FINRA Department of Enforcement
Enforcement Priorities
2014
I.
Disciplinary Actions
A.
Public Disciplinary Actions Database
The FINRA Disciplinary Actions Online is a public, searchable database (at
www.finra.org). The database makes available disciplinary action documents
including AWCs, settlements, NAC decisions, OHO decisions and complaints.
Users may search for actions by case number, document text, document type, action
date (by date range), a combination of document text and action date, individual
name and CRD number, or firm name and CRD number. The documents can be
viewed online, printed, or downloaded as text-searchable PDF files.
B.
Publicity Rule Changes
Rule 8313 amendments effective on Dec. 16, 2013. All AWCs, Orders Accepting
Offers of Settlements, and complaints filed after the effective date will be posted to
the on-line database and in the disciplinary monthly notices.
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II.
Greater access to information regarding its disciplinary actions provides
valuable guidance and information to firms, associated persons, other regulators,
and investors.
Releasing detailed disciplinary information to the public can serve to deter and
prevent future misconduct and to improve overall business standards in the
securities industry.
Allows investors to consider firms’ and representatives’ disciplinary histories
when considering whether to engage in business with them.
Firms may use such information to educate their associated persons about
compliance matters, highlighting potential violations and related sanctions, as
well as informing the firms’ compliance procedures involving similar business
lines, products or industry practices.
Any firm or individual facing allegations of rule violations may access existing
disciplinary decisions to gain greater insight on related facts and sanctions.
Program Changes
A.
Addressing Ongoing Conduct Expeditiously
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1. TCDOs (Temporary Cease and Desist Orders): FINRA Rule 9810 authorizes
the Department of Enforcement to seek a Temporary Cease and Desist Order
with respect to certain ongoing violations. FINRA Rule 9840 sets forth the
requirements for the issuance of a TCDO by a Hearing Panel. The Department
of Enforcement has increasingly used this tool in order to quickly address
ongoing customer harm when we learn of fraudulent conduct.
a.
W.R. Rice (2012030531101) (Nov. 2012) -- FINRA obtained a
TCDO to halt further fraudulent sales activities by WR Rice
Financial Services and its owner Joel I. Wilson, as well as the
conversion of investors' funds or assets. Enforcement also filed a
complaint against WR Rice and Wilson charging fraud in the sales of
limited partnership interests in entities in which Wilson has
ownership interest and control, alleging sales of more than $4.5
million in LP interests to approximately 100 investors from
predominantly low-to-moderate-income households, while
misrepresenting or omitting material facts. FINRA alleges that
Wilson and WR Rice promised proceeds would be invested in land
contracts on residential real estate, paying 9.9% interest, when
investors' funds were used to make unsecured loans to Wilson owned
or controlled entities. FINRA also alleges a failure to disclose
improper loans extensions.
b.
Westor Capital Group (2012031479601)(Jan. 2013) -- FINRA
obtained a TCDO against Westor Capital Group, Inc. and its
President, Chief Compliance Officer and Financial and Operations
Principal, Richard Hans Bach, to immediately stop the further
misappropriation and misuse of customer funds and securities. In
addition, FINRA filed a complaint against Westor and Bach,
charging them with failing to allow customers to withdraw account
balances and deliver securities, misusing customer securities, failing
to maintain physical possession or control of securities, and for
operating an unapproved self-clearing business.
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2.
c.
Success Trade (201234211301)(April 2013) -- FINRA obtained a
TCDO by consent to halt further fraudulent activities by Success
Trade Securities and its CEO & President, Fuad Ahmed, as well as
the misuse of investors' funds and assets. FINRA also issued a
complaint against Success Trade Securities and Ahmed charging
fraud in the sales of promissory notes issued by the firm's parent
company, Success Trade, Inc., in which Ahmed holds a majority
ownership interest. FINRA filed the TCDO, to which Ahmed and the
company agreed, thus immediately freezing their activities, based on
the belief that ongoing customer harm and depletion of investor
assets are likely to continue before a formal disciplinary proceeding
against Success Trade Securities.
d.
John Carris Investments and CEO George Carris (2011028647101)
(Oct. 2013) – On Oct. 14, 2013, FINRA obtained a TCDO by
consent by John Carris Investments, LLC (JCI) and its CEO, George
Carris, to immediately halt solicitations of its customers to purchase
Fibrocell Science, Inc. stock without making proper disclosures.
FINRA alleged that during May 2013, JCI fraudulently solicited its
customers to buy Fibrocell stock, without disclosing that during the
same time period, Carris and another firm principal were selling their
shares.
Expediting High Risk Broker Matters
a.
Cross-department initiative launched in February 2013 focused on
fast-tracked regulatory actions against high-risk brokers - brokers
with a pattern of complaints or disclosures for sales practice abuses
that could harm investors as well as the reputation of the securities
industry and financial markets.
b.
In January 2014, Enforcement formed a dedicated team to prosecute
high risk broker cases.
c.
When FINRA examines a firm that hires these high risk brokers,
examiners will review the firm’s due diligence conducted in the
hiring process, review for the adequacy of supervision of higher risk
brokers—including whether the brokers have been placed under
heightened supervision—based on the patterns of past conduct, and
examiners will place particular focus on these brokers’ clients’
accounts in conducting reviews of sales practices.
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3.
III.
Expedited Proceedings for Failure to Cooperate
a.
We may use expedited proceedings against individuals and firms that
fail to comply with information requests and/or OTR requests. Such
failures impede investigations. Further, individuals and firms have an
obligation under Rule 8210 to provide FINRA with requested
information.
b.
The response numbers indicate that not infrequently, the initiation of
the proceeding results in the information being provided.
c.
Statistics:
 2013: 251 proceedings
 2012: 246 proceedings
 2011: 257 proceedings
 2010: 189 proceedings
Substantive Areas of Interest
A.
Structured and Complex Products/Alternative Investments
1.
Residential Mortgage-Backed Securities and Commercial Mortgage-Backed
Securities (RMBS)
a.
Generally
Due to the embedded pre-payment option associated with mortgagebacked products, these securities carry significant re-investment risk,
which can strongly affect the yield investors realize. Also, with
collateralized mortgage obligations (CMOs), some tranches, such as
interest-only strips or inverse floaters, carry much higher levels of
risk than other tranches. Finally, the opaque nature of underlying
collateral and the lack of a robust secondary market for some
mortgage-backed securities should be considered when evaluating
suitability.
With respect to Residential Mortgage-Backed Securities (RMBS),
Issuers of subprime RMBS are required to disclose historical
performance information for past securitizations that contain
mortgage loans similar to those in the RMBS being offered to
investors. Historical delinquency rates are material to investors in
assessing the value of RMBS and in determining whether future
returns may be disrupted by mortgage holders' failures to make loan
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payments. As there are different standards for calculating
delinquencies, issuers are required to disclose the specific method it
used to calculate delinquencies.
b.
Citigroup Global Markets, Inc. (2008012808101) (May 2012)
FINRA fined Citigroup Global Markets, Inc. $3.5 million for
providing inaccurate mortgage performance information, supervisory
failures, and other violations in connection with subprime residential
mortgage-backed securitizations (RMBS).
FINRA found that from January 2006 to October 2007, Citigroup
posted inaccurate mortgage performance data on its website, where it
remained until early May 2012, even though the firm lacked a
reasonable basis to believe that this data was accurate. On multiple
occasions, Citigroup was informed that the information posted was
inaccurate yet failed to correct the data until May 2012. For three
subprime or Alt-A securitizations, the firm provided inaccurate
mortgage performance data that may have affected investors'
assessment of subsequent RMBS.
In addition, Citigroup failed to supervise mortgage-backed securities
pricing because it lacked procedures to verify the pricing of these
securities and did not sufficiently document the steps taken to assess
the reasonableness of traders' prices. Also, Citigroup failed to
maintain required books and records. In certain instances, when it repriced mortgage-backed securities following a margin call, Citigroup
failed to maintain a record of the original margin call, document the
supervisory approval, or demonstrate that the revised price was
applied to the same position throughout the firm.
2.
Collateralized Mortgage Obligations (CMOs), Collateralized Debt
Obligations (CDOs)
a.
Brookstone Securities (2007011413501) (May 2012)
FINRA hearing panel ruled that Brookstone Securities of Lakeland,
FL, and the firm's Owner/CEO Antony Turbeville and one of the
firm's brokers, Christopher Kline, made fraudulent sales of
collateralized mortgage obligations (CMOs) to unsophisticated,
elderly and retired investors. The panel fined Brookstone $1 million
and ordered it to pay restitution of more than $1.6 million to
customers, with $440,600 of that amount imposed jointly and
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severally with Turbeville, and the remaining $1,179,500 imposed
jointly and severally with Kline.
The panel also barred Turbeville and Kline from the securities
industry, and barred Brookstone's former Chief Compliance Officer
David Locy from acting in any supervisory or principal capacity,
suspended him in all capacities for two years and fined him $25,000.
The ruling resolves charges brought by FINRA in December 2009.
The panel found that from July 2005 through July 2007, Turbeville
and Kline intentionally made fraudulent misrepresentations and
omissions to elderly and unsophisticated customers regarding the
risks associated with investing in CMOs. All of the affected
customers were retired investors looking for safer alternatives to
equity investments. According to the decision, Turbeville and Kline
"preyed on their elderly customers' greatest fears," such as losing
their assets to nursing homes and becoming destitute during their
retirement and old age, in order to induce them to purchase
unsuitable CMOs. By 2005, interest rates were increasing, and the
negative effect on CMOs was evident to Turbeville and Kline, yet
they did not explain the changing conditions to their customers.
Instead, they led customers to believe that the CMOs were
"government-guaranteed bonds" that preserved capital and generated
10 percent to 15 percent returns. During the two-year period,
Brookstone made $492,500 in commissions on CMO bond
transactions from seven customers named in the December 2009
complaint, while those same customers lost $1,620,100.
Two of Kline's customers were elderly widows with very limited
investment knowledge, who, vulnerable after their husbands' deaths,
were convinced to invest their retirement savings in risky CMOs.
Kline told the widows that they could not lose money in CMOs
because they were government-guaranteed bonds, and Kline further
increased their risk by trading on margin.
Also, the panel noted that Locy completely ignored his responsibility
as chief compliance officer and "should have been a line of defense
against Turbeville's and Kline's egregious conduct," but instead "he
looked the other way while Turbeville and Kline traded CMO
accounts that were unsuitable for their customers."
The hearing panel concluded that Brookstone was responsible for
Turbeville's and Kline's action. According to the decision, "the firm
neither acknowledged nor accepted responsibility for the misconduct
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at issue in this matter. Instead, through Turbeville and Kline, it
attempted to blame the customers for their own losses."
b.
Guggenheim Securities, LLC (2010022640003) (Oct. 2012)
FINRA fined Guggenheim Securities, LLC of New York $800,000
for failing to supervise two collateralized debt obligation (CDO)
traders who engaged in activities to hide a trading loss. FINRA
sanctioned the two traders: Alexander Rekeda, the former head of
Guggenheim's CDO Desk, was suspended for one year and fined
$50,000; Timothy Day, a trader on Guggenheim's CDO Desk, was
suspended for four months and fined $20,000.
In October 2008, as the result of a failed trade, Guggenheim's CDO
Desk acquired a €5,000,000 junk-rated tranche of a collateralized
loan obligation (CLO). After unsuccessful attempts by Guggenheim's
CDO Desk to sell the position, Rekeda and Day persuaded a hedge
fund customer to purchase the CLO for $950,000 more than it had
previously agreed to pay by falsely presenting the CLO as part of a
package of securities a third party offered for sale. FINRA found that
in an attempt to hide the trading loss on the CLO position, the traders
provided the customer with order tickets that increased the price for
the CLO position and decreased the price of the other positions that
were part of the transaction. When the customer inquired about the
pricing adjustments, Day, at Rekeda's direction, lied and said a thirdparty seller of the CLO position had already settled the trade at a
higher price and requested the customer pay this higher price. The
customer agreed to overpay for the CLO and in return, Day and
Rekeda agreed to compensate the customer through other
transactions, including pricing adjustments on six other CLO trades,
a waiver of fees the customer owed in connection with
resecuritization transactions, and a cash payment to the customer.
The records created to document the transactions did not indicate any
connection to the overpayment for the CLO.
FINRA found Guggenheim failed to conduct adequate review of the
CDO Desk's trades, documentation concerning transactions by
traders on the desk, and the traders' email communications.
3.
Non-Traded REITs
a.
