Bad Brokers

According to FINRA, Merrill Lynch, Pierce, Fenner & Smith Incorporated was censured and ordered to pay $1,468,380 plus interest in restitution to customers on July 1, 2024, for failing to comply with Regulation Best Interest.

The firm failed to establish and maintain a supervisory system and writ...

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According to FINRA, Merrill Lynch, Pierce, Fenner & Smith Incorporated was censured and ordered to pay $1,468,380 plus interest in restitution to customers on July 1, 2024, for failing to comply with Regulation Best Interest.

The firm failed to establish and maintain a supervisory system and written procedures reasonably designed to ensure that its registered representatives had a reasonable basis to believe their recommendations were in each customer's best interest. Specifically, the firm offered customers a 12-month waiver of otherwise-applicable advisory fees on certain new-issue products, but only if the products were purchased initially in an advisory account.

However, in certain instances, firm representatives recommended that customers purchase such products in a brokerage account and then promptly recommended the transfer of those same products to an advisory account. These unnecessary brokerage recommendations caused customers to incur advisory fees that would have been avoided if the assets were purchased initially in advisory accounts. As a result of the firm's supervisory failures, customers paid almost $1.5 million in avoidable fees.

This case highlights the importance of Regulation Best Interest, which requires broker-dealers to act in the best interest of retail customers when making recommendations. Investors should understand that firms must not only make suitable recommendations but must also consider conflicts of interest and ensure that the recommendations serve the customer's best interest rather than generating unnecessary fees. The firm has since enhanced its supervisory system and written supervisory procedures to address these issues.

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According to FINRA, RBC Capital Markets, LLC was censured and fined $75,000 on July 2, 2024, for failing to provide certain customers with mutual fund sales charge waivers and fee rebates to which they were entitled through rights of reinstatement offered by mutual fund companies.

The firm's supe...

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According to FINRA, RBC Capital Markets, LLC was censured and fined $75,000 on July 2, 2024, for failing to provide certain customers with mutual fund sales charge waivers and fee rebates to which they were entitled through rights of reinstatement offered by mutual fund companies.

The firm's supervisory system did not adequately oversee discounts available through rights of reinstatement. The firm relied on an automated alert designed to identify transactions in which a customer liquidates a position in a fund family and then purchases back into the same family at a later date. However, the alert was not designed to capture all transactions eligible for reinstatement privileges. Additionally, the firm failed to reasonably review alerts that did trigger to ensure that eligible customers were credited with reinstatement privileges.

As a result of these supervisory failures, eligible customers paid $264,939.44 in excess sales charges and fees. The firm has made full restitution, plus interest, to the affected customers and was required to certify that it has remediated the issues and implemented a reasonably designed supervisory system.

This case illustrates the importance of proper supervisory systems for ensuring customers receive all fee waivers and discounts to which they are entitled. Investors purchasing mutual funds should be aware of available sales charge waivers, including rights of reinstatement, which allow investors who recently sold shares to repurchase them without paying a new sales charge. Investors should review their statements carefully and question any unexpected sales charges or fees.

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According to FINRA, SI Securities, LLC was censured and fined $185,000 on July 2, 2024, for willfully violating Exchange Act Rule 10b-9 and FINRA Rule 2010 by failing to return investor funds after a material change to the minimum contingency in an offering.

The firm sold subscriptions to a priva...

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According to FINRA, SI Securities, LLC was censured and fined $185,000 on July 2, 2024, for willfully violating Exchange Act Rule 10b-9 and FINRA Rule 2010 by failing to return investor funds after a material change to the minimum contingency in an offering.

The firm sold subscriptions to a private placement offering on a best-efforts basis with a minimum contingency of $1.29 million. On the day before the termination date, the issuer reduced the minimum contingency amount to $790,000. Because this was a material change to the terms of the offering, the firm was required to terminate the offering and return investor funds at that time. Instead, the firm asked investors to affirmatively reconfirm their subscriptions subject to the reduced minimum contingency amount, only refunding those who did not reconfirm.

Additional violations included failing to return funds directly to investors for terminated offerings. For terminated offerings that did not meet the minimum contingency, the firm instructed the escrow agent to send refunds to a separate firm account rather than directly to investors. The firm also failed to timely file with FINRA required documents and information for more than 50 private placement offerings, with delays ranging from two to 383 days.

The firm also willfully violated Exchange Act Section 17(a)(1) and Rule 17a-14 by failing to have a supervisory system reasonably designed to achieve compliance with Form CRS obligations and failed to deliver timely Form CRS to customers. This case demonstrates the critical importance of following proper procedures when material changes occur in securities offerings and maintaining adequate supervisory systems for regulatory compliance.

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According to FINRA, Oshima & Associates was censured and fined $10,000 on July 5, 2024, for maintaining inaccurate books and records by mismarking transactions as "unsolicited" when they were, in fact, "discretionary."

This violation relates to the fundamental requirement that broker-dealers main...

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According to FINRA, Oshima & Associates was censured and fined $10,000 on July 5, 2024, for maintaining inaccurate books and records by mismarking transactions as "unsolicited" when they were, in fact, "discretionary."

