SEC, FINRA Charge Broker-Dealer and Its Employee with Supervisory Violations

The SEC and FINRA each charged a Puerto Rico-based broker-dealer and one of its branch office managers with supervisory and suitability violations. The charges concern a former broker who persuaded customers to invest in company-affiliated mutual funds using money borrowed from a company-affiliated bank. In settled administrative proceedings, the SEC and FINRA collectively charged (i) the company with violating SEA Section 15(b)(4)(E) ("Registration and Regulation of Brokers and Dealers"), NASD Rule 3100 and FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade"); and (ii) the branch office manager with violating SEA Section 15(b)(4)(E). In addition, the SEC filed a complaint in federal court against the broker, that alleged violations of the anti-fraud provisions of the federal securities laws.

According to the SEC order, the company lacked procedures and systems to prevent and detect the branch office manager and employee's misconduct. Allegedly, the company was made aware on at least two occasions that the accused employee's customers may have been violating internal policies, but those policies failed to address reasonable follow-up. The SEC also found that although the company prohibited using line of credit proceeds to purchase securities, it had no system for monitoring such purchases when the proceeds were transferred outside of its own accounts.

The accused company agreed to settle (i) the FINRA charges by paying a $7.5 million fine and interest on up to $11 million in restitutions and (ii) the SEC charges by paying around $1.35 million in disgorgement and interest, as well as a civil money penalty of over $13.5 million. The branch office manager agreed to a 12-month bar on acting in a supervisory capacity and a civil money penalty of $25,000.