Generally
Although non-traded REITs may offer diversification benefits as
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a part of a balanced portfolio, they do have certain underlying
risk characteristics that can make them unsuitable for certain
investors. As an unlisted product without an active secondary
market, these products offer little price transparency to investors
and little liquidity. The related financial information for these
products may often be unclear to the investor, which makes the
true associated risks and value difficult to ascertain. With many
products, there are questions about valuation and concerns that in
some cases distributions to investors are paid with borrowed
money, over a lengthy period of time, with newly raised capital,
or by a return of principal rather than a return on investment. The
source of the distribution may not be transparent.
On Oct. 4, 2011, FINRA issued an Investor Alert called Public
Non-Traded REITs – Perform a Careful Review Before Investing
to help investors understand the benefits, risks, features, and fees
of these investments.
b.
David Lerner Associates, Inc. and David E. Lerner – Settlement
(2009020741901) (Oct. 2012)
FINRA ordered David Lerner Associates, Inc. (DLA) to pay
approximately $12 million in restitution to affected customers who
purchased shares in Apple REIT Ten, a non-traded $2 billion Real
Estate Investment Trust (REIT) DLA sold, and to customers who
were charged excessive markups. As the sole distributor of the Apple
REITs, DLA solicited thousands of customers, targeting
unsophisticated investors and the elderly, selling the illiquid REIT
without performing adequate due diligence to determine whether it
was suitable for investors. To sell Apple REIT Ten, DLA also used
misleading marketing materials that presented performance results
for the closed Apple REITs without disclosing to customers that
income from those REITs was insufficient to support the
distributions to unit owners. FINRA also fined DLA more than $2.3
million for charging unfair prices on municipal bonds and
collateralized mortgage obligations (CMOs) it sold over a 30 month
period, and for related supervisory violations.
In addition, FINRA fined David Lerner, DLA's founder, President
and CEO, $250,000, and suspended him for one year from the
securities industry, followed by a two-year suspension from acting as
a principal. David Lerner personally made false claims regarding the
investment returns, market values, and performance and prospects of
the Apple REITs at numerous DLA investment seminars and in
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letters to customers. To encourage sales of Apple REIT Ten and
discourage redemptions of shares of the closed REITs, he
characterized the Apple REITs as, for example, a "fabulous cash
cow" or a "gold mine," and he made unfounded predictions regarding
a merger and public listing of the closed Apple REITs, which he
inappropriately claimed would result in a "windfall" to investors.
FINRA also sanctioned DLA's Head Trader, William Mason,
$200,000, and suspended him for six months from the securities
industry for his role in charging excessive muni and CMO markups.
The sanctions resolve a May 2011 complaint (amended in December
2011) as well as an earlier action in which a FINRA hearing panel
found that the firm and Mason charged excessive muni and CMO
markups.
4.
Exchange-Traded Products
a.
Overview
Certain exchange-traded products that employ sophisticated
strategies or access more exotic markets can expose investors to
unexpected results or unforeseen risks. For example, exchangetraded funds (ETFs) that employ optimization strategies using
synthetic derivatives can expose individual investors to the risk of
significant tracking errors. In other words, the performance of the
ETF may differ from that of the underlying benchmark during
times of stress or volatility in unanticipated ways. These risks can
be exacerbated when the ETFs employ significant leverage.
b.
In May 2012, FINRA sanctioned Citigroup Global Markets, Inc;
Morgan Stanley & Co., LLC; UBS Financial Services; and Wells
Fargo Advisors, LLC a total of more than $9.1 million for selling
leveraged and inverse exchange-traded funds (ETFs) without
reasonable supervision and for not having a reasonable basis for
recommending the securities. The firms were fined more than $7.3
million and are required to pay a total of $1.8 million in restitution to
certain customers who made unsuitable leveraged and inverse ETF
purchases.
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Wells Fargo (20090191139) (May 2012) – $2.1 million fine
and $641,489 in restitution
Citigroup (20090191134) (May 2012) – $2 million fine and
$146,431 in restitution
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Morgan Stanley (20090181611) (May 2012) – $1.75 million
fine and $604,584 in restitution
UBS (20090182292) (May 2012) – $1.5 million fine and
$431,488 in restitution
ETFs are typically registered unit investment trusts (UITs) or openend investment companies whose shares represent an interest in a
portfolio of securities that track an underlying benchmark or index.
Leveraged ETFs seek to deliver multiples of the performance of the
index or benchmark they track. Inverse ETFs seek to deliver the
opposite of the performance of the index or benchmark they track,
profiting from short positions in derivatives in a falling market.
FINRA found that from January 2008 through June 2009, the firms
did not have adequate supervisory systems in place to monitor the
sale of leveraged and inverse ETFs, and failed to conduct adequate
due diligence regarding the risks and features of the ETFs. As a
result, the firms did not have a reasonable basis to recommend the
ETFs to their retail customers. The firms' registered representatives
also made unsuitable recommendations of leveraged and inverse
ETFs to some customers with conservative investment objectives
and/or risk profiles. Each of the four firms sold billions of dollars of
these ETFs to customers, some of whom held them for extended
periods when the markets were volatile.
Leveraged and inverse ETFs have certain risks not found in
traditional ETFs, such as the risks associated with a daily reset,
leverage and compounding. Accordingly, investors were subjected to
the risk that the performance of their investments in leveraged and
inverse ETFs could differ significantly from the performance of the
underlying index or benchmark when held for longer periods of time,
particularly in the volatile markets that existed during January 2008
through June 2009. Despite the risks associated with holding
leveraged and inverse ETFs for longer periods in volatile markets,
certain customers of these firms held leveraged and inverse ETFs for
extended time periods during January 2008 through June 2009.
c.
J.P. Turner (20110260985010) (Dec. 2013)
J.P. Turner & Co., L.L.C. ordered to pay $707,559 in restitution to 84
customers for sales of unsuitable leveraged and inverse ETFs and for
excessive mutual fund switches.
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FINRA found that J.P. Turner failed to establish and maintain a
reasonable supervisory system and instead, supervised leveraged and
inverse ETFs in the same manner that it supervised traditional ETFs.
The firm also failed to provide adequate training regarding these
ETFs. J.P. Turner also allowed its registered representatives to
recommend these complex ETFs without performing reasonable
diligence to understand the risks and features associated with the
products. As a result, many J.P. Turner customers held leveraged and
inverse ETFs for several months. J.P. Turner also failed to determine
whether the ETFs were suitable for at least 27 customers, including
retirees and conservative customers, who sustained collective net
losses of more than $200,000.
In addition, J.P. Turner engaged in a pattern of unsuitable mutual
fund switching. Mutual fund shares are typically suitable as longterm investments and are not proper vehicles for short-term trading
because of the transaction fees and commissions incurred from
repeated buying and selling of mutual fund shares. J.P. Turner failed
to establish and maintain a reasonable supervisory system designed
to prevent unsuitable mutual fund switching and lacked sufficient
procedures to adequately monitor for trends or patterns involving
mutual fund switches. During the relevant period, despite the
presence of several red flags, J.P. Turner failed to reject any of the
more than 2,800 mutual fund switches that appeared on the firm's
switch exception reports. As a result, 66 customers paid commissions
and sales charges of more than $500,000 in unsuitable mutual fund
switches.
d.
Stifel Nicholas and Century Securities (2012034576901 and
2011025493401) (Jan. 2014)
FINRA ordered Stifel, Nicolaus & Company, Inc. and Century
Securities Associates, Inc. – to pay combined fines of $550,000 and a
total of nearly $475,000 in restitution to 65 customers in connection
with sales of leveraged and inverse exchange-traded funds (ETFs).
Stifel and Century are affiliates and are both owned by Stifel
Financial Corporation.
FINRA found that between January 2009 and June 2013, Stifel and
Century made unsuitable recommendations of non-traditional ETFs
to certain customers because some representatives did not fully
understand the unique features and specific risks associated with
leveraged and inverse ETFs; nonetheless, Stifel and Century allowed
the representatives to recommend them to retail customers.
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Customers with conservative investment objectives who bought one
or more non-traditional ETFs based on recommendations made by
the firms' representatives, and who held those investments for longer
periods of time, experienced net losses.
FINRA also found that Stifel and Century did not have reasonable
supervisory systems in place, including written procedures, for sales
of leveraged and inverse ETFs. Stifel and Century generally
supervised transactions in leveraged and inverse ETFs in the same
manner that they supervised traditional ETFs, and neither firm
created a procedure to address the risk associated with longer-term
holding periods in the products. Further, both firms failed to ensure
that their registered representatives and supervisory personnel
obtained adequate formal training on the products before
recommending them to customers.
Stifel agreed to pay a fine of $450,000 and to make restitution of
nearly $340,000 to 59 customers. Century agreed to pay a fine of
$100,000 and to make restitution of more than $136,000 to six
customers.
e.
Berthel Fisher and Securities Management & Research
(2012032541401) (Feb. 2014)
FINRA fined Berthel Fisher & Company Financial Services, Inc. and
its affiliate, Securities Management & Research, Inc., a combined
$775,000 for supervisory deficiencies, including Berthel Fisher's
failure to supervise the sale of non-traded real estate investment
trusts (REITs), and leveraged and inverse exchange-traded funds
(ETFs). As part of the settlement, Berthel Fisher must retain an
independent consultant to improve its supervisory procedures
relating to its sale of alternative investments.
FINRA found that from January 2008 to December 2012, Berthel
Fisher had inadequate supervisory systems and written procedures
for sales of alternative investments such as non-traded REITs,
managed futures, oil and gas programs, equipment leasing programs,
and business development companies. In some instances, the firm
failed to accurately calculate concentration levels for alternative
investments, thus, the firm did not correctly enforce suitability
standards for a number of the sales of these investments. Berthel
Fisher also failed to train its staff on individual state suitability
standards, which is part of the suitability review, for certain
alternative investment sales.
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FINRA also found that from April 2009 to April 2012, Berthel Fisher
did not have a reasonable basis for certain sales of leveraged and
inverse ETFs. The firm did not adequately research or review nontraditional ETFs before allowing its registered representatives to
recommend them to customers, and failed to provide training to its
sales force regarding these products. The firm also failed to monitor
the holding periods of these investments by customers, resulting in
some instances in customer losses.
5.
Over-Concentration in Complex Products
Given the complexity of structured products, over-concentration poses a
particularly high risk.
a.
LPL Financial LLC (2011027170901) (March 2014)
FINRA fined LPL Financial LLC $950,000 for supervisory
deficiencies related to the sales of alternative investment products,
including non-traded real estate investment trusts (REITs), oil and
gas partnerships, business development companies (BDCs), hedge
funds, managed futures and other illiquid pass-through investments.
As part of the sanction, LPL must also conduct a comprehensive
review of its policies, systems, procedures and training, and remedy
the failures.
Many alternative investments, such as REITs, set forth concentration
limits for investors in their offering documents. In addition, certain
states have imposed concentration limits for investors in alternative
investments. LPL also established its own concentration guidelines
for alternative investments. However, FINRA found that from
January 1, 2008, to July 1, 2012, LPL failed to adequately supervise
the sales of alternative investments that violated these concentration
limits. At first, LPL used a manual process to review whether an
investment complied with suitability requirements, relying on
information that was at times outdated and inaccurate. The firm later
implemented an automated system for review, but that database
contained flawed programming and was not updated in a timely
manner to accurately reflect suitability standards. LPL also did not
adequately train its supervisory staff to analyze state suitability
standards as part of their suitability reviews of alternative
investments.
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b.
Wells Fargo (2008014350501) (June 2013) and Banc of America
(2008014763601) (June 2013)
FINRA fined the two firms a total of $2.15 million and ordered the
firms to pay more than $3 million in restitution to customers for
losses incurred from unsuitable sales of floating-rate bank loan funds.
FINRA ordered Wells Fargo Advisors, LLC, as successor for Wells
Fargo Investments, LLC, to pay a fine of $1.25 million and to
reimburse approximately $2 million in losses to 239 customers.
FINRA ordered Merrill Lynch, Pierce, Fenner & Smith Incorporated,
as successor for Banc of America Investment Services, Inc., to pay a
fine of $900,000 and to reimburse approximately $1.1 million in
losses to 214 customers.
Floating-rate bank loan funds are mutual funds that generally invest
in a portfolio of secured senior loans made to entities whose credit
quality is rated below investment-grade. The funds are subject to
significant credit risks and can also be illiquid. FINRA found that
Wells Fargo and Banc of America brokers recommended
concentrated purchases of floating-rate bank loan funds to customers
whose risk tolerance, investment objectives, and financial conditions
were inconsistent with the risks and features of floating-rate loan
funds. The customers were seeking to preserve principal, or had
conservative risk tolerances, and brokers made recommendations to
purchase floating-rate loan funds without having reasonable grounds
to believe that the purchases were suitable for the customers. FINRA
also found that the firms failed to train their sales forces regarding
the unique risks and characteristics of the funds, and failed to
reasonably supervise the sales of floating-rate bank loan funds.
c.
