FINRA Sanctions Firm for Sale of Unregistered Microcap Shares and Related Supervisory and AML Violations

FINRA settled charges with a firm for (i) selling billions of unregistered microcap shares and (ii) failing to implement supervisory and/or anti-money laundering ("AML") programs that were tailored adequately to detect "red flags" for suspicious activity connected to microcap shares. FINRA also suspended and fined two of the firm's business executives.

Specifically, FINRA found that the firm:

• did not "reasonably design" its supervisory system to satisfy its affirmative obligation to determine whether the microcap securities that it liquidated for clients were registered with the SEC or qualified for an exemption from registration;
• provided insufficient guidance and inadequate training on when or how to inquire into whether a sale was exempt, and inadequate tools to help supervisors identify red flags associated with illegal unregistered distributions; and
• failed to implement an adequate AML program tailored to detect red flags and patterns of potentially suspicious money-laundering activity related to these sales.

FINRA found that the firm sold billions of shares of thinly traded microcap securities between March 2011 and September 2012 without adequate review and due diligence. A significant portion of these shares were neither registered nor exempt from registration. FINRA fined the firm $6 million and ordered disgorgement of nearly $1.3 million in commissions plus interest. FINRA also suspended the firm's Executive Managing Director of Equity Capital Markets and fined him $35,000 for supervisory failures. It also suspended the equity trader and fined him $25,000.

FINRA Executive Vice President and Chief of Enforcement Brad Bennett asserted that "FINRA has no tolerance for firms and business executives who choose to engage in this business without robust systems designed to ensure that they do not become participants in illegal, unregistered distributions."