Firm Fined for Failing to Monitor Transmittals of Customer Funds to Third Parties
Commentary by Glen Barrentine
An investment banking and financial services firm settled FINRA charges for failing to supervise transmittals of customer funds to third parties and to respond to red flags on private securities transactions.
According to the Letter of Acceptance, Waiver and Consent, a representative of the firm facilitated over $7.2 million in "private securities transactions" by selling a fixed annuity product offered by a company formed by his college friend and business acquaintance ("Company A"). FINRA found that the firm had not approved the fixed annuities and that the firm's policies prohibited the representative's conduct. FINRA found that the firm did not have a supervisory system in place "to review transmittals of customer funds to third parties by wire or check," and the firm's existing supervisory system was not designed to flag multiple transfers of funds "by check or wire to the same external party" from an account with the firm. Further, FINRA found that the representative's supervisor, and by extension, the firm, failed to investigate Company A when wire transactions were submitted to the supervisor for approval. FINRA said that the firm discovered the representative's misconduct when customers "lost most, if not the entirety, of their investments."
As a result, FINRA determined that the firm violated FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade") and NASD Rules 3010 and 3012.
To settle the charges, the firm agreed to (i) censure and (ii) pay a $850,000 fine. Separately, the firm also paid $17 million in restitution for the lost investments.
Commentary
This AWC is a reminder that all securities products sold by a firm's representatives must be approved by the firm and that the firm must have a process in place to ensure compliance with such requirement. In this matter, FINRA felt that the firm should have had a system in place to flag and investigate transfer by multiple customers of large sums by check or wire to the same external party from an account with the firm.