FINRA Fines Firm for Reg BI Violations
A broker-dealer settled FINRA charges for supervisory failures related to the sale of leveraged and inverse exchange-traded products ("ETPs"), unauthorized trading and missed branch inspections.
According to the AWC, the firm failed to supervise the sale of non-traditional ETPs, which are designed for short-term trading and typically reset daily. FINRA found that firm representatives recommended these products to retail customers without adequately considering the intended holding period, resulting in customers holding the products for up to 110 days. These transactions caused more than $53,000 in losses. FINRA determined the firm's supervisory system and written procedures over ETP transactions were limited to verifying that registered representatives had signed an attestation acknowledging the risks of holding such products long-term. FINRA determined that these procedures failed to adequately address the application of Regulation Best Interest ("Reg BI") to these products.
FINRA also found that during the relevant period, the firm failed to detect red flags of unauthorized and discretionary trading. FINRA found that the firm prohibited discretionary trading in commission-based accounts, but relied on manual blotter reviews that did not identify patterns such as multiple clients receiving identical trades. FINRA also found that the firm's automated surveillance system failed due to technical issues during the relevant period.
In addition, FINRA found the firm failed to conduct timely inspections of one office of supervisory jurisdiction and six branch offices. FINRA noted that in some cases, the firm had no record of inspections taking place at all.
FINRA determined the firm violated Exchange Act Rule 15l-1 ("Regulation Best Interest") and FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3110 ("Supervision") and 3260(b) ("Discretionary Accounts").
To settle the charges, the firm agreed to (i) a censure, (ii) a $65,000 fine, (iii) restitution of $53,847.99 plus interest to 13 affected customers and (iv) an undertaking to certify remediation of the supervisory failures, including implementation of revised procedures and controls related to complex product recommendations and trade monitoring.