Broker Fined for Failing to Register Foreign Associated Persons
Commentary by Glen Barrentine
A firm settled FINRA charges for allowing non-registered foreign associated persons to conduct securities business using the firm's systems. FINRA also charged the firm for supervisory failures and for failing to maintain an effective AML program.
According to the AWC, the firm allowed 47 unregistered foreign individuals to access its trading platform and place trades for customers. FINRA found that these foreign individuals referred non-US customer accounts to the firm and executed trades through the firm's system using representative codes. FINRA said the firm did not establish supervisory systems or procedures to oversee these foreign persons, nor did it provide clear written supervisory procedures on the permissible activities of non-registered individuals.
FINRA said the firm paid approximately $20,000 in transaction-based compensation to non-registered foreign entities without disclosing these payments in trade confirmations. FINRA said this failure to disclose referral fees, for 325 transactions across nine customer accounts, compounded the firm's supervisory deficiencies.
FINRA also found that the firm's AML program was not reasonably designed to detect or report suspicious activities. FINRA said the firm did not conduct adequate ongoing customer due diligence and lacked procedures to assess the risks associated with customers and transactions.
As a result, FINRA concluded that the firm violated FINRA Rules 3110 ("Supervision"), 2010 ("Standards of Commercial Honor and Principles of Trade"), 1210 ("Registration Requirements") and 2040 ("Payments to Unregistered Persons").
To settle the charges, the firm agreed to (i) a censure, (ii) pay a civil monetary penalty of $250,000 and (iii) an undertaking to implement remedial measures. The firm agreed to submit a written certification within 180 days confirming that it addressed the identified deficiencies in its supervisory and AML systems.
Commentary
The AWC identifies a number of concerns with respect to non-US individuals that refer business to a US firm. The most obvious is that a US firm cannot pay individuals that are not properly regulated and licensed associated persons. A point that may be less obvious, but more significant, is that FINRA criticized the US broker-dealer for allowing the unregistered individuals access to the firm's trading platform for the purpose of placing trades on behalf of the referred customers.
Of course, as also identified in the AWC, firms must have supervisory procedures relevant to the above obligations.