Bad Brokers

According to FINRA, Portsmouth Financial Services, based in San Francisco, California, was censured, fined $25,000, and ordered to pay $31,667.02 plus interest of $6,446.72 in restitution to customers for failing to establish, maintain, and enforce a supervisory system reasonably designed to achieve...

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According to FINRA, Portsmouth Financial Services, based in San Francisco, California, was censured, fined $25,000, and ordered to pay $31,667.02 plus interest of $6,446.72 in restitution to customers for failing to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with its suitability obligations in connection with transactions involving non-traditional exchange-traded products (NT-ETPs). The firm was also required to certify that it has reviewed and remediated the issues identified and implemented a reasonably designed supervisory system, including written supervisory procedures.

Non-traditional exchange-traded products, such as leveraged and inverse ETFs, are complex financial instruments that reset daily and are generally designed for short-term trading strategies. When held for extended periods, these products can produce returns that diverge significantly from the performance of their underlying index or benchmark due to the effects of daily compounding. This makes them potentially unsuitable for buy-and-hold investors, particularly retail customers who may not fully understand these mechanics.

The findings revealed that Portsmouth Financial Services' written supervisory procedures failed to provide any guidance about how to review and evaluate NT-ETP recommendations. Critically, the procedures did not explain how to identify and address potentially unsuitable NT-ETP recommendations. The firm also did not establish a supervisory system to ensure that its representatives actually considered the intended holding period before recommending NT-ETPs. As a result of these supervisory failures, the firm failed to detect or address several occasions in which its representative, Matthew Jason Childs, recommended that customers buy and then hold NT-ETPs for potentially unsuitable periods.

For investors, this case illustrates the dangers of complex financial products being recommended without proper oversight. Non-traditional ETPs are powerful tools that can serve legitimate investment purposes when used correctly, but they carry significant risks when held beyond their intended short-term time horizon. Customers at Portsmouth Financial Services purchased daily reset NT-ETP positions and held them for periods ranging from eight to 1,034 days, incurring $31,667.02 in total net realized losses. Investors should always ask their financial advisor to explain the risks and intended holding period of any complex product before investing, and they should be cautious about recommendations to hold such products for extended periods.

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According to FINRA, Matthew Jason Childs of Palm Springs, California, was suspended from association with any FINRA member in all capacities for two months for recommending that retail customers purchase non-traditional exchange-traded products (NT-ETPs) without having a sufficient understanding of ...

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According to FINRA, Matthew Jason Childs of Palm Springs, California, was suspended from association with any FINRA member in all capacities for two months for recommending that retail customers purchase non-traditional exchange-traded products (NT-ETPs) without having a sufficient understanding of the risks and features associated with those products. The suspension was in effect from September 3, 2024, through November 2, 2024. In light of Childs' financial status, no monetary sanction was imposed.

The findings revealed that Childs recommended NT-ETPs to retail customers without having a reasonable basis to make those recommendations. NT-ETPs, which include leveraged and inverse exchange-traded funds, are complex instruments that use derivatives and other strategies to amplify returns or deliver the inverse of an index's performance on a daily basis. Because these products reset daily, their returns over longer periods can deviate significantly from the performance of the underlying benchmark due to compounding effects. This characteristic makes them generally unsuitable for long-term holding.

Despite these well-known risks, Childs recommended that his customers purchase daily reset NT-ETP positions and hold them for periods ranging from eight to 1,034 days. Holding leveraged or inverse ETPs for nearly three years, as occurred in the most extreme case here, can result in substantial losses even if the underlying index performs in the direction the investor anticipated. The customers who followed Childs' recommendations incurred $31,667.02 in total net realized losses.

FINRA rules require that brokers have a reasonable basis for their recommendations, which means they must understand the products they recommend and have a reasonable belief that the recommendations are suitable for their customers. This obligation is particularly important with complex products like NT-ETPs, where the risks may not be immediately apparent to retail investors.

For investors, this case is a stark reminder to ask questions before acting on any investment recommendation. Investors should ask their broker to explain how a product works, what risks are involved, and what the intended holding period is. If a broker cannot clearly explain these elements, that is a warning sign. Investors should also be aware that leveraged and inverse ETPs are generally not suitable for long-term investment strategies and should be skeptical of any recommendation to hold such products for extended periods. FINRA BrokerCheck allows investors to review the disciplinary history of any registered broker before entrusting them with their money.

