Bad Brokers

According to FINRA, Susquehanna Financial Group, LLLP was censured and fined $100,000 for inaccurately reporting transactions in TRACE-eligible securities without the required No Remuneration (NR) indicator.

The reporting failures occurred during the firm's transition to a new TRACE reporting sys...

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According to FINRA, Susquehanna Financial Group, LLLP was censured and fined $100,000 for inaccurately reporting transactions in TRACE-eligible securities without the required No Remuneration (NR) indicator.

The reporting failures occurred during the firm's transition to a new TRACE reporting system. Due to an error in that transition, the firm failed to include the NR indicator in TRACE reports for transactions executed without a mark-up, mark-down, or commission. The firm remediated the error only after FINRA brought it to the firm's attention.

Beyond the reporting errors themselves, FINRA found that the firm failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with FINRA Rule 6730(d). The firm had no supervisory system or procedures to oversee the use of the NR indicator when reporting trades to TRACE. The firm simply did not perform any review of its use of the NR indicator in its TRACE reports.

The NR indicator serves an important function in the fixed income markets. It identifies transactions where the reporting firm did not receive compensation, which provides valuable information about the nature of trades and helps ensure market transparency. When this indicator is missing or inaccurate, it can distort the market data that investors and regulators rely upon.

Following the FINRA action, Susquehanna amended its written supervisory procedures to require a supervisory review for the accuracy of the NR indicator when reporting trades to TRACE. The firm also retroactively performed this review.

This case illustrates the importance of proper testing and oversight when firms implement new reporting systems. System transitions are high-risk periods for compliance failures, and firms should have procedures in place to verify that new systems are functioning correctly. For investors, accurate TRACE reporting contributes to fair and transparent fixed income markets.

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According to FINRA, Rialto Markets LLC was censured and fined $50,000 for failing to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to safeguard customer records and information in violation of Regulation S-P.

The findings revealed serio...

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According to FINRA, Rialto Markets LLC was censured and fined $50,000 for failing to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to safeguard customer records and information in violation of Regulation S-P.

The findings revealed serious cybersecurity deficiencies despite prior FINRA guidance. FINRA had previously advised the firm to establish procedures and systems to address and mitigate cybersecurity risks. However, the firm's procedures failed to address, and the firm failed to implement, critical data loss prevention controls including multi-factor authentication for all email accounts, email access and other audit logs, alerts for suspicious activities, and email forwarding rules.

The consequences of these failures were severe. An unauthorized user gained access to a firm employee's business email account and had unrestricted access to the nonpublic personal information of over 4,400 firm customers, including Social Security numbers, driver's license numbers, and home addresses. While the firm was engaged in a private offering, the unauthorized user exploited this access to facilitate the fraudulent transfer of over $1 million from the firm's escrow agent to a bank account controlled by the unauthorized user.

The firm did not detect or prevent the unauthorized access until after the fraudulent transfer was discovered. Government authorities recovered some of the transferred funds, and the firm's escrow agent made the offeror whole by providing the remaining funds.

Upon discovering the breach, the firm enhanced its cybersecurity controls and procedures. The firm also quickly identified affected customers, notified them and regulatory authorities, and offered free credit monitoring.

This case serves as a stark reminder of the importance of cybersecurity in the financial services industry. Investors should be aware that their personal information is entrusted to financial firms and should inquire about the security measures firms have in place to protect that information.

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According to FINRA, Colliers Securities LLC was censured and fined $55,000 for multiple failures related to municipal securities transaction reporting and customer confirmations.

The firm failed to utilize the required special condition indicator for transactions in new issue municipal securities...

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According to FINRA, Colliers Securities LLC was censured and fined $55,000 for multiple failures related to municipal securities transaction reporting and customer confirmations.

The firm failed to utilize the required special condition indicator for transactions in new issue municipal securities reported to the Municipal Securities Rulemaking Board's (MSRB) Real-Time Transaction Reporting System (RTRS). As a participant in municipal securities offerings serving as sole underwriter, syndicate manager, syndicate member, selling group member, or distribution participant, the firm was required to append specific indicators when reporting. However, the firm failed to do so for approximately 5,400 List Offering Price and Takedown Transactions.

