Firm Settles FINRA Charges for Mischaracterizing CMOs in Account Statements

A broker-dealer settled FINRA charges for sending customers account statements that misidentified private label collateralized mortgage obligations ("CMOs") as government agency bonds or corporate bonds. 

According to the AWC, for the relevant period, the firm sent an estimated 150,000 account statements to more than 800 customers that miscategorized private label CMOs as "Government Agency Bonds."  After FINRA identified the inaccuracies, the firm recategorized the holdings as "Corporate Bonds." FINRA found that characterization was also inaccurate: unlike corporate bonds, CMOs are backed by pools of mortgages with varying maturities and prepayment risks. The firm sent an estimated 17,000 additional account statements using that flawed categorization.

FINRA determined that the firm had no reasonable system to supervise the accuracy of customer account statement categorizations. Although the firm had existing procedures requiring bimonthly reviews of a sample of statements, those reviews focused only on the accuracy of numerical values and did not check whether customer holdings were accurately categorized.

FINRA determined that the firm violated FINRA Rule 2210(d)(1) ("Communications with the Public"), FINRA Rule 4511 ("General Requirements" for books and records), FINRA Rule 3110 ("Supervision"), and FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").

To settle the case, the broker-dealer agreed to a censure, a $250,000 fine, and a requirement that senior management certify in writing within 90 days that the firm remediated the issues and implemented an adequate supervisory system to address the violations.