describe how supervisors should review report cards for NR indicator usage.

Given that Flow Traders executed a substantial volume of trades in TRACE-eligible securities without charging compensation, a proper review of the firm's monthly TRACE report cards showing zero trades reported with the NR indicator should have immediately alerted supervisors to a problem. The failure to detect this obvious discrepancy demonstrates inadequate supervision.

TRACE reporting provides critical transparency to the corporate and government bond markets. Accurate reporting helps ensure that market participants have access to reliable pricing information. The NR indicator specifically helps distinguish between compensated and non-compensated trades, which is relevant to understanding trading motivations and market dynamics.

The firm ultimately implemented daily reviews of NR indicator reporting accuracy and enhanced its written procedures to include these reviews, helping prevent future violations.

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According to FINRA, Kingswood Capital Partners, LLC was censured and fined $150,000 for failing to establish adequate written procedures for supervising alternative investment recommendations and for failing to reasonably supervise a registered representative who made unsuitable alternative investme...

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According to FINRA, Kingswood Capital Partners, LLC was censured and fined $150,000 for failing to establish adequate written procedures for supervising alternative investment recommendations and for failing to reasonably supervise a registered representative who made unsuitable alternative investment recommendations to three senior customers.

The firm's written supervisory procedures were fundamentally deficient regarding alternative investments. The procedures did not describe what factors supervisors should consider when assessing concentration in alternative investments, how concentration determinations should be made, or provide any guidance on what would constitute an overconcentrated position. The procedures also failed to describe what steps supervisors should take upon finding a potentially overconcentrated position or how supervisory reviews should be documented.

These procedural deficiencies led to failures in actual supervision. Despite red flags that a representative's recommendations were unsuitable, the firm approved transactions that allowed three senior customers—each with moderate risk tolerance and balanced growth investment objectives—to invest a total of $284,000 in illiquid alternative investments. Alternative investments typically involve higher risks, less liquidity, and longer time horizons than traditional investments, making them particularly unsuitable for seniors with moderate risk tolerance who may need access to their funds.

The failure to conduct reasonable supervisory review before approving these transactions resulted in real harm to customers. All three customers (or their beneficiaries) subsequently brought and settled arbitration claims against the firm related to these alternative investments.

Alternative investments, including non-traded REITs, business development companies, and private placements, have become increasingly common in retail portfolios. However, these products carry unique risks including illiquidity, complexity, high fees, and limited transparency. FINRA rules require firms to conduct reasonable due diligence on these products and ensure recommendations are suitable based on customers' financial situations and investment objectives.

This case illustrates the critical importance of robust supervisory systems for alternative investments, particularly when recommended to seniors. Firms must have clear, detailed procedures that guide supervisors in identifying potentially unsuitable concentrations and require meaningful review before approving transactions.

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According to FINRA, Clear Street LLC was censured and fined $175,000 for routing options orders with inaccurate origin codes and for failing to reasonably supervise the accuracy of these codes.

The firm routed options orders for execution with incorrect origin codes, resulting in 988,170 options ...

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According to FINRA, Clear Street LLC was censured and fined $175,000 for routing options orders with inaccurate origin codes and for failing to reasonably supervise the accuracy of these codes.

The firm routed options orders for execution with incorrect origin codes, resulting in 988,170 options contracts being executed with an origin code of "Customer" when they should have been coded "Professional Customer." This distinction is significant because professional customers are subject to different pricing and priority rules than retail customers on options exchanges. Professional customers typically receive less favorable pricing than retail customers, as exchanges often provide price improvement incentives for retail order flow.

By incorrectly coding professional customer orders as retail customer orders, Clear Street's orders may have received more favorable treatment than appropriate, potentially disadvantaging other market participants. The inaccurate origin codes were also reflected in the firm's order memoranda, which are required records that document order details.

