Bad Brokers

According to FINRA, Securities America, Inc. was ordered to pay $2 million in restitution to customers and fined $1 million for failing to reasonably supervise Class A mutual fund recommendations, resulting in customers paying unnecessary fees through recommendations that were potentially unsuitable...

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According to FINRA, Securities America, Inc. was ordered to pay $2 million in restitution to customers and fined $1 million for failing to reasonably supervise Class A mutual fund recommendations, resulting in customers paying unnecessary fees through recommendations that were potentially unsuitable or not in customers' best interests.

Between January 2018 and June 2024, when it became part of Osaic Wealth, Inc., Securities America effected approximately $3.8 billion in Class A mutual fund share purchases, which generated a substantial portion of the firm's revenue. Despite the significance of this business line, the firm failed to implement adequate supervisory systems and procedures.

Class A mutual fund shares typically charge a front-end sales load when purchased but offer lower ongoing expenses than other share classes. Importantly, when investors exchange one mutual fund for another fund within the same fund family, the front-end load is typically waived. However, when investors switch between different fund families, they pay a new front-end sales load on the Class A shares purchased.

Securities America failed to implement systems reasonably designed to supervise recommendations of Class A shares for compliance with FINRA Rule 2111 (Suitability) and Regulation Best Interest's Care Obligation. The firm's supervisory system was not reasonably designed to detect switches between fund families (where customers pay new sales loads) or short-term sales of Class A shares (where customers pay upfront loads without holding investments long enough to benefit).

Even when the firm identified such trades through exception reports, it failed to reasonably review them to ensure representatives had considered fees and commissions before making recommendations. This supervisory failure resulted in the firm approving more than 1,000 Class A mutual fund switches and more than 2,000 short-term sales that were potentially unsuitable or not in customers' best interests.

Collectively, these problematic trades caused customers to pay $2,019,040 in commissions and fees that could have been avoided. The $2 million restitution will return these fees to affected customers, making them financially whole.

The case originated from a FINRA cycle examination, demonstrating the important role of regulatory examinations in identifying systemic compliance problems. When properly designed exception reports and supervisory reviews might have allowed the firm to identify and prevent these problems before customers were harmed, the examination revealed the firm's supervisory deficiencies.

The sanctions reflect FINRA's emphasis on preventing customer harm through effective supervision. As Bill St. Louis, Executive Vice President and Head of Enforcement at FINRA, stated in the press release: "When firms fail to supervise mutual fund recommendations, investors pay the price through unnecessary fees and charges."

For investors, this case illustrates the importance of understanding mutual fund share classes and associated fees. When a financial professional recommends switching between mutual fund families or selling Class A shares shortly after purchase, investors should ask whether the recommendation serves their interests or primarily generates commissions for the representative.

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According to FINRA, American Portfolios Financial Services, Inc. (APFS) was ordered to pay $4.6 million in restitution to customers and fined $550,000 for inaccurately representing how it calculated fees in its bank deposit program and for retaining undisclosed surplus interest earned from customers...

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According to FINRA, American Portfolios Financial Services, Inc. (APFS) was ordered to pay $4.6 million in restitution to customers and fined $550,000 for inaccurately representing how it calculated fees in its bank deposit program and for retaining undisclosed surplus interest earned from customers' funds.

Bank deposit programs allow broker-dealers to automatically transfer customers' uninvested cash balances from brokerage accounts into interest-bearing, FDIC-insured bank accounts. These programs help customers earn interest on cash that might otherwise sit idle. During the relevant period, APFS enrolled approximately 85,000 customers in its bank deposit program.

From April 2018 through September 2022, APFS provided customers with inaccurate disclosures about how it calculated per-account fees for customers enrolled in the program. The firm's disclosures stated that fees would be calculated using a formula tied to the Federal Funds Target rate. However, the firm did not actually use this disclosed formula.

Instead, APFS first determined what customer yields to provide based on factors such as rates paid by its competitors, then retained the remaining interest paid by participating banks (less other administrative fees) as its fee. This methodology bore no relationship to the formula disclosed to customers. Over the entire relevant period, APFS collected more than $3 million in aggregate fees beyond what the disclosed formula would have yielded.

Additionally, APFS did not disclose that it retained surplus interest totaling approximately $1.25 million when interest rate changes created excess proceeds. When interest rates increased, participating banks paid higher interest on customer deposits. However, APFS did not always pass these increases through to customers, instead retaining the surplus as undisclosed additional revenue.