Morgan Stanley & Co. (2008015963801) (Jan. 2012)
Morgan Stanley fined $600,000 for failing to have a reasonable
supervisory system and procedures in place to notify supervisors
whether structured product purchases complied with the firm’s
internal guidelines related to concentration (the size of an
investment in relation to the customer’s liquid net worth) and
minimum net worth. A sampling of structured product transactions
revealed at least 14 unsuitable transactions for 8 customers. Prior
to settlement with FINRA (and as stated in the AWC) the firm
entered into settlements with these customers.
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d.
Merrill Lynch (2010022011901) (May 2012)
From approximately January 1, 2006 through March 1, 2009, Merrill
Lynch failed to have a reasonable supervisory system that would flag
for supervisors on an automated exception basis potentially
unsuitable concentration levels in structured products in customer
accounts, in violation of NASD Conduct Rules 3010 and 2110, for
the time period from January 1, 2006 to December 14, 2008, and
NASD Conduct Rule 3010 and FINRA Rule 2010, for the time
period from December 15, 2008 to March 1, 2009.
B.
Microcap – Fraud, Section 5, Anti-Money Laundering
1. Overview
Microcap or penny stocks are particularly vulnerable to market manipulation
given the lack of transparency in their underlying business, lack of verifiable
financial history and the opaque nature of their operations. We are particularly
concerned with fraud schemes that can harm retail investors. FINRA’s focus
includes, among other issues:

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bulletin board postings or email spam that distributes false or misleading
information by fraudsters attempting to pump up a microcap;
high pressure sales tactics employed by sales personnel;
the use of paid promoters to dispense “unbiased” opinions related to these
microcaps; and
individuals who use brokerage firms to liquidate microcap holdings,
whereby the firm may be facilitating an unregistered distribution. As part of
their anti-money laundering (AML) responsibilities, member firms are
obligated to monitor for suspicious activity and to file Suspicious Activity
Reports where warranted.
FINRA’s focus on AML and Section 5 compliance (discussed further below) is
closely linked to microcap fraud concerns. While fraudster may perpetrate
schemes from outside a broker-dealer (e.g., a stock promoter who does not work
for the broker-dealer may engineer a microcap fraud), firms that facilitate
microcap transactions and liquidations must have adequate supervisory systems
tailored to their high-risk business model.
FINRA Regulatory Notice 09-05
FINRA issued Regulatory Notice 09-05, Unregistered Resales of Restricted
Securities, to remind firms and brokers of their obligations to determine whether
securities are eligible for public sale before participating in what may be illegal
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distributions. It also discusses the importance of recognizing "red flags" of
possible illegal, unregistered distributions and reiterates firms' obligations to
conduct searching inquiries in certain circumstances to avoid participating in
illegal distributions and to file suspicious activity reports where appropriate.
2. Cases
a.
Brown Brothers Harriman (2013035821401)(Feb. 2014)
FINRA fined Brown Brothers Harriman & Co. (BBH) $8 million for
substantial anti-money laundering compliance failures including,
among other related violations, its failure to have an adequate antimoney laundering program in place to monitor and detect suspicious
penny stock transactions. BBH also failed to sufficiently investigate
potentially suspicious penny stock activity brought to the firm's
attention and did not fulfill its Suspicious Activity Report (SAR)
filing requirements. In addition, BBH did not have an adequate
supervisory system to prevent the distribution of unregistered
securities. BBH's former Global AML Compliance Officer Harold
Crawford was also fined $25,000 and suspended for one month.
Penny stock transactions pose heightened risks because low-priced
securities may be manipulated by fraudsters. FINRA found that from
Jan. 1, 2009, to June 30, 2013, BBH executed transactions or
delivered securities involving at least six billion shares of penny
stocks, many on behalf of undisclosed customers of foreign banks in
known bank secrecy havens. BBH executed these transactions
despite the fact that it was unable to obtain information essential to
verify that the stocks were free trading. In many instances, BBH
lacked such basic information as the identity of the stock's beneficial
owner, the circumstances under which the stock was obtained, and
the seller's relationship to the issuer. Penny stock transactions
generated at least $850 million in proceeds for BBH's customers.
FINRA also found that although BBH was aware that customers
were depositing and selling large blocks of penny stocks, it failed to
ensure that its supervisory reviews were adequate to determine
whether the securities were part of an illegal unregistered
distribution. FINRA Regulatory Notice 09-05 discusses "red flags"
that should signal a firm to closely scrutinize transactions to
determine whether the stock is properly registered or exempt from
registration, or whether it is being offered illegally. BBH customers
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deposited and sold penny stock shares in transactions that should
have raised numerous red flags.
b.
COR Clearing LLC (formerly Legent Clearing LLC)
(2009016234701) (Dec. 2013)
FINRA fined COR Clearing $1 million for numerous failures to
comply with anti-money laundering (AML), financial reporting, and
supervisory obligations. COR is also ordered to retain an independent
consultant to conduct a comprehensive review of its relevant policies,
systems, procedures and training; to submit proposed new clearing
agreements to FINRA for approval while the consultant conducts its
review; and for one year, submit certifications from its CEO and
CFO stating that each has reviewed the firm's customer reserve and
net capital computations for accuracy prior to submission.
COR provides clearing services for approximately 86 correspondent
firms through fully disclosed clearing arrangements. As a clearing
firm, COR performs order processing, settlement and recordkeeping
functions for introducing broker-dealers that do not maintain backoffice facilities to perform these functions. It services introducing
firms with significant numbers of accounts, conducting activity in
low-priced securities, as well as third-party wire activity. In its 2013
examination letter, FINRA identified microcap fraud and anti-money
laundering compliance as regulatory priorities that it would focus on
throughout the year because of the risk they pose to investor
protection and market integrity. FINRA specified the importance that
firms monitor customer accounts liquidating microcap and lowpriced OTC securities to ensure that, among other things, the firm is
not facilitating, enabling or participating in an unregistered
distribution.
FINRA found that COR's AML surveillance program did not
reasonably address the risks of its business model. These types of
accounts present a higher risk of money laundering and other
fraudulent activity. In addition, many of these correspondent firms
had been the subject of past disciplinary action for AML-related rule
violations. Notwithstanding the heightened AML risk, FINRA found
that COR's surveillance program failed to identify "red flags" related
to its correspondent firms and transactions by their customers.
Specifically, FINRA found that for several months in 2012, COR's
AML surveillance system suffered a near-complete collapse,
resulting in the firm's failure to conduct any systematic reviews to
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identify and investigate suspicious activity. FINRA also found that in
2009, COR implemented a "Defensive SARS" program, which the
firm used to file suspicious activity reports without first completing
the investigation necessary to support filing the report.
FINRA also found that COR made numerous financial reporting
errors over the four-year period, including repeatedly making
erroneous customer reserve and net capital computations, and filing
inaccurate FOCUS reports with FINRA. In addition, FINRA found
that COR had committed an extensive list of supervisory violations,
including failing to establish adequate supervisory systems relating to
Regulation SHO, the outsourcing of back-office functions, and the
firm's funding and liquidity. Finally, FINRA found that COR failed
to retain and review emails of one of its executives and failed to
ensure that its president was properly registered as a principal.
c.
John Carris Investments LLC (2011028647101) (amended Sept.
2013)
In addition to obtaining the TCDO described above, FINRA issued
an amended complaint against JCI, Carris, and five other firm
principals alleging additional fraudulent activity and securities
violations. In the complaint, FINRA alleges that while JCI acted as
a placement agent for Fibrocell, Carris and the firm artificially
inflated the price of Fibrocell stock by engaging in pre-arranged
trading and by making unauthorized purchases of Fibrocell stock in
customers' accounts.
FINRA also alleges that Carris and JCI fraudulently sold stock and
notes in its parent company, Invictus Capital, Inc., by not disclosing
its poor financial condition. In the complaint, FINRA states that JCI
and Carris misled Invictus investors by paying dividends to Invictus'
early investors with funds that were, in fact, generated by new sales
of Invictus securities. JCI and Carris did not have any reasonable
grounds to expect economic gains for Invictus investors. As of
March 2013, Invictus Capital had defaulted on $2 million of Invictus
notes sold to earlier John Carris Investments customers, did not have
funds to repay them, and has stated that it may be required to use
proceeds from its ongoing offering to make repayments. JCI
continues to solicit new investments in Invictus – an investment that
FINRA alleges is wholly unsuitable.
In addition, FINRA alleges that JCI issued false documentation that
failed to reflect the firm's payments for Carris' personal expenses
(such as tattoos, pet care and a motorcycle), and failed to remit
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hundreds of thousands of dollars in employee payroll taxes to the
United States Treasury.
d.
Oppenheimer & Co. (2009018668801) (Aug. 2013)
FINRA fined Oppenheimer and Co., Inc. $1,425,000 for the sale of
unregistered penny stock shares and for failing to have an AML
compliance program to detect and report suspicious penny stock
transactions. Oppenheimer is also required to retain an independent
consultant to conduct a comprehensive review of the adequacy of
Oppenheimer's penny stock and AML policies, systems and
procedures. Oppenheimer agreed to the sanctions to resolve charges
first brought against the firm in a FINRA complaint in May 2013.
FINRA found that from Aug. 19, 2008, to Sept. 20, 2010,
Oppenheimer, through branch offices located across the country, sold
more than a billion shares of twenty low-priced, highly speculative
securities (penny stocks) without registration or an applicable
exemption. The customers deposited large blocks of penny stocks
shortly after opening the accounts, and then liquidated the stock and
transferred proceeds out of the accounts. Each of the sales presented
additional "red flags" that should have prompted further review to
determine whether the securities were registered. FINRA also found
that the firm's systems and procedures governing penny stock
transactions were inadequate, and were unable to determine whether
stocks were restricted or freely tradable. Oppenheimer also failed to
conduct adequate supervisory reviews to determine whether the
securities were registered.
FINRA also found that Oppenheimer's AML program did not focus
on securities transactions and therefore failed to monitor patterns of
suspicious activity associated with the penny stock trades. In
addition, Oppenheimer failed to conduct adequate due diligence on a
correspondent account for a customer that was a broker-dealer in the
Bahamas, and therefore a Foreign Financial Institution under the
Bank Secrecy Act; the firm's failure contributed to Oppenheimer's
failure to understand the nature of the customer's business and the
anticipated use of the account, which was to sell securities on behalf
of parties not subject to Oppenheimer's AML review. This is the
second time Oppenheimer has been found to have violated its AML
obligations.
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e.
Atlas One Financial, Firstrade Securities, World Trade Financial
Corp.
FINRA fined three firms $900,000 for failing to establish and implement
adequate AML programs and other supervisory systems to detect suspicious
transactions. FINRA also fined and suspended four executives involved.
FINRA imposed the following sanctions.

Atlas One Financial Group, LLC (2011025673201) (May
2013) – fined $350,000; Napoleon Arturo Aponte, former
Chief Compliance Officer and AML Compliance Officer,
fined $25,000 joint and severally with the firm, and
suspended for three months in a principal capacity.

Firstrade Securities, Inc.(2010021211901) (May 2013) -fined $300,000.

World Trade Financial Corporation (WTF) (2010022543701)
(March 2013) – fined $250,000; President and Owner Rodney
Michel fined $35,000 and suspended in all capacities except
as a financial operations principal for four months; CCO
Frank Brickell fined $40,000 and suspended from association
in all capacities for nine months; trade desk supervisor and
minority owner Jason Adams fined $5,000 and suspended for
three months in a principal capacity.
Atlas One: FINRA found that from February 2007 through May
2011, Atlas One failed to identify suspicious account activity or did
not adequately investigate numerous AML "red flags." For example,
in 2007, the United States Department of Justice (DOJ) froze six
Atlas One accounts that were all controlled by one customer in
connection with a money laundering scheme. Even though the
accounts listed the same mailing address in San Jose, Costa Rica, and
an email address for another Atlas One customer as contact
information for the account and the other customer's information had
been utilized as contact information for the frozen accounts, Atlas
One failed to perform any additional scrutiny of the accounts that had
not been part of DOJ's action. FINRA also found that certain
customers' accounts engaged in a pattern of activity consisting of
moving millions of dollars through the accounts while conducting
minimal-to-no securities transactions. Atlas One's AML program
required Aponte to monitor for potentially suspicious activity and
AML red flags, investigate suspicious activity and report suspicious
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activity by filing a suspicious activity report (SAR), when necessary,
which he failed to do.
