Broker-Dealer Fined for "Unreasonable" Mark-Ups
Commentary by Steven Lofchie
A broker-dealer settled FINRA charges for failing to monitor the fairness of mark-ups that it charged retail customers through one of its registered representatives.
In a Letter of Acceptance, Waiver, and Consent, FINRA found that the broker-dealer's supervisory controls for reviewing the reasonableness of mark-ups when trading corporate bonds for its own account did not properly determine the fairness of a mark-up. The broker-dealer's supervisory guidelines required mark-up reviews to consider the type, availability and price of the security being sold, and the firm's expense in executing and filling the order. FINRA found that in practice, the firm and its compliance officer generally reviewed mark-ups only to ensure that they were consistent with the five-percent standard, and ignored other considerations.
FINRA found violations of Rule 2010 ("Standards of Commercial Honor and Principles of Trade"), Rule 2121 ("Fair Prices and Commissions") and Rule 3110 ("Supervision").
To settle the charges, the broker-dealer agreed to (i) a censure, (ii) restitution of $37,629 plus interest and (iii) undertakings to update its supervisory controls to comply with FINRA rules. Separately, the broker-dealer's principal serving as compliance officer agreed to (i) a one-month suspension from associating with any FINRA member, (ii) a civil monetary penalty of $5,000 and (iii) 20 hours of continuing education requirements concerning supervisory responsibility.
Commentary
Any firm treating a mark-up of less than 5 percent as being within safe harbors should fix its procedures yesterday (and should probably worry whether all of its compliance procedures need some updating.) That safe harbor was mined so many years ago that many of the people in the industry today probably started after it had been shut down.