APFS also incorrectly credited the retained excess administrative fees and surplus interest as revenue in its net capital calculation, resulting in inaccurate monthly financial reports filed with FINRA. Net capital rules require broker-dealers to maintain minimum levels of liquid assets. Accurate net capital calculations are essential for FINRA to monitor firm financial condition and ensure firms can meet obligations to customers.

Beyond the inaccurate fee calculations and undisclosed interest retention, APFS failed to maintain adequate supervisory systems. From April 2018 to May 2023, the firm lacked systems reasonably designed to supervise the bank deposit program. APFS had no supervisory procedures to ensure customer disclosures accurately communicated material information about the program or that fees were calculated in accordance with disclosures.

APFS was acquired by Osaic Holdings, Inc. in November 2022 and merged into Osaic Wealth, Inc. in October 2024. The fine in this case reflects that Osaic provided substantial assistance in calculating appropriate restitution, that APFS disclosed the underpayments to FINRA in October 2022 and began applying the disclosed formula, and that Osaic began paying restitution before the settlement was finalized.

For investors, this case underscores the importance of understanding how firms are compensated for bank deposit programs and other cash sweep options. Investors should review disclosures carefully and ensure the yields they receive are consistent with what was promised.

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According to FINRA, SG Americas Securities, LLC was fined $90,000 for publishing seven inaccurate quarterly reports on its handling of customers' orders in NMS securities, violating Rule 606(a) of Regulation NMS.

The firm's violations were significant and multi-faceted. In six quarterly reports, ...

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According to FINRA, SG Americas Securities, LLC was fined $90,000 for publishing seven inaccurate quarterly reports on its handling of customers' orders in NMS securities, violating Rule 606(a) of Regulation NMS.

The firm's violations were significant and multi-faceted. In six quarterly reports, the firm incorrectly reported receiving net payments of $0.04 per hundred shares from listed options venues when, in reality, the firm received no such payments and instead paid commissions to an intermediary broker-dealer. In one report, the firm erroneously disclosed receiving identical payments for order flow from twelve options venues when the actual payments differed significantly. Additionally, in seven quarterly reports, the firm incorrectly identified two of the venues to which it routed the most non-directed orders for execution.

Beyond the reporting failures, FINRA found that SG Americas Securities' supervisory system was fundamentally flawed. While the firm's written supervisory procedures required quarterly meetings to review Rule 606 reports, they provided no reasonable guidance on how these reviews should be conducted. The firm failed to perform basic validation steps, such as comparing sample data in draft reports with actual transaction records.

Rule 606 of Regulation NMS is designed to ensure transparency in how broker-dealers handle customer orders, providing investors with critical information about order routing practices and potential conflicts of interest arising from payment for order flow arrangements. Accurate reporting allows investors to evaluate whether their broker-dealer is obtaining best execution for their trades.

Investors should understand that payment for order flow can create conflicts of interest, as broker-dealers may be incentivized to route orders to venues that pay them the most rather than those offering the best execution. This case demonstrates the importance of accurate disclosure and the need for firms to maintain robust supervisory systems to ensure compliance with regulatory requirements.

After discovering these deficiencies, SG Americas Securities remediated the issues before publishing subsequent quarterly reports and amended its written supervisory procedures to address the identified problems.

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According to FINRA, Wedbush Securities Inc. was fined $150,000 for multiple violations including failure to maintain possession or control of customers' fully paid and excess margin securities, and failure to disclose required mark-up and mark-down information on customer confirmations.

The firm'...

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According to FINRA, Wedbush Securities Inc. was fined $150,000 for multiple violations including failure to maintain possession or control of customers' fully paid and excess margin securities, and failure to disclose required mark-up and mark-down information on customer confirmations.

The firm's most serious violation involved improper segregation of customer securities. Wedbush failed to combine credits and debits from separate accounts owned by the same customer under the same tax identification number before calculating securities available for rehypothecation. This error resulted in the firm overcalculating the number of shares available for its own use as collateral, creating deficits in customers' securities that should have been segregated. At times, these segregation deficits exceeded 100,000 shares and $2 million in value, placing customer assets at unnecessary risk.

The firm also violated customer protection rules by failing to establish systems to identify accounts owned by the same customer and to provide guidance to employees on proper segregation procedures. This lack of basic controls is particularly concerning given the fundamental nature of Rule 15c3-3 of the Securities Exchange Act, which exists to protect customer assets.