Beyond the inaccurate coding itself, FINRA found that Clear Street failed to reasonably supervise the accuracy of its options order origin codes. The firm used a report generated by a third-party post-trade surveillance platform to supervise origin code accuracy. However, this report was fundamentally flawed—it did not accurately reflect the firm's trading activity because it failed to correctly count multi-leg options orders. Multi-leg orders involve the simultaneous purchase and sale of multiple options contracts and are common in options trading strategies.

The firm's reliance on an inaccurate surveillance report meant it could not effectively detect origin code errors. Only after FINRA alerted the firm to the issue did Clear Street remediate this supervisory deficiency.

Options origin codes are essential for fair and orderly markets. They ensure that different categories of market participants receive appropriate treatment and pricing. When firms misclassify orders, it can distort market dynamics and create unfair advantages.

This case underscores the importance of firms validating their surveillance tools and ensuring they accurately capture trading activity before relying on them for supervisory purposes.

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According to FINRA, BofA Securities, Inc. was censured and fined $225,000 for providing inaccurate and incomplete information in 15 quarterly reports regarding customer orders in National Market System securities and for inadequate supervision of Rule 606 reporting compliance.

Rule 606 of Regulat...

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According to FINRA, BofA Securities, Inc. was censured and fined $225,000 for providing inaccurate and incomplete information in 15 quarterly reports regarding customer orders in National Market System securities and for inadequate supervision of Rule 606 reporting compliance.

Rule 606 of Regulation NMS requires broker-dealers to make publicly available quarterly reports disclosing information about their order routing practices. These reports must include details about where the firm routes customer orders for execution and any material aspects of the firm's relationships with those execution venues. This information is intended to help customers understand how their orders are being handled and whether the firm has conflicts of interest in its routing decisions.

BofA Securities published 15 quarterly Rule 606 reports that contained inaccurate and incomplete information. The firm failed to establish, maintain, and enforce adequate written supervisory procedures for Rule 606 compliance. Most notably, BofA Securities had no procedures and no reasonable process to review the information presented in its Rule 606 reports for completeness or accuracy.

While the firm conducted month-to-month comparisons of its Rule 606 reports prior to publication, this review was not designed to identify whether the information in the reports was complete or accurate. This superficial review process allowed material errors and omissions to persist across multiple quarterly reports.

The lack of adequate supervision meant that customers and regulators were receiving unreliable information about BofA Securities' order routing practices. This undermines the transparency that Rule 606 is designed to provide and may have prevented customers from making informed decisions about their brokerage relationships.

Following FINRA's findings, BofA Securities implemented updated written supervisory procedures concerning Rule 606 reports. These enhanced procedures now include specific supervisory steps designed to assess data accuracy and determine whether the firm's material aspects information is complete and accurate.

For investors, this case highlights the importance of Rule 606 reports as a tool for understanding how brokers handle orders. While these reports can be technical, they provide valuable information about potential conflicts of interest and whether a firm's routing practices serve customer interests.

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According to FINRA, Mundial Financial Group, LLC was censured, fined $100,000, and required to comply with undertakings for allowing an unregistered person to engage in securities activities and for significant anti-money laundering (AML) program deficiencies.

The firm allowed its indirect owner ...

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According to FINRA, Mundial Financial Group, LLC was censured, fined $100,000, and required to comply with undertakings for allowing an unregistered person to engage in securities activities and for significant anti-money laundering (AML) program deficiencies.

The firm allowed its indirect owner to engage in securities business activities requiring FINRA registration despite the individual not being registered in any capacity. This indirect owner served as the firm's primary source of new business, soliciting the majority of customers and managing client relationships. The individual presented himself as working for the firm, including using a firm email address to conduct business. Beyond customer acquisition, the indirect owner directed significant aspects of the firm's operations, including decisions about developing or funding new business lines, selecting the clearing firm, and making major personnel decisions such as hiring and setting salaries for key employees. The indirect owner also exercised control over the firm's finances.