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According to FINRA, JVM Securities, LLC, based in Oak Brook, Illinois, was censured and fined $60,000 for willfully violating Regulation Best Interest (Reg BI) and failing to establish adequate supervisory systems. The firm was also required to certify that it has remediated the issues identified an...

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According to FINRA, JVM Securities, LLC, based in Oak Brook, Illinois, was censured and fined $60,000 for willfully violating Regulation Best Interest (Reg BI) and failing to establish adequate supervisory systems. The firm was also required to certify that it has remediated the issues identified and implemented a reasonably designed supervisory system, including written supervisory procedures.

Regulation Best Interest, which took effect in June 2020, requires broker-dealers to act in the best interest of their retail customers when making securities recommendations. This includes establishing and maintaining written policies and procedures reasonably designed to achieve compliance with the regulation. The rule was adopted by the Securities and Exchange Commission to raise the standard of conduct for broker-dealers beyond the previous suitability standard, requiring firms to consider costs, reasonably available alternatives, and conflicts of interest when making recommendations.

The findings revealed that JVM Securities willfully violated Reg BI by failing to establish and maintain written policies and procedures and a supervisory system reasonably designed to achieve compliance with the regulation. The firm acted as a placement agent for private placement offerings that it recommended to retail customers, yet during a majority of the relevant period, its written policies and procedures contained no provisions relating to Reg BI whatsoever. This is a significant gap, as private placements are inherently higher-risk investments that require careful suitability and best interest analysis.

The firm also failed to have a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with its customer relationship summary (Form CRS) obligations. Form CRS is a disclosure document that broker-dealers are required to provide to retail investors, summarizing the types of services offered, fees and costs, conflicts of interest, and disciplinary history.

Additionally, the firm failed to timely file required documents related to three private placements and failed to have a supervisory system reasonably designed to comply with FINRA's filing requirements. The required filings were made almost two years late and only after FINRA specifically requested that the firm do so.

For investors, this case highlights the importance of Regulation Best Interest as a safeguard. Investors should ask their broker-dealer whether the firm has written policies for Reg BI compliance, and they should request and review the firm's Form CRS before opening an account. If a firm cannot produce these documents promptly, investors should consider it a red flag and look elsewhere for financial services.

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According to FINRA, Pershing LLC, based in Jersey City, New Jersey, was censured, fined $175,000, and required to pay regulatory transaction fees for unreported fractional share trades executed between June 1997 and June 2023. The firm was found in violation of FINRA's trade reporting rules for fail...

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According to FINRA, Pershing LLC, based in Jersey City, New Jersey, was censured, fined $175,000, and required to pay regulatory transaction fees for unreported fractional share trades executed between June 1997 and June 2023. The firm was found in violation of FINRA's trade reporting rules for failing to report millions of fractional share trades over a 26-year period.

The findings revealed that Pershing LLC failed to report fractional share trades to the FINRA/Nasdaq Trade Reporting Facility (FNTRF), the Over-the-Counter Reporting Facility (ORF), and their predecessors. During a sample period of 11 years, the firm failed to report over five million fractional share trades with customers. Because these trades went unreported, the firm also did not pay the regulatory transaction fees associated with them. Regulatory transaction fees fund the operations of securities regulators and are an essential component of the market oversight framework.

The firm also failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with FINRA's rules for reporting fractional share trades. Although the firm devised a supervisory framework for such reporting in July 2022, the system was not implemented until June 2023, meaning there was a gap of nearly a year between designing the solution and putting it into practice.

Accurate trade reporting is fundamental to the integrity of the securities markets. Regulators, investors, and market participants rely on trade data to monitor market activity, detect potential misconduct, and ensure fair pricing. When a major clearing firm like Pershing, which processes trades on behalf of numerous broker-dealers, fails to report millions of trades, it creates a significant gap in the market data that regulators depend on to protect investors.

For investors, this case underscores the importance of the infrastructure that supports the securities markets. While individual investors may not directly interact with trade reporting systems, the accuracy of these systems directly affects market transparency and the ability of regulators to detect fraud and manipulation. Investors should be aware that even large, well-established firms can have systemic compliance failures, and that FINRA actively investigates and sanctions such failures. This case also highlights how compliance problems, if left unaddressed, can compound over time, as evidenced by the 26-year duration of the reporting failures at Pershing.

