FINRA Fines Firm for Supervisory Failures Over Outside Brokerage Accounts

A firm settled FINRA charges for failing to establish adequate supervisory procedures to monitor registered representatives' outside brokerage accounts.

According to the AWC, the firm required associated persons to disclose and obtain approval for outside accounts to mitigate conflicts of interest and prevent trading on material nonpublic information. FINRA stated that while approximately 93% of these accounts were monitored via automated electronic feeds, the remaining 7% relied on a manual review process. This manual process required either the employee or the external firm to mail paper statements to a firm office.

FINRA found that the firm’s manual review system failed, following the onset of the COVID-19 pandemic, when office closures and organizational changes created a substantial backlog of unreviewed materials. FINRA stated that over a one-year period, the firm failed to timely collect or review approximately 8,200 account statements from roughly 700 employee-held accounts—representing about half of the accounts requiring manual review. FINRA highlighted that during this period, employees executed 161 trades in these accounts without obtaining required pre-clearance, violations that went unidentified due to the backlog. FINRA noted that the firm has since remediated the backlog and implemented an electronic upload system for these accounts.

FINRA determined that the broker-dealer violated FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision").

To settle the charges, the firm agreed to (i) a censure and (ii) a $325,000 fine.