Firm Settles Charges for Supervisory Failures on Low-Priced Securities Transactions
A firm settled FINRA charges for supervisory failures on low-priced securities transactions, related suspicious activity reporting and the creation and dissemination of statements of held away assets.
According to the AWC, the firm "did not require representatives to complete questionnaires for electronic deposits of low-priced securities, unless trading activity was flagged," allowing customers to liquidate millions of shares without adequate review. FINRA said that the firm lacked guidance on identifying red flags—such as customers depositing large blocks of thinly traded securities and immediately wiring out liquidation proceeds—and relied on daily reports that lacked the historical data necessary to identify suspicious patterns. FINRA found the firm failed to investigate instances where customers engaged in potentially suspicious activity, including one instance where three customers deposited over 100 million shares of an issuer and immediately liquidated them for proceeds of approximately $375,000. As a result, FINRA found that the firm’s supervisory systems were not reasonably designed to ensure compliance with registration requirements for low-priced securities and that the firm’s anti-money laundering program was deficient in detecting suspicious transactions.
FINRA also found that firm representatives used proprietary systems, third-party vendors, and manual "custom" templates to generate consolidated reports regarding assets held away from the firm. FINRA said the firm allowed representatives to manually enter valuation data without a system to verify the accuracy of the information or ensure the reports were not misleading. Further, FINRA said the firm failed to retain these reports as required books and records. FINRA said that the firm could not track how many reports were generated or sent via these various platforms. Consequently, FINRA determined that the firm failed to preserve tens of thousands of communications which prevented it from detecting instances where a representative provided customers with inaccurate valuations. As a result, FINRA found that the firm failed to reasonably supervise the creation and dissemination of consolidated reports regarding assets held away from the firm.
FINRA concluded that the firm violated Exchange Act Section 17(a) ("Records and Reports") and Rule 17a-4 ("Records to be preserved by certain exchange members, brokers and dealers"), as well as FINRA Rules 3310 ("Anti-Money Laundering Compliance Program"), 3110 ("Supervision"), 4511 ("General Requirements"), and 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the matter, the firm agreed to (i) a censure, (ii) a joint and several fine of $1,100,000, and (iii) an undertaking to certify in writing, within 180 days, the remediation of the SA Section 5 ("Prohibitions relating to interstate commerce and the mails") and identified AML supervisory issues.