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According to FINRA, StoneX Financial Inc., based in Winter Park, Florida, was censured, fined $70,000, and ordered to pay $27,074.36 plus interest in restitution for failing to provide best execution with respect to orders in Over-the-Counter (OTC) securities received from other broker-dealers on be...

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According to FINRA, StoneX Financial Inc., based in Winter Park, Florida, was censured, fined $70,000, and ordered to pay $27,074.36 plus interest in restitution for failing to provide best execution with respect to orders in Over-the-Counter (OTC) securities received from other broker-dealers on behalf of their customers. The firm was found in violation of its best execution obligations under FINRA rules.

Best execution is one of the most important obligations that broker-dealers owe to their customers. It requires firms to use reasonable diligence to ascertain the best market for a security and to buy or sell in that market so that the resulting price to the customer is as favorable as possible under prevailing market conditions. This obligation exists to ensure that investors receive fair treatment when their orders are executed.

The findings revealed that StoneX Financial's supervisory system for best execution in OTC securities failed to account for price opportunities available through an electronic messaging service known as OTC Link messages. OTC Link is a widely used inter-dealer quotation system that displays quotes and facilitates trading in OTC securities. By excluding OTC Link messages from its supervisory review, the firm had no way to determine whether customer orders received inferior executions compared to prices that were available through OTC Link. This systematic blind spot meant that customers may have consistently received worse prices than what was available in the market.

The firm later addressed the issue by integrating OTC Link messages into its order management system and implementing a new supervisory review process. However, the damage to customers had already been done during the period when the firm's systems were deficient.

For investors, this case is a reminder that best execution is not merely an abstract regulatory concept but a practical obligation that directly affects the prices investors receive when buying or selling securities. When firms fail to consider all available price sources, investors can end up paying more for securities they buy or receiving less for securities they sell. Investors who trade in OTC securities, which may include smaller or less liquid companies, should be particularly attentive to execution quality. Investors can review their trade confirmations to check the prices they received and should not hesitate to ask their broker about the firm's best execution practices and how it ensures customers receive competitive pricing.

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According to FINRA, Morgan Stanley Smith Barney LLC, based in Purchase, New York, was censured and fined $400,000 for providing non-institutional customers with trade confirmations that either inaccurately disclosed or failed to disclose required mark-up or mark-down information for transactions inv...

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According to FINRA, Morgan Stanley Smith Barney LLC, based in Purchase, New York, was censured and fined $400,000 for providing non-institutional customers with trade confirmations that either inaccurately disclosed or failed to disclose required mark-up or mark-down information for transactions involving municipal securities or corporate debt securities. The firm was found in violation of MSRB Rule G-15 and FINRA Rule 2232.

Trade confirmations are essential disclosure documents that broker-dealers must provide to customers after executing a transaction. For non-institutional customers trading in fixed-income securities such as municipal bonds and corporate bonds, these confirmations must include specific information about the mark-up or mark-down applied to the transaction. A mark-up is the amount a broker-dealer adds to the price it paid for a security when selling it to a customer, while a mark-down is the amount deducted from the price when buying a security from a customer. This information allows investors to understand the true cost of their transactions.

The findings revealed that Morgan Stanley Smith Barney's confirmations also omitted the time the trade was executed and failed to include references and hyperlinks to the Electronic Municipal Market Access (EMMA) system and the Trade Reporting and Compliance Engine (TRACE) webpages. EMMA and TRACE are publicly available tools that allow investors to access pricing data and other information about municipal and corporate bond transactions. By not providing these references, the firm deprived customers of easy access to tools they could use to evaluate the fairness of the prices they received.

Notably, the firm self-identified these compliance issues and reported them to FINRA. While self-reporting is generally viewed favorably by regulators and may result in reduced sanctions, it does not eliminate the violations or the harm caused to customers who received inadequate disclosures.

For investors, this case highlights the importance of carefully reviewing trade confirmations. Investors in municipal bonds and corporate debt securities should verify that their confirmations include mark-up or mark-down information, execution times, and references to EMMA and TRACE. These tools empower investors to compare the prices they received against prevailing market prices. If a confirmation appears incomplete, investors should contact their broker-dealer to request the missing information. Transparency in fixed-income trading costs is essential for making informed investment decisions and ensuring fair treatment.