This violation relates to the fundamental requirement that broker-dealers maintain accurate books and records. The distinction between unsolicited and discretionary transactions is significant because it affects the level of regulatory scrutiny and the firm's supervisory obligations. Discretionary transactions occur when a broker has authority to make investment decisions without the customer's prior approval for each transaction, which requires specific written authorization and heightened supervision.

The firm was required to certify that it has remediated the issues identified and implemented a reasonably designed supervisory system, including written supervisory procedures. Accurate record-keeping is essential for regulatory oversight and investor protection, as it allows regulators to monitor trading activity and ensure that firms are properly supervising discretionary accounts.

Investors should understand the difference between discretionary and non-discretionary accounts. In a discretionary account, the broker has authority to buy and sell securities without asking permission for each trade. This requires a high level of trust and proper documentation. Investors should regularly review their account statements to ensure that all transactions were properly authorized and that their account is being handled according to their agreement with the firm.

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According to FINRA, Joseph Gunnar & Co. LLC was censured, fined $65,000, and ordered to pay $69,898.17 plus interest in restitution to customers on July 8, 2024, for charging unfair commissions on equity transactions and failing to establish adequate supervision to monitor for unfair commissions.

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According to FINRA, Joseph Gunnar & Co. LLC was censured, fined $65,000, and ordered to pay $69,898.17 plus interest in restitution to customers on July 8, 2024, for charging unfair commissions on equity transactions and failing to establish adequate supervision to monitor for unfair commissions.

The firm charged a minimum commission of $100 on equity transactions, in addition to a handling fee. The commissions charged ranged from 5.01 percent to 55.56 percent of the transactions' principal amount. While the firm's supervisory system was designed to flag for review any transaction where the commission exceeded 2.4 percent of the transaction's principal amount, supervisors often failed to consider the factors required by FINRA Rule 2121.01 when determining whether the commission was fair.

Where the commission was equal to or less than the firm's $100 minimum commission, the firm's supervisors routinely approved transactions without considering relevant factors. Consequently, the firm never cancelled or reduced a commission for a transaction where it charged the $100 minimum commission, even though in many instances the total commission exceeded five percent of the transaction's principal amount.

This case highlights that broker-dealers must ensure their commissions are fair and reasonable, not excessive. FINRA rules require firms to consider multiple factors when determining fair pricing, including the type of security, the availability of the security, the expense of executing the order, the value of services rendered, and the amount of money involved in the transaction. Investors who notice high commission charges relative to the size of their transactions should question whether those charges are reasonable and fair.

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According to FINRA, Lincoln Financial Distributors, Inc. was censured and fined $300,000 on July 8, 2024, for indirectly paying approximately $2.9 million in transaction-based compensation to an unregistered entity.

The firm caused payments totaling approximately $8.7 million in transaction-based...

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According to FINRA, Lincoln Financial Distributors, Inc. was censured and fined $300,000 on July 8, 2024, for indirectly paying approximately $2.9 million in transaction-based compensation to an unregistered entity.

The firm caused payments totaling approximately $8.7 million in transaction-based compensation to be paid to an unaffiliated selling broker-dealer in connection with the sale of variable universal life insurance, a securities product. Of this amount, the firm directed that a portion of those funds be paid to an unregistered entity. The unregistered entity was a limited liability company not affiliated with the firm and primarily owned by an insurance agent who was not registered with FINRA. One of the selling broker-dealer's registered representatives also held a minority stake in the entity.

This violation is significant because FINRA registration requirements exist to protect investors by ensuring that individuals and entities receiving transaction-based compensation meet qualification standards, undergo background checks, and are subject to regulatory oversight and supervision. When firms pay transaction-based compensation to unregistered entities, they circumvent these important investor protections.

The case serves as a reminder that securities firms must ensure that all individuals and entities receiving transaction-based compensation from securities transactions are properly registered. Investors should be aware that the people selling them securities products should be registered with FINRA and that this registration can be verified through FINRA's BrokerCheck system. This transparency helps ensure accountability and provides investors with important information about the professionals handling their investments.

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According to FINRA, UBS Financial Services Inc. was censured and fined $850,000 on July 8, 2024, for failing to establish and maintain a supervisory system reasonably designed to monitor transmittals of customer funds to third parties and to respond reasonably to red flags of private securities tran...

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According to FINRA, UBS Financial Services Inc. was censured and fined $850,000 on July 8, 2024, for failing to establish and maintain a supervisory system reasonably designed to monitor transmittals of customer funds to third parties and to respond reasonably to red flags of private securities transactions.

The firm failed to detect that a registered representative, acting outside the scope of his employment, sold securities offered by a third party to his customers. Some of the representative's customers invested approximately $1.8 million through direct wire transfers from their firm accounts to the third party's bank account. Collectively, the customers invested over $7.2 million with the third party and lost most, if not all, of their investments.