Firstrade: FINRA found that Firstrade, an online trading firm
catering to the Chinese community, failed to implement an adequate
AML program to detect and report suspicious transactions, including
potential manipulative trading. Many of the suspicious transactions
involved Chinese issuer stocks and some of the most suspicious
activity in customer accounts was apparent pre-arranged trades of
Chinese issuer stock done in related accounts. (See FINRA Investor
Alert regarding China stocks.)
WTF: FINRA found that WTF, Brickell, Michel, and Adams failed
to create and enforce a supervisory system and written supervisory
procedures to monitor for unlawful transactions in unregistered
penny stocks. Between March 2009 and August 2011, WTF bought
and sold more than 27.5 billion shares of 12 penny stock issues on
behalf of one customer, Justin Keener, generating approximately $61
million in investor proceeds. In October 2012, FINRA barred Keener
following a disciplinary hearing for his failure to provide FINRA
with documents and information after he purchased an interest in a
FINRA member clearing firm. Despite the fact that the securities
traded were not properly registered and were not eligible for an
exemption to registration, WTF and Brickell executed the
transactions. The business generated by Keener's transactions
represented the majority of WTF's business and revenue. WTF and
Michel failed to supervise Brickell, who was acting as a producing
manager when making the stock liquidations at issue. Also, WTF,
acting through Brickell, failed to have a program reasonably designed
to monitor for and detect and report suspicious activity, as required
by the Bank Secrecy Act.
f.
John Thomas Financial (2012033467301) (April 2013):
FINRA filed a Complaint charging John Thomas Financial, (JTF),
and its CEO Tommy Belesis with fraud, trading ahead of customer
orders, failure to provide best execution, failure to follow customer
instructions, falsification of order tickets, books and records
violations, failure to supervise, making false and misleading
statements to FINRA, and intimidation.
JTF and many of its customers owned AWSR stock as a result of
participation in the company's private financings. According to the
complaint, on Feb. 23, 2012, the price of AWSR common stock,
which at the time was thinly traded on the OTC Bulletin Board,
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spiked higher, by over approximately 600 percent, opening at 28
cents per share, peaking at $1.80 per share and eventually closing
the day at $1.29 per share. On the same day, JTF sold 855,000
shares, the majority of its proprietary position in AWSR, reaping
proceeds of more than $1 million.
The complaint alleges that while JTF sold its shares at the height of
the price spike, the firm received at least 15 customer orders to sell
more than one million shares, yet JTF and Belesis prevented the
orders from being immediately executed. Some customer orders
were executed the following day or days after at prices grossly
inferior to those obtained by the firm while other customer orders
were not entered or executed at all. AWSR is now in bankruptcy
and the customers' investments are virtually worthless.
In addition, the complaint alleges that JTF and Belesis, through
Branch Office Manager Michelle Misiti and CCO Joseph
Castellano, lied to the firm's registered representatives and
customers about the reasons the customer shares could not be sold
on Feb. 23, 2012, including that there was a problem with the
clearing firm's trading systems, there was insufficient volume on
that day to fill the orders, and the shares could not be sold because
they were restricted under the Securities Act of 1933.
FINRA further alleges that to conceal that the firm received the
orders during the February 23 price spike but failed to execute
them, JTF and Belesis, through Misiti, "lost" order tickets for
customer orders received on Feb. 23, 2012, and replaced six of
those tickets with falsified tickets dated Feb. 24, 2012. Belesis and
Misiti also made misrepresentations to FINRA concerning Belesis'
role in the misconduct.
Also, the complaint charges JTF, Belesis, Castellano and Regional
Managing Director Ronald Vincent Cantalupo with violating
FINRA's anti-intimidation rule by physically threatening (including
threatening to have them "run over"), harassing and assaulting
registered representatives who have disagreed with Belesis'
business practices, and threatening to ruin the registered
representatives' financial careers by improperly marking their
industry records.
g.
Felix Investments LLC (2010020933302) (March 2012)
FINRA issued an AWC from Felix Investments LLC and brokers
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William L. Barkow, Emilio A. DiSanluciano, and Frank G. Mazzola.
The Firm was censured, fined $250,000, and required to complete an
undertaking. The undertaking requires the Firm to retain an
independent consultant, who will review the adequacy of the Firm’s
policies, systems and procedures and training, and recommend any
changes, which the Firm shall implement, regarding ensuring: (1)
Compliance with Section 5 of the Securities Act, in connection with
solicitations of unregistered securities offerings; (2) All
communications by the Firm and its brokers with the public comply
with the content standards set forth in NASD Rule 2210(d); and (3)
Supervisory reviews of email communications, and documentation of
such reviews, as required by NASD Rule 3010(d)(1). Barkow and
Mazzola were each separately fined $30,000 and suspended 15
business days. DiSanluciano was fined $20,000 and suspended for
ten business days.
The respondents consented to findings that Felix, acting through
Barkow and Mazzola, marketed two unregistered offerings to
potential investors through general solicitations, and thereby engaged
in the public offering and sale of unregistered securities, in
contravention of Section 5 of the Securities Act of 1933 and violation
of FINRA Rule 2010. The offerings were for interests in private
limited liability companies formed to invest in shares of Facebook,
Inc.
The AWC also included findings of other violations including
exaggerated, unwarranted, and misleading statements and claims, in
connection with the marketing of the offerings, books and records
failures (emails), net capital deficiencies, and related supervisory
failures.
On the same day that FINRA issued the AWC, the SEC filed a civil
action in the U.S. District Court for the Northern District of
California against Felix Investments LLC , Mazzola, and Facie Liber
Management Associates LLC (owned and managed by Mazzola and
Barkow) for fraud in connection with (1) the unregistered offerings
of interests in LLCs formed to invest in shares of Facebook, relating
to (a) self-dealing – earning secret commissions, (b) misrepresenting,
among other things, that (i) they were selling funds with underlying
Facebook shares when they knew the funds lacked ownership of
certain Facebook shares, (ii) the LLCs were approved by Facebook,
(iii) the LLCs possessed Facebook stock at $66 per share; and (2)
false statements to investors in other pre-IPO funds, including about
Twitter’s revenue and ownership of Zynga stock. The SEC seeks
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court orders prohibiting the defendants from engaging in securities
fraud and requiring them to disgorge their ill-gotten gains and pay
financial penalties. The fraud charges assert that the defendants
violated Exchange Act of 1934 Section 10(b) and Rule 10b-5,
Section 17(a) of the Securities Act, and that defendant Mazzola and
Facie Libre Management Associates LLC violated Section 206(A) of
the Advisers Act and Rule 206(4)-8 thereunder.
3.
Suspicious Transactions/High Risk Customers
a.
Banorte-Ixe Securities ( 2010025241301) (Jan. 2014)
FINRA fined Banorte-Ixe Securities International, Ltd., a firm that
services Mexican clients investing in U.S. and global securities,
$475,000 for not having adequate anti-money laundering (AML)
systems and procedures in place and for failing to register
approximately 200 to 400 foreign finders who interacted with the
firm's Mexican clients. FINRA also suspended Banorte Securities'
former AML Officer and Chief Compliance Officer, Brian Anthony
Simmons, for 30 days in a principal capacity, as he was responsible
for the firm's AML procedures and for monitoring suspicious
activities. As a result of the firm's AML compliance failures, Banorte
Securities opened an account for a corporate customer owned by an
individual with reported ties to a drug cartel, and did not detect,
investigate or report the suspicious rapid movement of $28 million in
and out of the account.
FINRA found that Banorte Securities' AML program failed in three
respects. First, the firm did not properly investigate certain
suspicious activities. The Bank Secrecy Act requires broker-dealers
to report certain suspicious transactions that involve at least $5,000
in funds or other assets to the Financial Crimes Enforcement
Network. Banorte Securities lacked an adequate system to identify
and investigate suspicious activity, and therefore failed to adequately
investigate and, if necessary, report activity in three customer
accounts. In one example, it failed to adequately vet a corporate
customer in Mexico who deposited and withdrew a substantial
amount of money within a short period of time—$25 million in a
single month—a "red flag" for suspicious activity. A few weeks later,
the same customer transferred $3 million into and out of another
corporate account via two wire transfers two and a half weeks apart.
Had Banorte Securities conducted a simple Google search in
response to the suspicious movement of funds, it would have learned
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that one of the owners of the corporate customer had been arrested by
Mexican authorities in February 1999 for alleged ties to a Mexican
drug cartel.
Secondly, Banorte Securities did not adopt AML procedures adequately
tailored to its business, relying instead on off-the-shelf procedures that were
not customized to identify the unique risks posed by opening accounts,
transferring funds and effecting securities transactions for customers
located in Mexico, a high-risk jurisdiction for money laundering, or the
risks that arose from the firm's reliance on foreign finders. Third, Banorte
Securities did not fully enforce its AML program as written.
In addition, FINRA found that from January 1, 2008, to May 9, 2013,
Banorte Securities failed to register 200 to 400 foreign finders. The
firm's Mexican affiliates employed foreign finders who not only
referred customers to Banorte Securities but also performed various
activities requiring registration as an associated person, including
discussing investments, placing orders, responding to inquiries, and
in some instances, obtaining limited trading authority over customer
accounts. The firm had previously registered individuals performing
the same functions prior to July 2006.
4. Master/Sub Accounts
a.
FINRA Regulatory Notice 10-18
FINRA issued Regulatory Notice 10-18 dealing with other issues
that arise from master/sub accounts. The application of many
FINRA rules, federal securities laws and other applicable federal
laws depends on the nature of the account and the identity of its
beneficial owners. At times, an account may take the form of a
master/sub-account arrangement where the beneficial ownership
interests in the various sub-accounts may or may not be identified to
the firm. Certain master/sub-account arrangements raise questions
regarding whether the master account and all sub-accounts have the
same beneficial owner and, therefore, whether they can legitimately
be viewed as one customer account for purposes of FINRA rules,
the federal securities laws, and other applicable federal laws.
If a firm has actual notice that the sub-accounts of a master account
have different beneficial ownership (but does not know the identities
of the beneficial owners) or the firm is privy to facts and/or
circumstances that would reasonably raise the issue as to whether
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the sub-accounts, in fact, may have separate beneficial owners (and
therefore is on “inquiry notice”), then the firm must inquire further
and satisfy itself as to the beneficial ownership of each such subaccount. This list is not exhaustive and is only included to reflect
some types of “red flags” that would put a firm on inquiry notice
that the sub-accounts may have separate beneficial owners,
including but not limited to, for example:




the sub-accounts are separately documented and/or receive
separate reports from the firm;
the firm addresses the sub-accounts separately in terms of
transaction, tax or other reporting;
the sub-accounts incur charges for commissions, clearance
and similar expenses, separately, based upon the activity
only of that subject sub-account;
the firm is aware of or has access to a master account or like
agreement that evidences that the sub-accounts have
different beneficial owners;
When a firm becomes aware of the identities of the beneficial
owners of the subaccounts pursuant to its duties arising from actual
notice or inquiry notice outlined above, the firm will be required to
recognize the sub- accounts as separate customer accounts for
purposes of applying FINRA rules, the federal securities laws, and
other applicable federal laws.
b.
Generally
FINRA has been focusing on whether or not firms have an
adequate anti- money laundering program given the firm’s business
model and in particular, whether or not the firm has an adequate
system for detecting and reporting suspicious activity. Those firms
with customers using certain master/sub account relationships can
present particular issues for AML compliance. The general
structure is one master account with various sub accounts. The
arrangement is particularly attractive to day-traders because they
may not be required to maintain a minimum account equity balance
and their buying power may exceed the individual 4:1 margin-toequity ratio required of accounts held directly at a broker-dealer.
These types of accounts can create several issues.
First, for AML purposes, sub-accounts, depending on how they are
set up, may trigger CIP and customer due diligence obligations for
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the underlying accountholders (See Treasury/SEC Q&A on
Omnibus Accounts and CIP obligations 10/1/03). But whether or
not a firm has CIP obligations with subaccounts, it still has an
obligation to monitor the accounts for suspicious activity.
Second, the firm may be at risk for aiding and abetting an
unregistered broker-dealer. (See SEC Release No. 60764 In the
matter of GLB Trading and Robert Lechman). FINRA has made
referrals to the SEC where we see a master account operating as an
unregistered broker-dealer.
c.
Direct Market Access
FINRA's Enforcement Department is conducting a review of
broker/dealers that provide Direct Market Access, Naked Access,
Electronic Access, or Sponsored Access to their customers. The
sweep is reviewing the firm’s AML policies particularly as they
related to master/sub account relationships and transaction
monitoring for suspicious activity reporting.