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According to FINRA, American Portfolios Financial Services, Inc., based in Holbrook, New York, was censured and fined $225,000 for failing to develop and implement an anti-money laundering (AML) compliance program reasonably designed to detect and cause the reporting of suspicious activity in low-pr...

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According to FINRA, American Portfolios Financial Services, Inc., based in Holbrook, New York, was censured and fined $225,000 for failing to develop and implement an anti-money laundering (AML) compliance program reasonably designed to detect and cause the reporting of suspicious activity in low-priced securities. The firm was also found in violation of its obligations under Section 5 of the Securities Act of 1933 regarding potentially restricted securities.

Anti-money laundering programs are a critical line of defense against financial crimes. Under the Bank Secrecy Act, broker-dealers are required to establish AML programs that include procedures for detecting and reporting suspicious activity. This obligation is particularly important in the context of low-priced securities, commonly known as penny stocks, which are frequently exploited in money laundering, market manipulation, and fraud schemes.

The findings revealed that American Portfolios relied exclusively on an exception report prepared by its clearing firm that showed only basic information concerning deposits of low-priced securities. This report did not show historical or aggregated information and was not a reasonable tool to identify patterns of suspicious activity. Without the ability to view patterns and trends over time, the firm could not effectively detect the hallmarks of suspicious activity, such as repeated deposits of low-priced securities followed by liquidation and withdrawal of funds.

The firm also failed to reasonably investigate customers who engaged in suspicious patterns of depositing shares of low-priced securities, liquidating some or all of those shares, and withdrawing the funds shortly thereafter. This deposit-sell-withdraw pattern is a well-known red flag for money laundering and potential violations of securities laws. Additionally, the firm failed to establish a supervisory system reasonably designed to achieve compliance with Section 5 of the Securities Act, which prohibits the sale of unregistered securities that do not qualify for an exemption from registration.

For investors, this case serves as a reminder that AML compliance is not merely a regulatory checkbox but a vital safeguard that protects the integrity of the markets. When firms fail to detect and report suspicious activity, it can facilitate fraud and market manipulation that harm innocent investors. Investors should be aware that activity in low-priced securities is subject to heightened scrutiny by regulators, and they should ensure that any transactions in such securities comply with applicable laws. This case also underscores the importance of firms maintaining robust compliance systems rather than relying on minimal third-party reporting.

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According to FINRA, North Capital Private Securities Corporation, based in Salt Lake City, Utah, was censured and fined $40,000 for failing to timely file offering documents with FINRA for certain private placements and for involvement in the preparation of retail communications that violated FINRA ...

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According to FINRA, North Capital Private Securities Corporation, based in Salt Lake City, Utah, was censured and fined $40,000 for failing to timely file offering documents with FINRA for certain private placements and for involvement in the preparation of retail communications that violated FINRA content standards. The firm was found in violation of FINRA filing requirements and FINRA Rule 2210, which governs communications with the public.

FINRA requires broker-dealers to file private placement offering documents within specified timeframes to enable regulatory review and investor protection oversight. The findings revealed that North Capital's filings were, on average, 163 days late, or 178 days after the first sale. These delays meant that FINRA could not review the offering materials in a timely manner to identify potential issues that could harm investors. Timely filing is essential because it allows regulators to flag problematic offerings before significant investor harm occurs.

The findings also revealed that the firm was involved in the preparation of retail communications that violated the content standards set forth in FINRA Rule 2210. The firm reviewed and approved emails and slide decks that were not fair and balanced and failed to prominently disclose risks associated with the investments being promoted. Perhaps most concerning, two slide decks contained language that improperly implied that FINRA endorsed the investment described. FINRA does not endorse any investment product, and any suggestion to the contrary is misleading and can give investors a false sense of security about the safety or quality of an investment.

For investors, this case illustrates several important points. First, the timely filing of private placement documents with FINRA is a regulatory requirement that exists to protect investors. When firms fail to make these filings on time, it undermines the regulatory review process that helps identify potentially fraudulent or problematic offerings. Second, investors should be skeptical of any marketing materials that suggest a regulatory body like FINRA has endorsed or approved a particular investment. FINRA does not endorse investments, and such claims are a serious red flag. Third, all investment communications must be fair and balanced, meaning they must present both the potential benefits and the risks of an investment. If marketing materials emphasize potential returns without equally disclosing risks, investors should approach the investment with caution and seek independent advice.