The firm did not have a reasonable supervisory system to review transmittals of customer funds to third parties by wire or check. While the firm automatically flagged for heightened review wires that met certain criteria, its automated surveillance system did not detect and monitor instances in which multiple unrelated customers transferred funds to the same external party. Furthermore, when the firm did flag wires for additional review, it failed to investigate why customers were wiring money to the same external, non-firm entity for an investment.

After discovering the representative's misconduct, the firm repaid the customers their principal plus the amount of appreciation listed on their statements, totaling more than $17 million in restitution. This case illustrates the critical importance of robust supervisory systems to detect patterns that may indicate fraud or unauthorized activity. Investors should be cautious about wiring funds to third parties and should verify that any investment opportunity is legitimate and has been properly reviewed by their brokerage firm.

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According to FINRA, FNBB Capital Markets, LLC was censured and fined $30,000 on July 10, 2024, for failing to include certain required mark-up and mark-down information on confirmations sent to retail customers in connection with municipal securities transactions.

The confirmations reported the f...

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According to FINRA, FNBB Capital Markets, LLC was censured and fined $30,000 on July 10, 2024, for failing to include certain required mark-up and mark-down information on confirmations sent to retail customers in connection with municipal securities transactions.

The confirmations reported the firm's mark-up and mark-down as a dollar amount but failed to include the mark-up or mark-down as a percentage of the prevailing market price. This occurred because the firm did not select the appropriate fields in its clearing firm's systems when entering the transactions. The firm also failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to ensure compliance with MSRB Rule G-15, which governs customer confirmations for municipal securities transactions.

The firm's written supervisory procedures did not reference or discuss the MSRB's requirement that mark-ups or mark-downs be disclosed as both a total dollar amount and a percentage of the prevailing market price. This dual disclosure requirement is designed to help investors understand the true cost of their transactions and compare pricing across different brokers.

This case underscores the importance of transparency in municipal securities transactions. Investors purchasing municipal bonds should receive confirmations that clearly disclose both the dollar amount and percentage of mark-ups or mark-downs charged by the firm. This information allows investors to assess whether they are receiving fair pricing and make informed decisions about their investments. Firms must ensure their systems and procedures are designed to provide these important disclosures to customers.

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According to FINRA, PFS Investments Inc. was censured and fined $60,000 on July 12, 2024, for failing to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with FINRA rules regarding outside business activities.

The firm was on notice that three of its...

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According to FINRA, PFS Investments Inc. was censured and fined $60,000 on July 12, 2024, for failing to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with FINRA rules regarding outside business activities.

The firm was on notice that three of its registered representatives co-owned and operated an outside business activity. Although the firm maintained written supervisory procedures requiring representatives to disclose outside business activities in writing consistent with FINRA Rule 3270, the firm did not enforce that requirement. The firm instructed the representatives that they could no longer remain associated with it unless they terminated their involvement with the outside business activity.

However, the three representatives continued actively working on the outside business activity, and the business continued to make significant sales to its customers. Despite this, the representatives did not immediately leave the firm, nor did the firm ever require them to provide written notice of their involvement with the outside business activity. During a nearly two-year period, hundreds of customers purchased approximately $33 million in e-commerce storefronts and digital real estate from the outside business activity.

This case highlights the critical importance of firms properly supervising and enforcing their policies regarding outside business activities. FINRA Rule 3270 requires registered representatives to provide written notice to their firm before engaging in any outside business activity, which allows the firm to evaluate potential conflicts of interest and ensure proper supervision. Investors should be aware that their registered representatives must disclose outside business activities to their firms, and undisclosed activities may indicate inadequate supervision or potential conflicts of interest.

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According to FINRA, Piper Sandler & Co. was censured and fined $25,000 on July 18, 2024, for permitting an associated person to engage in activities requiring qualification as a municipal securities representative when that individual was not qualified to act in that capacity.

In connection with ...

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According to FINRA, Piper Sandler & Co. was censured and fined $25,000 on July 18, 2024, for permitting an associated person to engage in activities requiring qualification as a municipal securities representative when that individual was not qualified to act in that capacity.

In connection with a municipal bond offering for which the firm acted as underwriter, the associated person provided advice and represented the firm in meetings or calls with the issuer and municipal advisor. These activities required the person to be registered as a municipal securities representative, but the individual lacked the necessary qualifications.

The firm's supervisory systems and written supervisory procedures were not reasonably designed to ensure compliance with MSRB rules relating to qualification requirements. While the firm's procedures tasked supervisors with ensuring that associated persons maintained the registrations required for their job functions and did not engage in activities inconsistent with their qualifications, the procedures did not provide supervisors with guidance on how to carry out these responsibilities. Furthermore, the firm did not provide supervisors access to systems reflecting associated persons' testing, licensing, or registration information.

Following this violation, the firm established a supervisory system for monitoring the registrations of its associated persons and adopted written supervisory procedures requiring compliance to provide supervisors with monthly updates on associated persons' testing, licensing, and qualification status. This case illustrates the importance of ensuring that individuals performing securities-related activities have the appropriate qualifications and registrations. Investors can verify the registrations and qualifications of individuals through FINRA's BrokerCheck system.

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