Broker-Dealer Settles FINRA Charges for Supervisory Failures over RMBS Transactions

A broker-dealer settled FINRA charges for failing to adequately address red flags arising from residential mortgage-backed securities ("RMBS") transactions negotiated by one of the broker-dealer's associated persons.

In a Letter of Acceptance, Waiver and Consent, FINRA alleged that one of the broker-dealer's registered representatives made misleading statements to counterparties regarding available bid or offer prices in relation to the sale and purchase of 11 RMBS. FINRA also stated that the broker-dealer's written supervisory procedures ("WSPs") mandated the review of nine of the RMBS transactions, as they surpassed the markup margin for RMBS. FINRA found that the broker-dealer failed to conduct further investigation upon learning that, in several of the flagged transactions:

• the same registered representative was on both sides of such transactions;

• the representative negotiated directly with counterparties in order to obtain the greatest spreads for the broker-dealer;

• only the representative had firsthand access to the bids or offer prices sent by the counterparties; and

• highly variant profits were generated in "a highly illiquid and opaque market."

As a result, FINRA found that the broker-dealer did not reasonably review the transactions or supervise the registered representative and determined that the broker-dealer violated NASD Rule 3010 and FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").

To settle the charges, the broker-dealer agreed to a censure and a $250,000 fine.