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According to FINRA, SAL Equity Trading, GP, based in Bala Cynwyd, Pennsylvania, was censured and fined $75,000 for inaccurately reporting transactions to the Trade Reporting and Compliance Engine (TRACE) by failing to include the required No Remuneration (NR) indicator. The firm was found in violati...

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According to FINRA, SAL Equity Trading, GP, based in Bala Cynwyd, Pennsylvania, was censured and fined $75,000 for inaccurately reporting transactions to the Trade Reporting and Compliance Engine (TRACE) by failing to include the required No Remuneration (NR) indicator. The firm was found in violation of FINRA Rule 6730(d), which governs the accuracy of TRACE reports.

TRACE is FINRA's system for collecting and disseminating information on secondary market transactions in fixed-income securities, including corporate bonds and other debt instruments. Accurate TRACE reporting is essential for market transparency because it provides investors, regulators, and market participants with reliable data about bond prices and trading activity. The NR indicator is a specific reporting flag that must be included when a transaction is executed without a mark-up, mark-down, or commission. This indicator helps ensure that the pricing data available to the market accurately reflects the terms of each transaction.

The findings revealed that SAL Equity Trading's reporting errors resulted from an error during the firm's transition to a new TRACE reporting system. During this transition, the firm failed to include the NR indicator in TRACE reports for transactions that were executed without any remuneration to the firm. The firm also failed to establish a supervisory system reasonably designed to achieve compliance with FINRA Rule 6730(d), meaning there was no adequate quality control process in place to catch these reporting errors.

System transitions are a known risk area in the securities industry, as changes to technology infrastructure can introduce errors in data feeds, reporting mechanisms, and compliance processes. Firms are expected to thoroughly test new systems before implementation and to have supervisory controls in place to detect and correct errors during and after the transition.

For investors, this case demonstrates the importance of accurate trade reporting in the fixed-income markets. While individual investors may not directly monitor TRACE data, the accuracy of this data underpins the transparency and fairness of the bond market. Inaccurate reporting can distort market pricing information and undermine investor confidence. This case also serves as a reminder that firms must take extra care during system transitions to ensure that compliance obligations continue to be met. Investors who trade in fixed-income securities should be aware that TRACE data is publicly available and can be used to verify the fairness of bond prices they receive.

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According to FINRA, Cantor Fitzgerald & Co., based in New York, New York, was censured, fined $100,000, and ordered to pay $51,241.16 plus interest in restitution for failing to provide best execution with respect to customer orders in Over-the-Counter (OTC) securities. The firm was found in violati...

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According to FINRA, Cantor Fitzgerald & Co., based in New York, New York, was censured, fined $100,000, and ordered to pay $51,241.16 plus interest in restitution for failing to provide best execution with respect to customer orders in Over-the-Counter (OTC) securities. The firm was found in violation of its best execution obligations under FINRA rules.

Best execution requires broker-dealers to use reasonable diligence to ascertain the best market for a security and to execute customer orders so that the resulting price is as favorable as possible under prevailing market conditions. This fundamental obligation protects investors by ensuring they receive competitive prices when buying or selling securities.

The findings revealed that Cantor Fitzgerald's supervisory system for best execution failed to account for price opportunities available through OTC Link messages, an electronic messaging service widely used for trading OTC securities. Even after the firm incorporated OTC Link messages into its best execution supervision review, the review had unreasonably narrow parameters. Specifically, the firm only reviewed trades executed between 9:45 a.m. and 3:45 p.m., only when the order and OTC Link message were executable for at least five seconds, and only when the potential price improvement was at least $10. These narrow parameters meant that many instances of potential price improvement were excluded from review.

Furthermore, a technical issue caused an exception report used for best execution supervision to generate no data for 75 trading days. This meant that during those 75 days, the firm had effectively no supervisory review of best execution for OTC securities, leaving customers exposed to potentially inferior executions without any mechanism for detection or correction.

For investors, this case illustrates that best execution obligations are ongoing and require robust, comprehensive supervisory systems. Even when a firm takes steps to improve its processes, those improvements must be meaningfully designed to capture the full range of potential issues. Narrow review parameters and technical failures can undermine the purpose of supervisory controls. Investors who trade in OTC securities should be particularly attentive to execution quality, as these markets may have less liquidity and wider spreads than exchange-listed securities. Investors can review their trade confirmations and compare execution prices against publicly available market data to assess whether they are receiving competitive pricing from their broker-dealer.

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