Additionally, the firm failed to disclose, or accurately disclose, required mark-up and mark-down information on retail customer confirmations. Approximately 50 confirmations for municipal securities transactions and approximately 50 confirmations for corporate debt securities transactions either did not include or inaccurately disclosed the mark-up or mark-down information. These failures stemmed from errors in the firm's order management system and data entry errors.

The firm became aware of the confirmation issue from FINRA in May 2023 but did not remediate the error until January 2024, an unacceptably long delay.

FINRA also found that the firm's supervisory system and procedures were not reasonably designed to achieve compliance with MSRB Rules G-14 and G-15. The procedures failed to specify what steps firm personnel should take when reviewing RTRS reports.

Mark-up and mark-down disclosure is important for investors because it allows them to understand the costs associated with their bond transactions. Following the action, the firm began conducting and documenting daily reviews of its RTRS reporting and customer confirmations, provided additional employee training, and updated its procedures.

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According to FINRA, PNC Investments LLC was censured, fined $200,000, and required to comply with certain undertakings for failing to establish and maintain a reasonably designed supervisory system for the surveillance of deferred variable annuity exchange rates.

Variable annuity exchanges occur ...

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According to FINRA, PNC Investments LLC was censured, fined $200,000, and required to comply with certain undertakings for failing to establish and maintain a reasonably designed supervisory system for the surveillance of deferred variable annuity exchange rates.

Variable annuity exchanges occur when customers surrender an existing variable annuity contract and use the proceeds to purchase a new one. While such exchanges can sometimes benefit customers, they can also result in significant costs, including surrender charges, loss of benefits, and new commission charges. Excessive exchange rates by individual representatives can be a red flag for churning or other unsuitable recommendations.

FINRA found that the firm's supervisory system did not require it to determine if its associated persons had rates of effecting variable annuity exchanges that should raise concerns about whether such rates evidenced conduct inconsistent with FINRA rules or federal securities laws. The system provided no guidance on how to make such determinations.

Furthermore, the firm's systems did not require tracking or further review of representatives with potentially inappropriate rates of exchanges. The firm also failed to provide guidance to assist supervisors in evaluating whether representatives' exchange rates warranted further review or for them to otherwise assess representatives' aggregate exchange activity.

For investors, variable annuities are complex products with significant fee structures. When representatives engage in excessive exchanges, customers may incur unnecessary costs and lose valuable contract features. Proper surveillance of exchange activity is essential for protecting investors from unsuitable recommendations.

This case underscores the importance of firms having robust surveillance systems to identify potentially problematic patterns in their representatives' sales activities. Investors in variable annuities should carefully consider whether any recommended exchange truly serves their interests and should understand all associated costs before proceeding.

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According to FINRA, Velox Clearing LLC was censured, fined $1,300,000, and required to comply with certain undertakings for serious failures in its anti-money laundering (AML) program and business communications recordkeeping.

The firm's AML program was not reasonably designed to address its high...

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According to FINRA, Velox Clearing LLC was censured, fined $1,300,000, and required to comply with certain undertakings for serious failures in its anti-money laundering (AML) program and business communications recordkeeping.

The firm's AML program was not reasonably designed to address its high-risk customer base and their trading in volatile low-priced securities. Until January 2023, the firm's AML procedures were not customized to its business at all. While the procedures mentioned using exception reports to monitor for suspicious trading, they failed to describe what reports would be used or how they would be reviewed to identify red flags.

The firm also failed to commit adequate staff and resources to its AML program, cycling through eight different AML Compliance Officers with no additional support staff. These officers were burdened with other compliance and operational tasks that prevented them from adequately monitoring trading activity. As a result, the firm failed to detect numerous red flags of potentially suspicious trading including indicators of spoofing, layering, bid support, and marking the close.

Compounding these issues, the firm failed to preserve or supervise employees' use of off-channel business communications. Despite written procedures prohibiting unapproved communication platforms, firm personnel, including the CEO and operations staff, routinely used unapproved text messaging and social media platforms for business communications with clients. These communications included discussions about customer accounts, trading, and order placement. Even after compliance staff instructed employees to cease using unapproved platforms, firm personnel continued to do so with senior management's knowledge. This resulted in over 10,000 off-channel communications going unreviewed and unretained.

The firm also failed to properly supervise and document associated persons' outside brokerage accounts. This case represents a comprehensive failure to maintain the compliance infrastructure necessary to protect investors and market integrity.