Additionally, Wedbush failed to disclose required mark-up and mark-down information on retail customer confirmations for municipal securities and corporate and agency debt securities transactions. These failures occurred because firm personnel did not timely enter the prevailing market price into the firm's order management system. The firm's written supervisory procedures contained no guidance on when to enter this critical pricing information, and the firm provided no training to supervisors on this requirement.

Investors should understand that customer protection rules exist to ensure their securities are properly segregated and protected from potential firm insolvency. Mark-up and mark-down disclosure requirements help investors understand the true cost of their transactions and evaluate whether they are receiving fair pricing.

Following FINRA's findings, Wedbush established new procedures related to Rule 15c3-3 compliance and amended its written supervisory procedures concerning customer confirmations.

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According to FINRA, Piper Sandler & Co. was fined $95,000 for publishing inaccurate quarterly Rule 606 reports that overstated statistical information related to options orders and failed to adequately disclose material aspects of its relationships with certain execution venues.

The firm's report...

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According to FINRA, Piper Sandler & Co. was fined $95,000 for publishing inaccurate quarterly Rule 606 reports that overstated statistical information related to options orders and failed to adequately disclose material aspects of its relationships with certain execution venues.

The firm's reporting failures stemmed from a coding error made by one of its reporting vendors. This vendor incorrectly calculated the value of certain options orders as if each contract represented one share of underlying stock, when in fact a standard option contract represents 100 shares. This fundamental error caused the firm to overstate its reportable options orders and created inaccuracies in statistical data including order percentages and payments received or paid.

Beyond the technical errors, Piper Sandler published five Rule 606 reports that failed to adequately disclose material aspects of its relationship with certain execution venues. Despite prior notification from FINRA about deficiencies in its material aspects disclosures, the firm's reports did not provide complete descriptions of its payment for order flow arrangements or profit-sharing relationships with certain venues. Specifically, the firm stated that its primary options executing broker "may" pass through fees and rebates when, in fact, the broker passed through these fees and rebates in full—a significant misrepresentation of the actual arrangement.

The firm's supervisory failures were equally concerning. Piper Sandler's written procedures failed to provide guidance on how supervisory reviews should be conducted or what should be reviewed. The firm failed to conduct reasonable supervisory reviews of its Rule 606 reports, including failing to verify the accuracy of statistical information obtained from its vendors.

Investors rely on Rule 606 reports to understand how their broker-dealer handles order routing, payment for order flow arrangements, and potential conflicts of interest. Accurate disclosure of material aspects—including profit-sharing arrangements—is critical for investors to assess whether their orders are being routed in their best interest.

After these issues came to light, Piper Sandler worked with its vendor to correct the reporting errors, enhanced its material aspect disclosures, republished certain Rule 606 reports with updated information, and revised its policies and procedures related to Rule 606 reporting.

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According to FINRA, Oakwood Capital Securities, Inc. was fined $20,000 for failing to establish and maintain a supervisory system reasonably designed to surveil rates of deferred variable annuity exchanges while under previous management.

The firm's supervisory failures were fundamental and compl...

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According to FINRA, Oakwood Capital Securities, Inc. was fined $20,000 for failing to establish and maintain a supervisory system reasonably designed to surveil rates of deferred variable annuity exchanges while under previous management.

The firm's supervisory failures were fundamental and complete. Oakwood Capital failed to establish or maintain any procedures whatsoever to monitor its registered representatives' deferred variable annuity exchange rates. The firm did not maintain any system for tracking exchange rates, leaving a significant gap in its supervisory framework. This lack of oversight is particularly troubling given the potential for abuse in variable annuity transactions, where representatives may recommend unsuitable exchanges to generate commissions.

The firm's sole review process for variable annuity transactions consisted of a manual, transaction-by-transaction review of each application to approve individual transactions. However, this review focused only on the immediate transaction and failed to consider patterns of activity across multiple transactions. No review was conducted to monitor representatives' overall exchange rates or to identify potential red flags indicating churning or unsuitable recommendations.

This complete absence of pattern-based surveillance had predictable consequences. The firm failed to detect a series of short-term variable annuity exchanges recommended by one of its representatives. These exchanges included multiple unsuitable transactions that should have been identified through proper surveillance systems. Short-term exchanges are often unsuitable because variable annuities typically carry surrender charges and are designed as long-term investments, making frequent exchanges costly and inappropriate for most investors.

Investors should understand that variable annuities are complex products with significant fees, including surrender charges that can last for many years. Frequent exchanges between variable annuities, particularly in short timeframes, are often unsuitable and may indicate that a representative is prioritizing commissions over the client's best interests.