Registration requirements exist to ensure that individuals engaging in securities activities meet qualification standards and are subject to regulatory oversight. By allowing an unregistered person to perform these functions, Mundial circumvented these fundamental investor protections.

The firm also maintained a deficient AML compliance program. Mundial failed to establish and implement policies and procedures reasonably designed to detect and cause the reporting of suspicious transactions. While the firm's written procedures included lists of red flags for suspicious activity, they did not address how to detect or investigate those red flags. The procedures failed to identify what alerts or reports the firm would use to identify potential suspicious transactions or how to utilize those tools.

As a result, Mundial failed to detect or reasonably investigate red flags of suspicious activity, including red flags brought directly to its attention by its clearing firm. The firm's AML program also lacked appropriate risk-based policies for identifying and reporting potential insider trading. Although the firm maintained a list of insiders, it implemented no policies or procedures to guide personnel on how to monitor transactions of customers on that list.

Strong AML programs are critical for preventing the securities industry from being used for money laundering, terrorist financing, and other illicit activities. The firm's undertaking should help address these deficiencies.

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According to FINRA, Credit Suisse Securities (USA) LLC was censured and fined a total of $7,125,000 (of which $445,312.50 is payable to FINRA) for failing to establish and maintain a supervisory system and procedures reasonably designed to detect and prevent market manipulation and insider trading.
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According to FINRA, Credit Suisse Securities (USA) LLC was censured and fined a total of $7,125,000 (of which $445,312.50 is payable to FINRA) for failing to establish and maintain a supervisory system and procedures reasonably designed to detect and prevent market manipulation and insider trading.

The firm's surveillance failures were extensive and systemic. Credit Suisse's surveillance systems failed to analyze hundreds of millions of trade and order records, leaving enormous gaps in the firm's ability to detect potentially violative trading by its customers. As a result of missing or potentially inaccurate data in its surveillance systems, the firm did not detect and investigate numerous instances of potentially violative trading.

FINRA's analysis revealed that the firm's surveillance reports failed to detect multiple specific instances of potentially manipulative trading by firm customers, including potential spoofing, marking the open, wash trades, and insider trading. Spoofing involves placing orders with the intent to cancel them before execution to create a false impression of market interest. Marking the open refers to executing trades at or near the market open to manipulate opening prices. Wash trades are simultaneous or near-simultaneous buying and selling that creates misleading market activity without actual change in beneficial ownership.

Despite the critical importance of accurate data for surveillance, Credit Suisse had no system or procedure to monitor the accuracy and completeness of data supplied to its surveillance systems. Four separate firm audits found that the database was omitting data and transmitting flawed data, and that the firm lacked controls to compensate for the database's unreliability. The firm retained an outside consultant who recommended replacing the database entirely due to the risks it posed to the firm's regulatory and compliance program.

Despite these warnings, Credit Suisse did not initially make material progress to replace the problematic database and did not substantially complete the replacement until September 2020. This delay meant the firm operated with inadequate surveillance capabilities for an extended period, during which customer misconduct could go undetected.

For investors, this case illustrates the importance of broker-dealer surveillance systems in maintaining market integrity. These systems help detect manipulation and insider trading that can harm market fairness and investor confidence. The substantial fine reflects the severity of these failures.

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According to FINRA, Digital Brokerage Services LLC was censured and fined $85,000 for distributing retail communications regarding its mobile application and crypto assets that failed to comply with FINRA's content standards.

The firm distributed certain retail communications about crypto assets ...

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According to FINRA, Digital Brokerage Services LLC was censured and fined $85,000 for distributing retail communications regarding its mobile application and crypto assets that failed to comply with FINRA's content standards.

The firm distributed certain retail communications about crypto assets or crypto asset-related services that contained two significant deficiencies. First, some communications failed to clearly disclose that the crypto assets were not offered through a registered broker-dealer. This omission is material because investments through registered broker-dealers provide certain regulatory protections that may not apply to crypto assets offered through other channels.