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According to FINRA, NewEdge Securities, LLC (formerly known as Mid Atlantic Capital Corporation) was censured and fined $125,000 for failing to report over 19,000 interdealer transactions to TRACE and inaccurately reporting the capacity for over 2,000 additional transactions.

The reporting failur...

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According to FINRA, NewEdge Securities, LLC (formerly known as Mid Atlantic Capital Corporation) was censured and fined $125,000 for failing to report over 19,000 interdealer transactions to TRACE and inaccurately reporting the capacity for over 2,000 additional transactions.

The reporting failures stemmed from the firm's misunderstanding of its reporting obligations. The firm erroneously believed that transactions effected using Delivery versus Payment (DVP) and Receive versus Payment (RVP) accounts created and controlled by a customer firm were not interdealer trades, so it failed to report those transactions to TRACE.

When the firm subsequently replaced the DVP/RVP accounts with a principal account belonging to another member firm, it failed to update its TRACE reporting process and continued to miss reporting these interdealer trades. Additionally, the firm inaccurately reported to TRACE that it had executed transactions with another member firm in an agency capacity when it actually executed those transactions in a principal capacity.

FINRA found that the firm failed to establish, maintain, and enforce a supervisory system and written supervisory procedures reasonably designed to achieve compliance with TRACE reporting rules. The firm had no system or procedures to identify potential failures to report transactions to TRACE. It also lacked any system for verifying that it conducted reviews regarding the accuracy of information reported to TRACE.

Accurate TRACE reporting is essential for transparency in the fixed income markets. When firms fail to report transactions or report them inaccurately, it undermines the integrity of market data that investors, regulators, and other market participants rely upon.

This case illustrates the importance of firms thoroughly understanding their reporting obligations and having systems in place to ensure compliance. Firms should not assume that certain transaction types are exempt from reporting without carefully verifying their obligations under applicable rules.

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According to FINRA, SEI Investments Distribution Co. was censured and fined $150,000 for failing to report interdealer transactions to TRACE and inaccurately reporting execution capacity for related customer transactions.

The firm failed to report interdealer transactions between itself and anoth...

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According to FINRA, SEI Investments Distribution Co. was censured and fined $150,000 for failing to report interdealer transactions to TRACE and inaccurately reporting execution capacity for related customer transactions.

The firm failed to report interdealer transactions between itself and another firm that acted as an executing broker to fill customer orders. The firm incorrectly believed that the agent it employed to submit transaction information to TRACE was reporting these interdealer transactions. However, neither the agent nor the firm reported the transactions, resulting in unreported trades.

For most of the related customer orders, the firm inaccurately reported to TRACE that it executed transactions in a principal capacity when it actually executed them in an agency capacity. The firm later began using a principal account for these customer transactions, which made its principal capacity reporting accurate going forward.

The firm also failed to report the correct capacity in customer trade confirmations. Customers received confirmations for transactions that contained inaccurate information about how their trades were executed.

FINRA found that the firm failed to establish, maintain, and enforce a supervisory system and written supervisory procedures reasonably designed to achieve compliance with TRACE reporting rules. The firm had no system or procedures to identify potential failures to report transactions to TRACE or errors in the firm's reporting of its execution capacity.

Accurate reporting of execution capacity matters because it affects how customers understand their transactions. Whether a firm acts as principal or agent can have implications for pricing and potential conflicts of interest. Customers have a right to know in what capacity their broker-dealer acted.

This case demonstrates the importance of firms not only having proper reporting systems but also verifying that third-party agents they rely upon are actually performing the reporting functions the firm expects. Firms remain responsible for their reporting obligations regardless of delegation arrangements.

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According to FINRA, Evan Pfeuffer was barred from association with any FINRA member in all capacities for refusing to provide information and documents requested during a FINRA investigation.

The investigation originated from public reports of litigation between member firms. As part of its inqui...

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According to FINRA, Evan Pfeuffer was barred from association with any FINRA member in all capacities for refusing to provide information and documents requested during a FINRA investigation.

The investigation originated from public reports of litigation between member firms. As part of its inquiry into these matters, FINRA requested information and documents from Pfeuffer. Without admitting or denying the findings, Pfeuffer consented to the bar and to the entry of findings that he refused to comply with FINRA's requests.