1) Biremis, Corp., President and Chief Executive Officer, Peter
Beck (2010021162202) (July 2012)
FINRA expelled Biremis, Corp., formerly known as Swift Trade
Securities USA, Inc., and barred its President and Chief
Executive Officer, Peter Beck, for supervisory violations related
to detecting and preventing manipulative trading activities such
as "layering," short sale violations, failure to implement an
adequate anti-money laundering program, and financial,
operational and numerous other securities law violations.
FINRA found that during various periods from June 2007 to June
2010, Biremis and Mr. Beck failed to establish a supervisory
system reasonably designed to achieve compliance with the
applicable laws and regulations prohibiting manipulative trading
activity. Among other things, Biremis' supervisory system failed
to include policies and procedures designed to detect and prevent
layering on U.S. markets. Layering involves the placement of
non-bona-fide orders on one side of the market in order to cause
market movement that will result in the execution of an order
entered on the opposite side of the market, after which the nonbona-fide orders are then canceled. Biremis also failed to
establish policies and procedures reasonably designed to detect
and prevent manipulative activity designed to affect the closing
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price of a security. As a result, Biremis failed to detect and
prevent potential layering activity and potential manipulation of
the closing price of equity securities on U.S. markets.
FINRA found that despite the fact Biremis' only business was to
execute transactions on behalf of day traders around the world,
Biremis and Mr. Beck failed to implement an adequate antimoney laundering (AML) program to comply with the Bank
Secrecy Act. Among the violations related to its AML program,
Biremis failed to properly detect suspicious activities and file
suspicious activity reports (SARs) when appropriate. Also, Mr.
Beck appointed an unqualified and untrained individual to
supervise Biremis' AML compliance program and Biremis failed
to provide adequate AML training to employees.
Biremis and Mr. Beck also violated a number of additional
securities laws and rules. Biremis failed to maintain a margin
system and margin accounts, and did not have policies and
procedures in place related to the use of margin. The firm also
failed to prepare customer reserve computations and failed to
maintain a special reserve bank account for the exclusive benefit
of customers. In addition, Biremis placed thousands of short sale
orders, which was in violation of an emergency order issued by
the SEC that temporarily banned short selling in certain
securities. Also, between at least April 2008 and May 2009,
Biremis improperly calculated its net capital, operating in net
capital deficiency by up to $25 million. Additionally, the firm
failed to maintain all required emails and instant messages over a
five-year period.
2) Hold Brothers (2010023771001) (Sept. 2012)
FINRA, along with NYSE Arca, Inc., The NASDAQ Stock
Market LLC, NASDAQ OMX BX, Inc., and BATS Exchange,
Inc. censured and fined Hold Brothers On-Line Investment
Services, LLC $3.4 million for manipulative trading activities,
anti-money laundering (AML), and other violations. In a related
case, the Securities and Exchange Commission (SEC) today
announced a settlement with Hold Brothers, fining the firm more
than $2.5 million.
Hold Brothers, headquartered in New York, is a self-clearing
broker-dealer that primarily operates as a day-trading firm by
facilitating direct market access to customers and to its
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proprietary traders. Between Jan. 1, 2009 through Dec. 31, 2011,
Hold Brothers' largest account, Demostrate LLC and an affiliate,
Trade Alpha, were day-trading firms wholly owned and funded
by Hold Brothers' principals. Demostrate and Trade Alpha
engaged traders and trading groups in various foreign countries,
primarily China, to trade its capital. FINRA found that
Demostrate and Trade Alpha were controlled by, or under
common control with, Hold Brothers.
Demostrate and Trade Alpha used sponsored access relationships
with Hold Brothers to connect to U.S. securities exchanges to
manipulate the prices of multiple securities. FINRA uncovered
hundreds of instances where the foreign day traders used
spoofing and layering activities to induce the trading algorithms
of unwitting market participants to provide the traders with
favorable execution pricing that would not otherwise have been
available to them in the absence of the day traders' illicit spoofing
and layering activities.
Generally, spoofing is a form of market manipulation which
involves placing certain non-bona fide order(s), usually inside the
existing National Best Bid or Offer (NBBO), with the intention
of triggering another market participant(s) to join or improve the
NBBO, followed by canceling the non-bona fide order, and
entering an order on the opposite side of the market. Layering
involves the placement of multiple, non-bona fide, limit orders on
one side of the market at various price levels at or away from the
NBBO to create the appearance of a change in the levels of
supply and demand, thereby artificially moving the price of the
security. An order is then executed on the opposite side of the
market at the artificially created price, and the non-bona fide
orders are immediately canceled. FINRA also found thousands of
instances where Demostrate or Trade Alpha traders engaged in
pre-arranged trades and wash sales.
Hold Brothers also failed to establish and maintain a supervisory
system and written procedures that were reasonably designed to
supervise the firm's trading activities. FINRA found that
numerous "red flags" indicative of suspicious trading were not
detected or investigated. This included broad categories of
significant suspicious trading, involving patterns of spoofing,
layering, pre-arranged trading, and wash trading. In addition,
FINRA found that Hold Brothers' AML policies, procedures, and
internal controls were inadequate and failed to detect suspicious
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transactions and did not trigger the reporting of the suspicious
transactions as required by the Bank Secrecy Act. Hold Brothers
also failed to tailor its AML program to its business, as required.
Between 2009 and 2011, the firm averaged approximately
400,000 trades per day, approximately 90 percent of which were
placed through the Demostrate account. Despite this high volume
of trading, Hold Brothers' AML procedures only provided for
manual monitoring to detect suspicious trading activity in the
accounts.
There were also numerous instances when Hold Brothers'
compliance department determined that Trade Alpha or
Demostrate traders had engaged in suspicious or manipulative
trading. These instances of suspicious activity were not escalated
to the firm's AML compliance officer and the firm never
considered filing a suspicious activity report relating to the
activity.
As part of the disciplinary action, FINRA and the exchanges also
ordered Hold Brothers to retain an independent consultant to
conduct a comprehensive review of the adequacy of the firm's
policies, systems and procedures, and training related to AML,
trading, day trading, compliance with SEC Rule 15c3-5, and the
use of foreign traders.
5.
Foreign Finders
a.
General
Foreign finders and related foreign affiliates pose compliance risks
and may elevate a firm’s AML risk level. Recent examinations and
enforcement cases have uncovered problematic arrangements with
foreign finders. NASD Rule 1060(b) permits member firms, in
limited circumstances, to pay transaction-related compensation to
non-registered foreign persons or foreign finders. Specifically, the
sole involvement of the foreign finder in the member firm’s
business must be the initial referral of non-U.S. customers to the
firm. FINRA reminds firms that the scope of permissible business
activities and the associated regulatory requirements differ between
foreign finders and foreign associates. Examiners have found finders
whose activities go beyond an initial referral of non-U.S. customers
to the firm and who are involved in the servicing of non-U.S.
customer accounts, including having trading authority over
accounts, entering customer orders directly to the clearing firm’s
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online platform, and processing new account documents and funds
transfers. As a result of such activities, the foreign finder provisions
in NASD Rule 1060(b) are not applicable, and the finder is required
to be registered as a Foreign Associate pursuant to NASD Rule
1100, or in another appropriate registration category and be
supervised as an associated person of the firm. Firms that engage
foreign finders should ensure their procedures appropriately address
the limited scope of activities permissible under such arrangements
and potential risks. See Notices to Members 01-81 and 95-37.
A firm’s AML risk may be elevated by foreign finders and related
foreign affiliates depending on the geographical regions involved,
types of customers introduced, and products and services offered.
Some of the red flags observed include customer accounts
exhibiting significant account activity with very low levels of
securities transactions, significant credit or debit card
activity/withdrawals with very low levels of securities transactions,
wire transfers to/from financial secrecy havens or high-risk
geographic locations without an apparent business reason, and
payment by third-party check or money transfer without an
apparent connection to the customer. Relationships with foreign
finders and related foreign entities have also been used to hide
securities activities and payment of transaction-based compensation
to previously disciplined individuals, and to engage in cross-trading
for the inappropriate benefit of the finder. Prior to entering into
these relationships, firms must have reasonably designed
procedures to, among other things, assess and address the potential
AML risks associated with the business, and monitor any
subsequent activity conducted with foreign finders and related
foreign entities.
b. Banorte-Ixe Securities ( 2010025241301) (Jan. 2014) (Noted
above – III.B.3.a.)
FINRA found that from January 1, 2008, to May 9, 2013, Banorte
Securities failed to register 200 to 400 foreign finders. The firm's
Mexican affiliates employed foreign finders who not only referred
customers to Banorte Securities but also performed various activities
requiring registration as an associated person, including discussing
investments, placing orders, responding to inquiries, and in some
instances, obtaining limited trading authority over customer
accounts. The firm had previously registered individuals performing
the same functions prior to July 2006.
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C. Arbitration
1. Restricting ability to participate in class actions.
a.
Charles Schwab (2011029760201) (Feb. 2012)
FINRA filed a complaint against Charles Schwab & Company
charging the firm with violating FINRA rules by requiring its
customers to waive their rights to bring class actions against the firm.
FINRA's complaint charges that in October 2011, Schwab amended
its customer account agreement to include a provision requiring
customers to waive their rights to bring or participate in class actions
against the firm. Schwab sent the amended agreements to nearly 7
million customers. The agreement also included a provision
requiring customers to agree that arbitrators in arbitration
proceedings would not have the authority to consolidate more than
one party's claims. FINRA's complaint charges that both provisions
violate FINRA rules concerning language or conditions that firms
may place in customer agreements.
Decision -- The FINRA Hearing Panel dismissed two of three causes
in a February 2013 Decision against Charles Schwab & Company.
The panel concluded that the amended language used in Schwab's
customer agreements to prohibit participation in judicial class actions
does violate FINRA rules, but that FINRA may not enforce those
rules because they are in conflict with the Federal Arbitration Act
(FAA).
In the third cause of action, the panel found that Schwab violated
FINRA rules by attempting to limit the powers of FINRA arbitrators
to consolidate individual claims in arbitration. The panel further
concluded that the FAA does not bar enforcement of FINRA's rules
regarding the powers of arbitrators, because the FAA does not dictate
how an arbitration forum should be governed and operated, or
prohibit the consolidation of individual claims. The panel ordered
Schwab to take corrective action, including removing violative
language, and imposed a fine of $500,000.
The decision is on appeal to the National Adjudicatory Council.
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2. Attempts to limit the arbitrability of claims
a.
Merrill Lynch (2009020188101) (Jan. 2012)
In January 2012, FINRA accepted an AWC whereby Merrill Lynch,
Pierce, Fenner & Smith consented to a $1 million fine and findings
that it failed to arbitrate disputes with employees relating to
retention bonuses. Registered representatives who participated in
the bonus program had to sign a promissory note that prevented
them from arbitrating disagreements relating to the note, forcing the
registered representatives to resolve disputes in New York state
courts.
FINRA found that Merrill Lynch, after merging with Bank of
America in January 2009, implemented a bonus program to retain
certain high-producing registered representatives and purposely
structured it to circumvent the requirement to institute arbitration
proceedings with employees when it sought to collect unpaid
amounts from any of the registered representatives who later left the
firm. FINRA rules require that disputes between firms and
associated persons be arbitrated if they arise out of the business
activities of the firm or associated person.
In January 2009, Merrill Lynch paid $2.8 billion in retention
bonuses structured as loans to over 5,000 registered representatives.
The promissory notes required registered representatives to agree
that actions regarding the notes could be brought only in New York
state court, a state which greatly limits the ability of defendants to
assert counterclaims in such actions.
Also, Merrill Lynch structured the program to make it appear that
the funds for the program came from MLIFI, a non-registered
affiliate, rather than from the firm itself, allowing it to pursue
recovery of amounts due in the name of MLIFI in expedited
hearings in New York state courts to circumvent Merrill Lynch's
requirement to arbitrate disputes with its associated persons.
Later that year, after a number of registered representatives left the
firm without repaying the amounts due under the loan. Merrill
Lynch filed over 90 actions in New York state court to collect
amounts due under the promissory notes, thus violating a FINRA
rule that requires firms to arbitrate disputes with employees.
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D. Supervision
1. Direct Market Access/Sponsored Access: Newedge USA LLC
(2009018694401) (July 2013)
Newedge agreed to pay a total of $9.5 million to FINRA, NYSE, NYSE
ARCA, NASDAQ, and BATS for failing to supervise trading by clients that
directly accessed U.S. equities markets through Newedge's order routing
platform and/or internet service providers (Direct Market Access) or routed
orders directly to market centers (Sponsored Access). In addition, Newedge
also violated Regulation SHO (Reg SHO) and SEC Emergency Orders
concerning short sales, and failed to obtain and retain books and records.