Second, the communications did not provide a fair and balanced presentation of the benefits and risks of the crypto products discussed. FINRA rules require that communications with the public present a balanced picture, including discussion of potential risks alongside any benefits or opportunities. Promotional materials that highlight potential gains without adequate discussion of risks can mislead investors, particularly with volatile and complex products like crypto assets.

Cryptocurrency investments carry unique and substantial risks, including extreme price volatility, limited regulatory oversight, cybersecurity vulnerabilities, and the potential for total loss. The lack of investor protections that apply to traditional securities, such as SIPC insurance, makes clear and prominent risk disclosure particularly important for crypto products.

The timing of these violations is significant, as retail interest in crypto assets surged during the relevant period. Investors making decisions based on incomplete or unbalanced information about crypto products may not have fully understood what they were purchasing or the risks involved.

After FINRA notified Digital Brokerage Services of the violative communications, the firm took corrective action. It stopped using certain communications related to crypto assets and undertook a comprehensive review of how it described crypto assets and crypto asset-related services. The firm then discontinued or updated its communications to achieve compliance with FINRA's content standards.

This case serves as a reminder that even in emerging areas like cryptocurrency, established securities regulations regarding communications with the public continue to apply. Firms must ensure their marketing materials are fair, balanced, and include all necessary disclosures.

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According to FINRA, Osaic Institutions, Inc. (formerly Infinex Investments, Inc.) was censured, fined $650,000, and required to comply with undertakings for failing to establish and implement adequate policies and procedures to detect and report suspicious transactions and for failing to conduct ong...

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According to FINRA, Osaic Institutions, Inc. (formerly Infinex Investments, Inc.) was censured, fined $650,000, and required to comply with undertakings for failing to establish and implement adequate policies and procedures to detect and report suspicious transactions and for failing to conduct ongoing customer due diligence.

The firm's written AML program was derived from a generic template that was not tailored to the firm's specific business activities. The program provided incomplete guidance on how to detect and investigate red flags of suspicious activity. Critically, the procedures included no guidance on escalating or investigating potentially suspicious activity, including cyber-events, for the purpose of determining whether to file a Suspicious Activity Report (SAR). SARs are critical tools that help law enforcement detect and investigate money laundering, terrorist financing, and other financial crimes.

Osaic Institutions relied on AML exception reports to surveil for potentially suspicious trades and money movements. However, the firm's implementation of this surveillance was seriously flawed. Either the reports did not monitor for numerous red flags relevant to the firm's business, or the firm failed to review or timely review the reports. In total, the firm failed to review at least 30 individual AML exception reports and failed to timely review at least 121 individual reports.

The firm also failed to investigate certain activity for potential SAR filings and did not review attempted but unsuccessful cyber-events to determine whether SAR filings were warranted. Cyber-events can be indicators of account compromise or other suspicious activity requiring reporting.

Additionally, the firm failed to include in its AML program risk-based procedures for conducting ongoing customer due diligence. The firm's policies and procedures were silent on the obligation to maintain and update customer information on a risk basis. As a result, the firm did not develop risk profiles for domestic customers and did not create risk profiles for foreign customers until December 2023, at which time it simply designated all foreign accounts as high-risk without meaningful differentiation. The firm conducted no risk-based ongoing customer due diligence for either domestic or foreign accounts until implementing changes.

Ultimately, the firm implemented procedures for reviewing AML exception reports, but only after FINRA's examination revealed the deficiencies. This case underscores that broker-dealers play a critical frontline role in preventing financial crimes.

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According to FINRA, The Benchmark Company, LLC was censured and fined $65,000 for failing to establish and maintain adequate supervisory procedures to prevent prohibited trade-throughs of protected quotations in National Market System securities.

The firm's order management system (OMS) contained...

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According to FINRA, The Benchmark Company, LLC was censured and fined $65,000 for failing to establish and maintain adequate supervisory procedures to prevent prohibited trade-throughs of protected quotations in National Market System securities.