This case highlights the critical importance of supervisory systems that look beyond individual transactions to identify patterns of potentially problematic conduct. Firms have an obligation to implement surveillance systems that can detect churning and other unsuitable trading patterns.

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According to FINRA, Deutsche Bank Securities Inc. was fined $2.5 million and required to comply with undertakings for violating multiple research report disclosure requirements, impacting approximately 110,000 debt and equity research reports.

The firm's violations were extensive and systematic. ...

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According to FINRA, Deutsche Bank Securities Inc. was fined $2.5 million and required to comply with undertakings for violating multiple research report disclosure requirements, impacting approximately 110,000 debt and equity research reports.

The firm's violations were extensive and systematic. FINRA discovered a critical flaw in the data feed Deutsche Bank used to trigger disclosures for expected investment banking compensation. This data feed excluded foreign issuers not listed on the New York Stock Exchange or NASDAQ, or for which a U.S. listing was not identified as the primary listing. As a result, the firm published approximately 90,000 equity research reports and 9,000 debt research reports that omitted required disclosures about expecting to receive or intending to seek investment banking compensation from subject companies.

Additionally, Deutsche Bank failed to disclose investment banking client relationships in approximately 8,000 equity research reports and 800 debt research reports. These reports failed to disclose that subject companies had been firm clients in the prior year and the types of services provided—information critical for investors to assess potential conflicts of interest.

The firm also published approximately 1,170 equity research reports and 335 debt research reports that failed to disclose analyst ownership of securities in subject companies. Furthermore, there were six transactions in third-party managed accounts where research analysts traded stocks inconsistently with their ratings, violating restrictions on analyst trading in covered securities.

Another significant failure involved high-yield sector compendium debt research reports. The firm directed readers to a website for applicable disclosures, but the search function only returned results for issuers with equity research coverage. This resulted in 172 compendium debt reports containing incomplete company disclosures.

Research disclosure requirements exist to protect investors by revealing conflicts of interest that could bias analyst recommendations. When analysts or their firms have investment banking relationships with companies they cover, or when analysts own securities they research, these relationships can create incentives to issue favorable reports regardless of underlying fundamentals.

The firm's supervisory failures were equally troubling. Deutsche Bank lacked systems to verify that data feeds used for required disclosures were accurate and complete, and failed to monitor and restrict analyst trading in covered securities held in third-party managed accounts.

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According to FINRA, Laidlaw & Company (UK) Ltd. was fined $200,000 for conducting securities business while failing to maintain required minimum net capital on at least 108 days, filing inaccurate net capital deficiency notices, and failing to establish an independent escrow account in a contingency...

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According to FINRA, Laidlaw & Company (UK) Ltd. was fined $200,000 for conducting securities business while failing to maintain required minimum net capital on at least 108 days, filing inaccurate net capital deficiency notices, and failing to establish an independent escrow account in a contingency offering for an affiliated issuer.

The firm's net capital violations were serious and prolonged. Net capital deficiencies ranged from approximately $53,000 to $1.26 million, with deficiencies exceeding $1 million on four separate days. These violations occurred because Laidlaw failed to consistently reconcile its bank statements with its general ledger, and the estimates underlying the firm's weekly net capital calculations often overstated net capital compared to assets and liabilities ultimately recorded in the general ledger.

Net capital requirements are fundamental to investor protection, ensuring that broker-dealers maintain sufficient liquid assets to meet their obligations to customers and other creditors. When firms operate below minimum net capital requirements, they pose risks to customer assets and market stability.

The firm's reporting failures compounded the problem. Laidlaw filed two inaccurate notices of net capital deficiency. After identifying a reconciliation failure that caused a deficiency, the firm filed a notification, then filed an amended notification with a different start date. However, the amended notification was inaccurate because the actual deficiency period began before and ended after the dates disclosed. Later, after FINRA raised concerns about calculation accuracy, the firm filed another inaccurate deficiency notification.

Additionally, Laidlaw violated securities offering rules by participating in a contingency offering for an affiliated company without establishing an independent escrow account for investor funds. The firm was required to ensure investor funds were transmitted to an independent escrow agent before the contingency was met. Instead, the subscription agreement instructed investors to send funds directly to the company, eliminating critical investor protections designed for contingency offerings.

The firm's supervisory system was fundamentally inadequate. Laidlaw did not maintain procedures for reconciling accounts and intercompany transactions or for performing net capital calculations. Following FINRA's findings, the firm added procedures for calculating weekly and moment-to-moment net capital and updated its written supervisory procedures regarding reconciliation processes and documentation of net capital calculations.