FINRA and the exchanges found that Newedge did not have sufficient
procedures, adequate surveillance tools, or necessary information to monitor
DMA and SA client trading. Newedge's supervisory violations occurred over
a four-year period, during which numerous internal documents noted the
firm's deficiencies. Even after these "red flags" were raised, Newedge did
not take adequate steps to satisfy its supervisory obligations.
FINRA and the exchanges found that Newedge did not have sufficient
procedures, adequate surveillance tools, or necessary information to monitor
DMA and SA client trading. Newedge's supervisory violations occurred over a
four-year period, during which numerous internal documents noted the firm's
deficiencies. Even after these "red flags" were raised, Newedge did not take
adequate steps to satisfy its supervisory obligations.
In one example, FINRA also found that Newedge did not have adequate
procedures or controls to monitor which clients used DMA and SA to trade in
the equities markets. Newedge failed to reasonably and effectively monitor for
certain types of potentially manipulative trading, such as wash trading, despite
numerous requests from its own compliance department to implement a wash
trading surveillance report. Also, Newedge could not adequately monitor certain
clients' trading because it did not receive any order data reflecting their activity.
Newedge also lacked essential knowledge about the beneficial owners of certain
accounts directly accessing U.S. markets through firm affiliates, knowledge that
was necessary for Newedge to properly monitor for potentially manipulative or
suspicious activity. In addition to failing to obtain or retain required records,
such as certain order data and client documentation, Newedge failed to retain
certain email and text message data.
2.
Pricing
a.
UVEST (2009016347101) (April 2012)
The firm ordered to pay a $230,000 fine plus an undertaking to pay
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approximately $44,000 in restitution to customers. It also consented
to findings that it, among other things, violated:
b.

FINRA Rule 2010 and NASD Rules 2110 and 3010(a) and (b)
when, between July 9, 2007 and September 20, 2009, it failed
to apply “breakpoint” and “rollover and exchange” discounts
(collectively “sales charge discounts”) to eligible customer
purchases of Unit Investment Trusts. Also between July 9,
2007 and September 20, 2009, UVEST failed to establish,
maintain and enforce an adequate supervisory system and
WSPs reasonably designed to achieve compliance with its
obligation to identify and ensure customers received sales
charge discounts on all eligible UIT purchases.

FINRA Rule 2010, NASD Rule 2110 and 3010(a) and (b)
when, between July 9, 2007 and September 20, 2009, UVEST
customers purchased UITs in 3,194 brokerage accounts, and
UVEST failed to establish, maintain and enforce an adequate
supervisory system and WSPs reasonably designed to achieve
compliance with its obligation to provide UIT prospectuses to
customers.
Pruco Securities, LLC (2011029046101) (Dec. 2012)
Ordered to pay more than $10.7 million in restitution, plus interest, to
customers who placed mutual fund orders with Pruco via facsimile or
mail, and received an inferior price for their shares. FINRA also
fined Pruco $550,000 for its pricing errors and for failing to have an
adequate supervisory system and written procedures in this area.
3.
Consolidated Account Statements/Reports
a.
Triad Advisors (2011025792001) and Securities America
(2010025742201) (March 2014)
FINRA sanctioned and fined two firms — Triad Advisors and
Securities America — $650,000 and $625,000, respectively, for
failing to supervise the use of consolidated reporting systems
resulting in statements with inaccurate valuations being sent to
customers, and for failing to retain the consolidated reports in
accordance with securities laws. In addition, Triad was ordered to
pay $375,000 in restitution.
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A consolidated report is a single document that combines
information regarding most or all of a customer's financial holdings,
regardless of where those assets are held. Consolidated reports
supplement, but do not replace official customer account statements.
Both Triad Advisors and Securities America had a consolidated
report system that permitted their representatives to create
consolidated reports, allowing them to enter customized asset values
for accounts held away from the firm and to provide the reports to
customers.
For more than two years, Triad and Securities America failed to
supervise hundreds of brokers, some of whom were creating and
sending false and inaccurate consolidated reports to customers. Many
of these consolidated reports contained inflated values for
investments, some of which were in default or receivership.
Moreover, at Triad, a number of consolidated reports sent to
customers reflected fictitious promissory notes or other fictitious
assets, which enabled two representatives to conceal their
misconduct. Triad has paid restitution to some of the affected
customers and FINRA has ordered Triad to pay restitution to the
remaining affected customers.
F.
Research Reports and Material Non-Public Information
1.
David Gutman/John Tyndall (2012033227402) (Gutman – Dec. 2013)
(Tyndall – Jan. 2014)
FINRA barred David Michael Gutman, a Vice President in the conflicts
office of J.P. Morgan Securities, LLC, and Christopher John Tyndall, a
former registered representative at Meyers Associates, L.P., from the
securities industry for their roles in an insider trading scheme. Gutman and
Tyndall were longtime close personal friends.
FINRA's investigation found that Gutman improperly shared material, nonpublic information with Tyndall during conversations that took place
between March 2006 to October 2007 regarding at least 15 pending
corporate merger and acquisition transactions. Gutman learned about the
pending merger transactions through his work in J.P. Morgan's conflicts
office, which reviews all investment banking transactions for potential
conflicts of interest for the firm. Tyndall then used the information to trade
ahead of at least six of the corporate announcements using personal and
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family accounts over nearly a two-year period, and also recommended the
stocks to his customers and friends.
Gutman consented to the entry of FINRA's findings that he violated NASD
Rule 2110 in failing to comply with his obligation to observe high
standards of commercial honor and just and equitable principles of trade.
Tyndall consented to the entry of FINRA's findings that he violated NASD
Rules 2110 and 2120, and Section 10(b) of the Exchange Act and Rule
10b-5 promulgated thereunder for his role in the scheme.
2. Citigroup Global Markets (20080123101) (Jan. 2012)
FINRA ordered Citigroup Global Markets to pay a $725,000 fine and findings
that it failed to disclose certain conflicts of interest in its research reports and
research analysts' public appearances.
Citigroup failed to disclose potential conflicts of interest inherent in their
business relationships in certain research reports it published from January 2007
through March 2010. Citigroup and/or its affiliates managed or co-managed
public securities offerings, received investment banking or other revenue from,
made a market in the securities of and/or had a 1 percent or greater beneficial
ownership in covered companies, and did not make these required disclosures in
certain research reports.
In addition, Citigroup research analysts failed to disclose these same potential
conflicts of interest in connection with public appearances in which covered
companies were mentioned.
FINRA found that Citigroup failed to disclose the required information because
the database it used to identify and create the disclosures was inaccurate and/or
incomplete due primarily to technical deficiencies. In addition, Citigroup failed
to have reasonable supervisory procedures in place to ensure that the firm was
populating its research reports with required disclosures.
3. Goldman, Sachs & Co. (2009019301201) (April 2012)
FINRA fined Goldman, Sachs & Co. $22 million for failing to supervise equity
research analyst communications with traders and clients and for failing to
adequately monitor trading in advance of published research changes to detect
and prevent possible information breaches by its research analysts. The
Securities and Exchange Commission (SEC) today announced a related
settlement with Goldman. Pursuant to the settlements, Goldman will pay $11
million each to FINRA and the SEC.
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In 2006, Goldman established a business process known as "trading huddles" to
allow research analysts to meet on a weekly basis to share trading ideas with the
firm's traders, who interfaced with clients and, on occasion, equity salespersons.
Analysts would also discuss specific securities during trading huddles while they
were considering changing the published research rating or the conviction list
status of the security. Clients were not restricted from participating directly in
the trading huddles and had access to the huddle information through research
analysts' calls to certain of the firm's high priority clients. These calls included
discussions of the analysts' "most interesting and actionable ideas."
Trading huddles created the significant risk that analysts would disclose material
non-public information, including, among other things, previews of ratings
changes or changes to conviction list status. Despite this risk, Goldman did not
have adequate controls in place to monitor communications in trading huddles
and by analysts after the huddles.
Goldman did not adequately review discussions in the trading huddles to
determine whether an equity research analyst may have previewed an upcoming
ratings change. For example, an analyst said of a particular company in a trading
huddle in 2008 that "we expect companies with consumer and small business
exposure to be under pressure in the current environment, including [the
company]." The next day, the analyst sought and received approval to
downgrade the company from "neutral" to "sell," and to add the stock to
Goldman's conviction sell list. Goldman published an equity research report
making these changes that same day.
Goldman also failed to establish an adequate system to monitor for possible
trading in advance of research rating or conviction list changes in employee or
proprietary trading, institutional customer, or market-making and clientfacilitation accounts. Accordingly, Goldman failed to identify and adequately
investigate increased trading in proprietary accounts in advance of the addition
of securities to the firm's conviction list, certain transactions effected in an
account in advance of changes in published research that warranted review
based on their size or profitability and/or atypical trading for that account, and
certain spikes in trading volume that immediately preceded the addition of
stocks to the firm's conviction list.
4. Rodman & Renshaw LLC (2011026060501) (Aug. 2012)
FINRA was fined Rodman & Renshaw LLC $315,000 for supervisory and other
violations related to the interaction between the firm's research and investment
banking functions. Rodman's former CCO, William A. Iommi Sr., was fined
$15,000, suspended from acting in a principal capacity for 90 days and must
requalify as a general securities principal. FINRA found the firm's supervisory
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system was deficient, which resulted in at least two incidents where a research
analyst participated in efforts to solicit investment banking business, and another
incident where a research analyst attempted to arrange a payment from a public
company. FINRA sanctioned the two research analysts involved; Lewis B. Fan
was fined $10,000 and suspended for 30 business days for violating NASD Rule
2711 by participating in efforts to solicit investment banking business from two
public companies, and Alka Singh was fined $10,000 and suspended for six
months after FINRA found that she attempted to arrange a concealed fee from a
public company for which she provided research coverage.
Rodman, the New York-based broker-dealer subsidiary of Direct Markets
Holdings Corp., provides investment banking services, including Private
Investments in Public Entities (PIPEs) and registered direct offerings, to public
and private companies. It also provides research, sales and trading services to
institutional investors and therefore must have supervisory and compliance
procedures to monitor potential conflicts of interest between research and
investment banking, given concerns that research analysts could be pressured to
tailor their coverage to the interests of a firm's current or prospective investment
banking clients.
FINRA found that from January 2008 to March 2012, Rodman failed to have an
adequate supervisory system to monitor interactions between its investment
banking and research functions. As a result, Rodman failed to prevent research
analysts from soliciting investment banking business. In addition, the firm
compensated a research analyst for his contribution to the firm's investment
banking business and failed to prevent Rodman's CEO, a member of the firm's
Research Analyst Compensation Committee while simultaneously engaged in
investment banking activities, from having influence or control over research
analysts' evaluations or compensation.
G.
Fixed Income
1. Municipal Securities
a.
Cases
1) Cal PSA – FINRA sanctioned five firms a total of more than
$4.48 million for unfairly obtaining the reimbursement of fees
they paid to the California Public Securities Association (Cal
PSA) from the proceeds of municipal and state bond offerings.
The firms violated fair dealing and supervisory rules of the
Municipal Securities Rulemaking Board by obtaining
reimbursement for these voluntary payments to pay the lobbying
group. The firms were fined more than $3.35 million and are
required to pay a total of $1.13 million in restitution to certain
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issuers in California.
FINRA sanctioned the following firms:





Citigroup (2010022049802) (Dec. 2012) – $888,000 fine
and $391,106 in restitution
Goldman Sachs (2010022049803) (Dec. 2012) –
$568,000 fine and $115,997 in restitution
JP Morgan (2009021126401) (Dec. 2012) – $465,700 fine
and $166,676 in restitution
Merrill Lynch (2010022049801) (Dec. 2012) – $787,000
fine and $287,200 in restitution
Morgan Stanley (2010022049804) (Dec. 2012) –
$647,700 fine and $170,054 in restitution
FINRA found that between January 2006 and December 2010,
the firms made payments to Cal PSA, an association that engages
in a variety of political activities including lobbying on behalf of
companies seeking to influence California state government, and
requested that those voluntary payments be reimbursed as
underwriting expenses from the proceeds of the negotiated
municipal and state bond offerings. This practice was unfair as
Cal PSA's activities did not bear a direct relationship to those
bond offerings and were not underwriting expenses. Also, the
firms did not adequately disclose the nature of the fees to issuers
and failed to establish reasonable procedures in this area. In fact,
the need for adequate policies and procedures in this area was
heightened in light of the nature of Cal PSA's political activities.
In addition, Citigroup, Goldman, Merrill Lynch and Morgan
Stanley failed to have adequate systems and written supervisory
procedures reasonably designed to monitor how the municipal
securities associations used the funds that these firms paid.
