FINRA Fines Firm for Reg BI Violations
Commentary by Glen Barrentine
A broker-dealer settled FINRA charges for failing to implement adequate supervisory systems in multiple areas, including compliance with Regulation Best Interest ("Reg BI"), Form CRS obligations, email monitoring and outside account reviews.
According to the AWC, the firm's procedures did not address its obligations under Reg BI, including (i) how registered representatives should ensure their recommendations were in the best interest of retail customers and (ii) how supervisors evaluate those recommendations for cost or consider reasonably available alternatives. FINRA found that the firm's WSPs did not include any mechanisms to identify or mitigate conflicts of interest.
FINRA also determined that the firm (i) did not implement procedures to ensure the timely delivery, updating and recordkeeping of Form CRS filings, (ii) had no supervisory designation to oversee this compliance area, (iii) did not include processes to detect customer complaints in its e-mail review procedures and (iv) did not report any customer complaints to FINRA during a three-year period.
FINRA also found that the firm failed to update Forms U4 to reflect that two associated persons were named in a civil litigation alleging securities-related misconduct. The firm did not file the required customer complaint with FINRA.
FINRA said the firm failed to establish a system for supervising outside brokerage accounts of its associated persons, despite being notified of 63 such accounts. FINRA said the firm did not obtain duplicate trade confirmations or statements, leaving it unable to monitor for trading misconduct or insider trading.
FINRA found that the broker-dealer also failed to conduct required inspections of its only Office of Supervisory Jurisdiction ("OSJ") and eleven branch offices during a two-year period, and failed to conduct meaningful supervisory control testing or submit the required annual reports to senior management. FINRA said the firm's CEO failed to submit an adequate certification regarding the existence and review of supervisory processes.
As a result of these failings, FINRA determined that the firm violated Exchange Act Rule 15l-1 ("Regulation Best Interest"), Exchange Act Rule 17a-14 ("Form CRS, for preparation, filing and delivery of Form CRS"), and FINRA Rules 3110 ("Supervision"), 2010 ("Standards of Commercial Honor and Principles of Trade"), 3120 ("Supervisory Control System"), 3130 ("Annual Certification of Compliance and Supervisory Processes"), 4530 ("Reporting Requirements"), 1122 ("Filing of Misleading Information as to Membership or Registration") and 3210 ("Accounts At Other Broker-Dealers and Financial Institutions").
To settle the charges, the broker-dealer consented to (i) a censure, (ii) a $150,000 fine and (iii) an undertaking requiring written certification of remediation, including a retroactive review of electronic communications and implementation of updated supervisory systems.
Commentary
The AWC lists 7 separate violations, consisting of (i) failure to conduct required office inspections, (ii) failure to conduct reasonable supervisory testing, (iii) failure to establish WSPs for the review of outside brokerage accounts as well as the failure to review a significant number of outside brokerage accounts, (iv) failure to timely update two Form U4s and failure to report civil litigation to FINRA, (v) failure to review electronic correspondence for evidence of customer complaints, (vi) failure to establish WSPs related to Form CRS and (vii) failure to establish sufficiently detailed WSPs relating to Regulation BI.
Many of these failures persisted for several years and relate to areas that are long standing and fairly basic requirements, e.g. outside account review, review of electronic communications, updates of Form U-4s and reporting of civil litigation, the conduct of office inspections and supervisory testing.
This may make one wonder whether supervisor charges may also be warranted, though there is no way of knowing FINRA's thinking in this regard as any such charges would not be discussed in this AWC.