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According to FINRA, Nomura Securities International, Inc. was fined $625,000 and required to comply with undertakings for violating Rule 200(f) of Regulation SHO by improperly including securities positions of two affiliates when calculating the net positions of an independent trading unit.

The f...

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According to FINRA, Nomura Securities International, Inc. was fined $625,000 and required to comply with undertakings for violating Rule 200(f) of Regulation SHO by improperly including securities positions of two affiliates when calculating the net positions of an independent trading unit.

The firm's violations centered on improper aggregation of trading positions. Nomura included accounts of two affiliated foreign broker-dealers in calculations of an aggregation unit's net positions. However, these affiliates lacked self-regulatory oversight and were not subject to Securities and Exchange Commission examination—critical requirements for inclusion in aggregation unit netting under Rule 200(f).

By including these prohibited affiliates' accounts in the aggregation unit's net positions, Nomura failed to accurately calculate net positions, failed to accurately mark some sales as long or short, and failed to locate securities for some short sales where required. These failures undermine Regulation SHO's purpose of preventing abusive short selling practices and ensuring market integrity.

What makes this case particularly egregious is the firm's prolonged delay in remediation despite having knowledge of the violations. By at least 2016, Nomura became aware that Rule 200(f) did not permit inclusion of its two affiliated foreign broker-dealers in aggregation unit netting. However, the firm failed to take reasonable steps to remedy the problem in a timely manner.

Nomura began working to remove the affiliates' accounts from the aggregation unit in 2016, but this work stopped in 2017. The firm did not restart remediation efforts until FINRA raised the issue in 2019, and did not complete the work until April 2022—approximately six years after becoming aware of the problem. This extended period of non-compliance demonstrates a troubling failure to prioritize regulatory compliance.

The firm's supervisory failures enabled these violations to persist. Nomura's supervisory system and written procedures were not reasonably designed to achieve compliance with Rule 200(f). The firm's procedures failed to require exclusion of entities lacking self-regulatory oversight and not subject to SEC examination from aggregation unit netting.

Regulation SHO exists to prevent naked short selling and other abusive practices that can manipulate markets and harm investors. Proper calculation of net positions and accurate marking of sales as long or short are essential to these protections.

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According to FINRA, Virtu Americas LLC was fined a total of $675,000, with $84,375 payable to FINRA, for failing to reasonably document risk management controls designed to prevent entry of erroneous orders and failing to establish a system to regularly review the effectiveness of those controls.

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According to FINRA, Virtu Americas LLC was fined a total of $675,000, with $84,375 payable to FINRA, for failing to reasonably document risk management controls designed to prevent entry of erroneous orders and failing to establish a system to regularly review the effectiveness of those controls.

The firm's documentation failures were comprehensive and concerning. Virtu failed to reasonably document its system of risk management controls to demonstrate that certain controls were reasonably designed. Neither the firm's supervisory procedures nor other documentation adequately described the firm's process for determining thresholds for certain controls or explained the rationale for chosen thresholds. The firm largely did not maintain records of its rationales for such thresholds, making it impossible to verify whether the controls were appropriately calibrated.

A particularly problematic aspect involved the firm's "soft blocks"—controls that paused orders until the firm reviewed the block. Virtu did not have written procedures concerning how reviewers should evaluate soft block alerts or under what circumstances a soft block should be overridden or confirmed. The firm's procedures also did not require reviewers to contemporaneously document their reviews or their rationale for overriding soft blocks and releasing orders into the market. Without such documentation requirements, the risk management controls to which these soft blocks applied were not reasonably designed to prevent erroneous orders.

Additionally, Virtu failed to establish, document, and maintain a system reasonably designed to regularly review the effectiveness of its risk management controls and supervisory procedures. While the firm maintained written procedures to review control thresholds and assess overall operations, these procedures did not reasonably describe what the firm was required to review or how reviews should be conducted. The firm's failure to reasonably document how thresholds were determined or why they were reasonable resulted in an inadequate annual evaluation of individual risk controls and the overall risk management system.

Risk management controls are critical in today's high-speed electronic trading environment. Erroneous orders can cause significant market disruptions, harm investors, and damage market integrity. Proper documentation of these controls and regular effectiveness reviews ensure that controls remain appropriate as market conditions and trading strategies evolve.

Following these findings, Virtu decommissioned the two platforms that housed the problematic controls and remediated the identified issues.

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