The firm's order management system (OMS) contained a coding error that caused it to send intermarket sweep orders (ISOs) directly to an exchange of which the firm was not a member. ISOs are special order types that allow a firm to execute at a price that may be inferior to the best available price, provided the firm simultaneously routes orders to execute against all better-priced protected quotations at other markets. However, when The Benchmark Company's ISOs were sent to the non-member exchange, that exchange rejected them.

The rejection of these ISOs meant that the firm did not simultaneously route ISOs to execute against the full size of all protected bids or offers as required by Regulation NMS. This caused the firm to route and execute orders at prices inferior to the exchange's protected quote—a violation known as a "trade-through." Trade-throughs undermine market quality by allowing executions at inferior prices when better prices are available at other venues.

After FINRA notified the firm of the trade-throughs, The Benchmark Company fixed the coding error. However, the firm subsequently implemented a system update to its OMS that reintroduced the same coding error. The firm again began routing ISOs directly to the exchange, which rejected them, causing additional route-throughs and trade-throughs. The firm continued sending violative ISOs until FINRA notified it again and the firm corrected the coding error a second time.

In total, the firm sent 1,427 ISOs directly to the exchange that were rejected. These rejected ISOs caused additional simultaneously routed ISOs to route through or trade through protected quotes in approximately 1,770 instances.

Beyond the technical failure, the firm's written policies and procedures were inadequate. Although the procedures required reviewing an exception report to identify whether routed ISOs were filled, canceled, or rejected, the firm did not actually review this report. Even after FINRA alerted the firm to the violations, the firm took no steps to ensure the coding errors would not recur or that the exception report was being reviewed.

The firm later fixed the coding errors and implemented procedures to review and supervise the exception report review process.

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According to FINRA, Carter, Terry & Company, Inc. was censured, fined $75,000, and ordered to pay $176,590.57 in restitution to customers for failing to reasonably supervise recommendations regarding unit investment trusts (UITs), particularly early redemption recommendations.

UITs are investment...

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According to FINRA, Carter, Terry & Company, Inc. was censured, fined $75,000, and ordered to pay $176,590.57 in restitution to customers for failing to reasonably supervise recommendations regarding unit investment trusts (UITs), particularly early redemption recommendations.

UITs are investment products with a defined termination date. When investors hold UITs until maturity, they avoid paying additional sales charges. However, when representatives recommend that customers redeem UITs early and roll the proceeds into new UITs, customers must pay new sales charges that could have been avoided. These recommendations may violate Regulation Best Interest's Care Obligation if they are not in the customer's best interest and are driven by the representative's compensation interests.

Carter, Terry & Company had no written policies or procedures addressing UIT recommendations, including early redemption recommendations, for much of the relevant period. In May 2023, the firm added a section to its procedures addressing UITs and the need for additional review of early redemptions. However, even these updated procedures did not require consideration of the costs associated with early redemption recommendations or provide criteria for supervisors to determine whether such recommendations were in customers' best interests.

The firm's surveillance for problematic UIT transactions was inadequate. The firm flagged UIT transactions for supervisory review using an automated report that identified purchases following sales or liquidations of UITs, but this report did not identify early redemptions. Reviewers were not directed to manually identify early redemptions.

The firm later began requiring representatives to submit sales/exchange forms for early UIT redemptions, but failed to implement any process for ensuring representatives actually submitted these forms. Representatives failed to submit forms for over 100 early redemptions. For forms that were submitted, the firm generally accepted representatives' purported rationales without meaningful scrutiny and approved every early redemption that received supervisory review.

These supervisory failures allowed a representative to engage in a pattern of recommending that customers sell UITs significantly before maturity and roll proceeds into new UITs, often the next series of the same UIT. Collectively, these recommendations caused customers to pay $176,590.57 in costs and fees that would have been avoided by holding UITs to maturity. The restitution will return these unnecessary fees to affected customers.

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