H.
Mark-Ups and Mark-Downs
1. State Trust Investments (2010023001602) (June 2013)
StateTrust Investments, Inc. was fined $1.045 million and FINRA sanctioned
the firm's head trader, Jose Luis Turnes, for charging excessive markups and
markdowns in corporate bond transactions. In particular, 85 of the transactions
operated as a fraud or deceit upon the customers. FINRA also ordered StateTrust
to pay more than $353,000 in restitution, plus interest, to customers who
received unfair prices. In addition, Turnes was suspended for six months and
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fined $75,000. In a related April 2012 action, Jeffrey Cimbal, StateTrust's Chief
Compliance Officer, was fined $20,000 and suspended for five months in a
principal capacity for failing to supervise Turnes.
FINRA found that StateTrust charged excessive markups/markdowns to
customers in a total of 563 transactions. In 227 instances, the markups or
markdowns exceeded 5 percent. In 85 of those instances, StateTrust, acting
through Turnes, charged excessive markups and markdowns, ranging from 8
percent to over 23 percent away from the prevailing market price, which
operated as a fraud or deceit upon the customers. In each of the 85 instances,
StateTrust either bought bonds from its bank or insurance affiliate and then sold
the bonds to customers at a price that was 8 percent or more away from the
prevailing market; or bought bonds from customers at prices that were 8 percent
or more below the prevailing market, and then sold them to its bank or insurance
affiliate at a slight markup. During that period, Turnes was also the chairman
and largest indirect shareholder of the bank and its insurance affiliates.
2. Citi International Financial Services LLC (2007011299401) (Feb. 2012)
FINRA fined Citi International $600,000 and ordered more than $648,000 in
restitution and interest to more than 3,600 customers for charging excessive
markups and markdowns on corporate and agency bond transactions, and for
related supervisory violations.
FINRA found that from July 2007 through September 2010, Citi International
charged excessive corporate and agency bond markups and markdowns. The
markups and markdowns ranged from 2.73 percent to over 10 percent, and were
excessive given market conditions, the cost of executing the transactions and the
value of the services rendered to the customers, among other factors. In addition,
from April 2009 through June 2009, Citi International failed to use reasonable
diligence to buy or sell corporate bonds so that the resulting price to its
customers was as favorable as possible under prevailing market conditions.
During the relevant period, Citi International's supervisory system regarding
fixed income transactions contained significant deficiencies regarding, among
other things, the review of markups and markdowns below 5 percent and
utilization of a pricing grid for markups and markdowns that was based on the
par value of the bonds, instead of the actual value of the bonds. Citi International
was also ordered to revise its written supervisory procedures regarding
supervisory review of markups and markdowns, and best execution in fixed
income transactions with its customers.
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I. E-Mail Retention and Review
1. Barclays Capital Inc. (201102667901) (Dec. 2013)
FINRA fined Barclays Capital Inc. $3.75 million for systemic failures to preserve
electronic records and certain emails and instant messages in the manner required for a
period of at least 10 years.
Federal securities laws and FINRA rules require that business-related electronic
records be kept in non-rewritable, non-erasable format (also referred to as
"Write-Once, Read-Many" or "WORM" format) to prevent alteration. The SEC
has stated that these requirements are an essential part of the investor protection
function because a firm's books and records are the "primary means of
monitoring compliance with applicable securities laws, including antifraud
provisions and financial responsibility standards."
FINRA found that from at least 2002 to 2012, Barclays failed to preserve many
of its required electronic books and records—including order and trade ticket
data, trade confirmations, blotters, account records and other similar records—in
WORM format. The issues were widespread and included all of the firm's
business areas, thus, Barclays was unable to determine whether all of its
electronic books and records were maintained in an unaltered condition.
FINRA also found that from May 2007 to May 2010, Barclays failed to properly
retain certain attachments to Bloomberg emails, and additionally failed to
properly retain approximately 3.3 million Bloomberg instant messages from
October 2008 to May 2010. In addition to violating FINRA, SEC and NASD
rules and regulations, this adversely impacted Barclay's ability to respond to
requests for electronic communications in regulatory and civil matters.
Finally, Barclays failed to establish and maintain an adequate system and written
procedures reasonably designed to achieve compliance with SEC, NASD, and
FINRA rules and regulations, as well as to timely detect and remedy
deficiencies related to those requirements.
2. LPL Financial (2012032218001) (May 2013)
FINRA fined LPL Financial LLC (LPL) $7.5 million for 35 separate, significant
email system failures, which prevented LPL from accessing hundreds of
millions of emails and reviewing tens of millions of other emails. Additionally,
LPL made material misstatements to FINRA during its investigation of the
firm's email failures. LPL was also ordered to establish a $1.5 million fund to
compensate brokerage customer claimants potentially affected by its failure to
produce email.
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As LPL rapidly grew its business, the firm failed to devote sufficient resources
to update its email systems, which became increasingly complex and unwieldy
for LPL to manage and monitor effectively. The firm was well aware of its
email systems failures and the overwhelming complexity of its systems.
Consequently, FINRA found that from 2007 to 2013, LPL's email review and
retention systems failed at least 35 times, leaving the firm unable to meet its
obligations to capture email, supervise its representatives and respond to
regulatory requests. Because of LPL's numerous deficiencies in retaining and
surveilling emails, it failed to produce all requested email to certain federal and
state regulators, and FINRA, and also likely failed to produce all emails to
certain private litigants and customers in arbitration proceedings, as required. In
addition, LPL made material misstatements to FINRA concerning its failure to
supervise 28 million DBA emails. In a January 2012 letter to FINRA, LPL
inaccurately stated that the issue had been discovered in June 2011 even though
certain LPL personnel had information that would have uncovered the issue as
early as 2008. Moreover, the letter stated that there weren't any "red flags"
suggesting any issues with DBA email accounts when, in fact, there were
numerous red flags related to the supervision of DBA emails that were known to
many LPL employees.
In addition, LPL likely failed to provide emails to certain arbitration claimants
and private litigants. LPL agreed to notify eligible claimants and deposit $1.5
million into a fund to pay customer claimants for its potential discovery failures.
Customer claimants who brought arbitrations or litigations against LPL as of
Jan. 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon
request, emails that the firm failed to provide them. Claimants will also have a
choice of whether to accept a standard payment of $3,000 from LPL or have a
fund administrator determine the amount, if any, that the claimant should
receive depending on the particular facts and circumstances of that individual
case. Maximum payment in cases decided by the fund administrator cannot
exceed $20,000. If the total payments to claimants exceed $1.5 million, LPL will
pay the additional amount.
3. ING (2012031270301) (May 2013)
FINRA fined five affiliates of ING $1.2 million for failing to retain or review
millions of emails for periods ranging from two months to more than six years.
The five firms, indirect subsidiaries of ING Groep N.V., are Directed Services,
LLC; ING America Equities, Inc.; ING Financial Advisers, LLC; ING Financial
Partners, Inc.; and ING Investment Advisors, LLC.
FINRA found that the firms failed to properly configure hundreds of employee
email accounts to ensure that the emails sent to and from those accounts were
retained and reviewed at various times between 2004 and 2012. In addition, four
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of the firms failed to set up systems to retain certain types of emails, such as
emails using alternative email addresses, emails sent to distribution lists, emails
received as blind carbon copies, encrypted emails and "cloud" email (emails sent
through third-party systems). As a result of these failures, emails sent to and
from hundreds of employees and associated persons were not retained; and
because the emails were not retained, they were not subject to supervisory
review. FINRA found that the firms violated the recordkeeping provisions of
the federal securities laws and FINRA rules, and supervisory requirements under
FINRA rules.
In addition, four of the firms failed to review millions of emails that the firms'
email review software had flagged for supervisory review. At various times
between January 2005 and May 2011, nearly six million emails flagged for
review went unreviewed by supervisory principals because the email review
software was not properly configured.
FINRA also ordered the firms to conduct a comprehensive review of their
systems for the capture, retention and review of email, and to subsequently
certify that they have established procedures reasonably designed to address and
correct the violations.
J.
Systems and Operations-Related Supervisory Failures
1. Technology Failures
a.
Merrill Lynch (2008014187701) (June 2012)
FINRA fined Merrill Lynch $2.8 million for supervisory failures that
resulted in overcharging customers $32 million in unwarranted fees,
and for failing to provide certain required trade notices. Merrill
Lynch has provided $32 million in remediation, plus interest, to the
affected customers.
FINRA found that from April 2003 to December 2011, Merrill
Lynch failed to have an adequate supervisory system to ensure that
customers in certain investment advisory programs were billed in
accordance with contract and disclosure documents. As a result, the
firm overcharged nearly 95,000 customer accounts fees of more than
$32 million. Merrill Lynch has since returned the unwarranted fees,
with interest, to the affected customers.
Merrill Lynch also failed to provide timely trade confirmations to
customers in certain advisory programs due to computer
programming errors. From July 2006 to Nov. 2010, Merrill Lynch
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failed to send customers trade confirmations for more than 10.6
million trades in over 230,000 customer accounts. In addition,
Merrill Lynch failed to properly identify whether it acted as an agent
or principal on trade confirmations and account statements relating to
at least 7.5 million mutual fund purchase transactions. At various
times, Merrill Lynch also failed to deliver certain proxy and voting
materials, margin risk disclosure statements and business continuity
plans.
b.
FINRA fined five (5) firms for failing to deliver prospectuses to
customers within three business days of purchase and/or failed to
establish, maintain and enforce reasonable supervisory systems and
procedures to ensure timely mutual fund prospectus delivery between
January 1, 2009 and June 30, 2011.





LPL Financial, LLC (2011029101501) (Dec. 2012) -$400,000 fine
Scottrade, Inc. (2011029102701) (Dec. 2012) -- $50,000 fine
State Farm VP Management Corp. (2011029102801) (Dec.
2012) -- $155,000 fine
T. Rowe Price, Inc. (2011029102901) (Dec. 2013) -- $40,000
fine
Deutsche Bank Securities, Inc. (2011029270401) (Dec. 2012)
-- $125,000 fine
In addition, one firm, State Farm, had two additional violations.
First, State Farm failed to deliver annual prospectus updates for
certain mutual fund customers as required by the firm’s written
procedures and in violation of NASD Rule 3010(b)(1), FINRA Rule
2010 and NASD Rule 2110. Second, State Farm failed to implement
procedures reasonably designed to review, monitor and retain email
sent by Registered Representatives to customers in violation of
NASD Rule 3010 and FINRA Rule 2010.
Finally, Deutsche Bank also had an additional violation.
Specifically, the firm self-reported that it had failed to deliver
preliminary IPO prospectuses to certain customers in contravention
of SEC Rule 15c2-8 and, thereby, violated FINRA Rule 2010.
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b.
Ameriprise Financial Services, Inc. and American Enterprise
Investment Services, Inc. (2010025157301) (March 2013)
FINRA found that Ameriprise and AEIS failed to establish, maintain
and enforce supervisory systems designed to review and monitor the
transmittal of funds from customer accounts to third-party accounts.
The firms did not have policies or procedures to detect or prevent
multiple transmittals of funds going to third-party accounts, instead
relying on a manual review of wire requests without the benefit of
exception reports that could have helped to discern suspicious
patterns. Ameriprise and AEIS also failed to adequately track or
further investigate wire transfer requests that had been rejected.
Ameriprise agreed to a $750,000 fine.
K.
Books and Records
1.
Deutsche Bank Securities, Inc. (2010023559301) (Dec. 2013)
Under DBSI's enhanced lending program, which involves mostly hedge fund
customers, the firm arranges for its London affiliate, Deutsche Bank AG London
(DBL), to lend cash and securities to DBSI's customers. FINRA's 2009
examination of the firm uncovered a number of serious problems in connection
with this program. For example, the firm's books reflected that it owed $9.4
billion to its affiliate, but neither the firm nor FINRA examiners could readily
determine which portions of that debt were attributable to the customers'
enhanced lending activity, and which were attributable to DBL's own
proprietary trading. The lack of transparency in DBSI's books and records meant
the firm was unable to readily monitor the accounts originating out of the
enhanced lending business. FINRA also found that there were instances where
DBSI made inaccurate calculations that resulted in the firm overstating its
capital or failing to set aside enough funds in its customer reserve account to
appropriately protect customer securities. For example, DBSI incorrectly
classified certain enhanced lending stock loans; when it reclassified them in
April 2010, DBL was obligated to pay a margin call of $3.1 billion. DBSI
improperly computed its payable balance, thus reducing the firm's reported
liabilities and inaccurately overstating the firm's net capital. Separately, in
March 2010, the firm incorrectly computed its customer reserve formula. As a
result, the firm's customer reserve fund was deficient by $700 million to $1.6
billion during March 2010. DBSI agreed to a $6.5 million fine.