Cooperation with regulatory investigations is a fundamental obligation of all persons associated with FINRA member firms. FINRA Rule 8210 requires associated persons to provide information and testimony in connection with FINRA investigations and examinations. This rule is essential to FINRA's ability to protect investors by investigating potential misconduct.

When individuals refuse to cooperate with FINRA investigations, it prevents regulators from fully examining potential violations of securities laws and rules. This obstruction can leave investors unprotected and undermine confidence in the securities markets.

A bar from the securities industry is the most severe sanction FINRA can impose on an individual. It permanently prohibits the person from associating with any FINRA member firm in any capacity. This sanction reflects the seriousness with which FINRA views failures to cooperate with its regulatory functions.

For investors, this case serves as a reminder that their interests are protected by regulatory oversight. When registered representatives or other associated persons refuse to participate in investigations, it raises serious concerns about what they may be trying to hide.

Investors can check the background of any broker or firm using FINRA's BrokerCheck tool, which includes information about disciplinary actions such as bars. This resource helps investors make informed decisions about who they trust with their investments.

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According to FINRA, Jose Anthony Quinones was barred from association with any FINRA member in all capacities for refusing to provide documents and information requested during a FINRA investigation.

The investigation arose from an amended Form U5 filed by Quinones' former member firm. The Form U...

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According to FINRA, Jose Anthony Quinones was barred from association with any FINRA member in all capacities for refusing to provide documents and information requested during a FINRA investigation.

The investigation arose from an amended Form U5 filed by Quinones' former member firm. The Form U5 is the Uniform Termination Notice for Securities Industry Registration, which firms must file when a registered person leaves the firm. The amended filing disclosed that Quinones was under review for potential involvement in an undisclosed outside business activity (OBA) at the time he was terminated from the firm for failing to renew his securities registration.

Outside business activities are a significant concern for securities regulators because they can create conflicts of interest, divert attention from customer service, or involve activities that could harm investors. FINRA rules require registered persons to provide written notice to their firms before engaging in outside business activities, allowing firms to evaluate potential conflicts and determine whether limitations or conditions should be imposed.

When FINRA sought to investigate the circumstances surrounding Quinones' potential undisclosed OBA, he refused to provide the requested documents and information. This refusal prevented FINRA from fully examining whether violations occurred and whether investors may have been harmed.

Without admitting or denying the findings, Quinones consented to the bar. The bar permanently prohibits him from associating with any FINRA member firm in any capacity.

For investors, this case highlights the importance of disclosure requirements in the securities industry. When brokers fail to disclose their outside activities, customers cannot make fully informed decisions about their financial relationships. Investors should feel comfortable asking their financial advisors about any outside business activities and should report any concerns to FINRA.

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According to FINRA, Jeffrey Alan Arbeit was barred from association with any FINRA member in all capacities for refusing to produce information and documents requested during a FINRA investigation.

The investigation concerned allegations made in a Form U5 filing submitted by Arbeit's member firm....

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According to FINRA, Jeffrey Alan Arbeit was barred from association with any FINRA member in all capacities for refusing to produce information and documents requested during a FINRA investigation.

The investigation concerned allegations made in a Form U5 filing submitted by Arbeit's member firm. The Form U5 stated that Arbeit was terminated from the firm for failing to report private securities transactions.

Private securities transactions, sometimes called "selling away," occur when a registered representative participates in securities transactions outside the regular course or scope of their employment with a member firm. FINRA rules require registered persons to provide written notice to their firms before participating in such transactions and to receive the firm's approval before participating in transactions for which they will receive compensation.

These rules exist to protect investors. When representatives conduct securities business outside their firm's knowledge and supervision, customers lose important protections. Firms cannot supervise transactions they don't know about, and customers may be exposed to unsuitable or fraudulent investments without the oversight that comes with transactions conducted through a member firm.

When FINRA sought to investigate the circumstances surrounding Arbeit's alleged unreported private securities transactions, he refused to provide the requested information and documents. Without admitting or denying the findings, Arbeit consented to the bar.

This case serves as a reminder that registered representatives have ongoing obligations to disclose their securities activities to their firms. Investors should be cautious of any investment opportunity presented by their broker that does not appear to go through normal firm channels. If a broker suggests an investment that seems separate from their firm's offerings, investors should ask questions and verify that the transaction is being properly supervised.

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