According to FINRA, Fenix Securities LLC was censured and fined $250,000 on October 21, 2024, for permitting foreign individuals to conduct a securities business using the firm's systems when they were not registered with FINRA in any capacity.
The firm used foreign individuals to refer non-U.S. customer accounts to the firm, and the individuals then accessed the firm's trading platform and used that access to place trades in customer accounts. The firm issued the individuals representative codes that were used to effect transactions in the referred accounts. Additionally, the firm issued trade confirmations that failed to disclose its payment of transaction-based referral fees. The firm paid approximately $20,000 in transaction-based compensation to a foreign, non-registered entity in connection with transactions for customer accounts that were referred to the firm by foreign individuals associated with the entity.
The firm failed to reasonably supervise its business with non-registered foreign individuals who engaged in securities business on the firm's behalf. Despite its routine use of non-registered foreign individuals to direct customers to the firm and place trades using its systems, the firm did not establish or maintain any policies or procedures concerning its registration obligations regarding such foreign individuals. Until August 2023, the firm's written supervisory procedures did not provide any guidance concerning payments of transaction-based compensation to foreign finders. The firm also did not have any supervisory system or procedures to review trade confirmations to ensure they disclosed foreign finder fees.
The firm also failed to develop and implement a reasonable anti-money laundering (AML) program. The firm's AML compliance program did not have procedures that could be reasonably expected to detect and cause the reporting of suspicious transactions. The firm's AML program did not have procedures or guidance on how to review for red flags of suspicious transactions. Rather than reviewing certain exception reports specified in the firm's procedures, the firm conducted a manual review of activity reports that listed basic information about all transactions and did not identify potentially suspicious activity.
Additionally, the firm's AML compliance program did not develop and implement reasonable risk-based procedures for conducting ongoing customer due diligence. While the firm's procedures required conducting risk assessments of new accounts, in practice the firm gave all customers the same "acceptable" risk ranking based on internet and OFAC searches conducted only at account opening, without any assessment of the AML risk presented by the customer. The firm also lacked any process to conduct ongoing due diligence of customers.
This case reveals serious structural problems in the firm's operations. Allowing unregistered individuals to place trades in customer accounts completely circumvents the regulatory framework designed to protect investors. FINRA registration requirements exist to ensure that individuals conducting securities business have passed appropriate examinations and are subject to oversight. When firms allow unregistered individuals to conduct business, investors have no assurance that these individuals have any training or competence, and there is no regulatory record that investors can check. The failure to disclose finder's fees on trade confirmations compounds the problem by hiding from investors the fact that unregistered, unvetted individuals were being compensated for their business. The AML failures created an environment where suspicious activity could go undetected and unreported. Investors should avoid firms that cut corners on registration requirements, as it suggests a broader disregard for investor protection rules.