L.
Social Networking – FINRA Regulatory Notice 10-06
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1. Regulatory Notice 10-06, Social Media Websites; Guidance on Blogs and Social
Media Web Sites
The Regulatory Notice provided guidance to firms on applying the
communications rules to social media sites, such as blogs and social networking
sites. The goal of this Notice is to ensure that—as the use of social media sites
increases over time—investors are protected from false or misleading claims and
representations, and firms are able to effectively and appropriately supervise
their associated persons’ participation in these sites. The Notice emphasized the
need for each firm, when establishing its policies and procedures in this area, to
develop policies and procedures that are best designed to ensure that the firm
and its personnel comply with all applicable requirements. The Notice also
emphasized that it was addressing the use by a firm or its personnel of social
media sites for business purposes and did not purport to address the use by
individuals of social media sites for purely personal reasons.
2. Recordkeeping: Every firm that intends to communicate, or permit its associated
persons to communicate through social media sites must first ensure that it can
retain records of those communications as required by Exchange Act Rules 17a3 and 17a-4 and NASD Rule 3110. SEC and FINRA rules require that for record
retention purposes, the content of the communication is determinative and a
broker-dealer must retain those electronic communications that relate to its
“business as such.”
3. Suitability: If a firm or its personnel recommends a security through a social
media site suitability requirements of NASD Rule 2310 apply. Whether a
particular communication constitutes a ”recommendation” for purposes of Rule
2310 will depend on the facts and circumstances of the communication. (See
Notice to Members (NTM) 01-23 (Online Suitability) for additional guidance
concerning when an online communication falls within the definition of
“recommendation” under Rule 2310.)
4. Supervision: The content provisions of FINRA’s communications rules apply to
interactive electronic communications that the firm or its personnel send through
a social media site. While prior principal approval is not required under Rule
2210 for interactive electronic forums, firms must supervise these interactive
electronic communications under NASD Rule 3010 in a manner reasonably
designed to ensure that they do not violate the content requirements of FINRA’s
communications rules. Firms may adopt supervisory procedures similar to those
outlined for electronic correspondence in FINRA Regulatory Notice 07-59
(FINRA Guidance Regarding Review and Supervision of Electronic
Communications). As set forth in that notice, firms may employ risk-based
principles to determine the extent to which the review of incoming, outgoing and
internal electronic communications is necessary for the proper supervision of
their business.
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5. Third Party Posts: The Notice also addresses the issue of third party posts and
whether such posts become communications of the firm under Rule 2210. As a
general matter, FINRA does not treat posts by customers or other third parties as
the firm’s communication with the public subject to Rule 2210. Thus, the prior
principal approval, content and filing requirements of Rule 2210 do not apply to
these posts. Under certain circumstances, however, third-party posts may
become attributable to the firm. Whether third-party content is attributable to a
firm depends on whether the firm has (1) involved itself in the preparation of the
content (”entanglement” theory) or (2) explicitly or implicitly endorsed or
approved the content (”adoption” theory).
M.
Cyber security/Regulation S-P
1. Generally
SEC and FINRA rules require every broker-dealer to adopt written policies and
procedures that address safeguards for the protection of customer records and
information. We are looking at firms that do not have adequate Reg S-P policies
or have had breaches in security and have not responded appropriately to the
breach.
2. Morgan Keegan & Company, Inc. (2010022554701) (April 2012)
Morgan Keegan was fined $150,000. During 2009 and 2010 (the "Relevant
Period"), the Firm's policies and procedures failed to provide sufficient
safeguards to detect, monitor for and report customer data breaches. The Firm
also failed to provide adequate training to certain of its employees regarding
customer breaches. As a result, certain Firm employees failed to report customer
data breaches timely to the Firm. Accordingly, the Firm violated Rule 30 of
Regulation S-P, NASD Rules 3010 (a) and (b), and FINRA Rule 2010.
3. Samuel Delshaul Shoemaker (2011030666301) (Oct. 2013) (Default decision)
While employed as a personal banker by a FINRA member firm, Respondent
Samuel Delshaul Shoemaker abused his position by siphoning personal
confidential information of three bank customers to an accomplice who used the
information to fraudulently create debit cards for the customers' accounts.
Shoemaker then used the cards to shop and obtain cash for his accomplice.
When confronted by a bank investigator, Shoemaker confessed. When FINRA
requested him to provide information and testimony, however, he chose not to
respond at all. For fraudulently misappropriating customer funds, in violation
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of.FINRA Rule 2010, and completely failing to provide information and
testimony, in violation of FINRA Rules 8210 and 2010, Respondent Samuel
Delshaul Shoemaker is barred from associating with any FINRA member firm
in any capacity.
N. Regulation SHO
1. Generally
In a short sale, the seller sells a security it does not own. When it is time to
deliver the security, the short seller either purchases or borrows the security in
order to make the delivery. Reg SHO requires a broker or dealer to have
reasonable grounds to believe that the security could be borrowed and available
for delivery before accepting or affecting a short sale order. Requiring firms to
obtain and document this "locate" information before the short sale is entered
reduces the number of potential failures to deliver in equity securities. In
addition, Reg SHO requires a broker or dealer to mark sales of equity securities
as long or short.
2. Newedge USA LLC (20090186944) (July 2013)
Newedge failed to establish, maintain and enforce adequate supervisory systems
and procedures that were reasonably designed to achieve compliance with 17
C.F.R. Part 242 (Regulation SHO). In addition, by accepting customer's short
sale orders without a reasonable basis to believe the securities could be
borrowed, Newedge directly violated Rule 203(b) of Regulation SHO. The Firm
also violated Rules 200(f) and 200(g) of Regulation SHO, in that the Firm could
not determine its net position for appropriate sell order marking in a given
security Firm-wide, and could not reasonably determine whether sell orders
entered by clients were accurately marked.
Newedge further failed to establish, maintain, and enforce adequate supervisory
procedures, and a reasonable system of follow-up and review, that were
reasonably designed to achieve compliance with the July and September 2008
Emergency Orders issued by the Securities and Exchange Commission pursuant
to Section 12(k)(2) of the Securities Exchange Act of 1934, and violated Section
12(k)(4) of the Exchange Act by entering short sale orders on the NYSE in
covered financial institutions in violation of the September 2008 Emergency
Order.
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IV.
PROCEDURAL ISSUES
A.
Credit for Cooperation
1. Guidance Regarding Credit for Extraordinary Cooperation, FINRA Regulatory
Notice 08-70 (November 2008)
www.finra.org/Industry/Regulation/Notices/2008/P117453
FINRA issued the guidance to apprise firms of the circumstances in which
extraordinary cooperation by a firm or individual may directly influence the
outcome of an investigation. The types of extraordinary cooperation by a firm or
individual that could result in credit can be categorized as follows: (1) selfreporting before regulators are aware of the issue; (2) extraordinary steps to
correct deficient procedures and systems; (3) extraordinary remediation to
customers; and (4) providing substantial assistance to FINRA’s investigation.
These steps alone or taken together can be viewed in a particular case as
extraordinary cooperation and, depending on the facts and circumstances, can
have an impact on FINRA’s enforcement decisions.
In connection with the attorney-client privilege, the waiver or non-waiver of the
privilege itself will not be considered in connection with granting credit for
cooperation. Moreover, it is not the waiver of attorney-client privilege that
warrants credit for cooperation but rather the extraordinary assistance to the staff
in uncovering the facts in an investigation that yields the benefit.
There is significant regulatory value in crediting conduct that rises to the level of
extraordinary cooperation. Such cooperation may put the regulator on notice of
regulatory problems before it finds them during an examination or investigation
or assist the regulator in resolving matters more quickly, thereby allowing it to
deploy regulatory resources more efficiently. This enables FINRA to achieve its
mission of investor protection and market integrity more effectively.
Credit for extraordinary cooperation in FINRA matters may be reflected in a
variety of ways, including a reduction in the fine imposed, eliminating the need
for or otherwise limiting an undertaking, and including language in the
settlement document and press release that notes the cooperation and its positive
effect on the final settlement by FINRA Enforcement. In an unusual case,
depending on the facts and circumstances involved, the level of extraordinary
cooperation could lead FINRA to determine to take no disciplinary action at all.
By publishing these standards of cooperation, FINRA seeks to increase
transparency as to the basis for sanctions imposed in cases and to encourage
firms to root out, correct and remediate violative behavior. By making clear that
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FINRA has given credit for extraordinary cooperation in a particular case,
FINRA will inform firms and associated persons of the types of conduct
considered and the degree to which such actions are to the individual or firm’s
benefit.
It is important to note that the level of cooperation is just one factor to be
considered in determining the appropriate disciplinary action and sanctions.
Other factors include the nature of the conduct, the extent of customer harm, the
duration of the misconduct, and the existence of prior disciplinary history, all of
which impact the appropriate sanction in any particular matter.
2. Cases
Enforcement announced several cases in late 2012 and early 2013 where it
granted the Respondent credit for cooperation that resulted in lower sanctions:
a.
Pruco Securities (2011029046101) (Dec. 2012)
Self-reported pricing errors caused by failure to timely process hard
copy mutual fund trades. Provided extraordinary cooperation by
hiring independent consultant to assess and remediate, providing
FINRA full access to consultant’s findings and plan. Fine of
$550,000 would have been higher absent extraordinary cooperation.
b.
HSBC (2011027202401) (Jan. 2013)
The Firm self-reported systemic deficiencies involving electronic
blue sheets, prospectus delivery, equity research disclosures, and
retention of text messages, and provided extraordinary cooperation
by working closely with FINRA staff to provide information about
discovery and remediation, and working with FINRA exam staff to
test effectiveness about remediation. The $250,000 fine would have
been higher absent cooperation.
c.
ING (2012031270301) (May 2013)
The Firm self-reported systemic e-mail retention issues. The five
affiliated firms provided extraordinary cooperation by conducting a
robust internal investigation and substantially assisting FINRA staff,
including sharing information from investigation. Fine of $1.2
million would have been higher absent cooperation.
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B.
FINRA Regulatory Notice 11-06 – Reporting the Results of Internal
Investigations
New FINRA Rule 4530(b), which became effective in July 2011, requires a
member firm to report to FINRA within 30 calendar days after the firm has
concluded, or reasonably should have concluded, on its own that the firm or an
associated person of the firm has violated any securities, insurance, commodities,
financial or investment related laws, rules, regulations or standards of conduct of
any domestic or foreign regulatory body or self-regulatory organization (SRO).
This requirement is generally modeled after a requirement in the NYSE rule.
The new rule does not require firms to report every instance of noncompliant
conduct. With respect to violative conduct by a firm, this provision requires the
firm to report only conduct that has widespread or potential widespread impact to
the firm, its customers or the markets, or conduct that arises from a material failure
of the firm’s systems, policies or practices involving numerous customers, multiple
errors or significant dollar amounts. Regarding violative conduct by an associated
person, the provision requires a firm to report only conduct that has widespread or
potential widespread impact to the firm, its customers or the markets; conduct that
has a significant monetary result on a member firm(s), customer(s) or market(s); or
multiple instances of any violative conduct.
For purposes of compliance with the “reasonably should have concluded” standard,
FINRA will rely on a firm’s good faith reasonable determination. If a reasonable
person would have concluded that a violation occurred, then the matter is
reportable; if a reasonable person would not have concluded that a violation
occurred, then the matter is not reportable.
Additionally, a firm determines the person(s) within the firm responsible for
reaching such conclusions, including the person’s required level of seniority.
However, stating that a violation was of a nature that did not merit consideration
by a person of such seniority is not a defense to a failure to report such conduct.
Further, it may be possible that a department within a firm reaches a conclusion of
violation, but on review senior management reaches a different conclusion.
Nothing in the rule prohibits a firm from relying on senior management’s
determination, provided such determination is reasonable as described above.
Moreover, the reporting obligation under FINRA Rule 4530 and the internal
review processes set forth under other rules (e.g., FINRA Rule 3130) are mutually
exclusive. While internal review processes may inform a firm’s determination that
a specific violation occurred, they do not by themselves lead to the conclusion that
the matter is reportable.
For example, FINRA would not view a discussion in an internal audit report
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regarding the need for enhanced controls in a particular area, standing alone, as
determinative of a reportable violation. It should also be noted that an internal
audit finding would serve only as one factor, among others, that a firm should
consider in determining whether a reportable violation occurred.
Lastly, the new rule provides that certain disciplinary actions taken by a firm
against an associated person must be reported under a separate provision rather
than under the internal conclusion provision.
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