FINRA Fines Broker-Dealer for AML Compliance Program Failures

FINRA censured and fined a broker-dealer for a compliance program that was not designed to detect suspicious trading in low-priced securities.

According to the AWC, a broker-dealer that did not hold customer funds or securities executed about $300 million low priced securities transactions involving more than 150 million shares. An omnibus account - which pools the trades of multiple undisclosed underlying customers - held by a foreign financial institution ("FFI") affiliate accounted for over 70 percent of that activity. Some of the underlying customers of the omnibus account were themselves FFIs based in jurisdictions known for financial secrecy. FINRA found that the firm ran an AML program during the relevant period that was not reasonably designed to detect and report suspicious transactions in low-priced securities. 

FINRA said that the firm's policies directed staff to watch for red flags but did not specify how to detect, investigate, or escalate them, and the firm relied on a manually assembled surveillance report that routinely ran thousands of pages and showed no aggregated or historical data. As a result, the firm failed to detect or investigate suspicious trading, including customers who routed high-volume sell orders for low-priced securities with no offsetting purchases. These failures continued after another regulator had earlier alerted the firm to similar deficiencies.

FINRA also found that the firm failed to apply a reasonably designed due diligence program to correspondent accounts it maintained for FFIs, including periodic reviews of account activity. The firm's procedures incorrectly stated that the FFI due diligence requirements did not apply to it.

Further, FINRA said the firm inaccurately reported to the Trade Reporting and Compliance Engine ("TRACE") the capacity in which it executed nearly 4,300 transactions. The firm sent customers about 4,000 trade confirmations that failed to disclose trading capacity, mark-ups or mark-downs, required webpage references, or accurate execution times.

As a result, FINRA concluded that the firm's supervisory system and written supervisory procedures were not reasonably designed to achieve compliance with the registration requirements for low-priced securities, or with TRACE reporting and trade-confirmation disclosure requirements.

FINRA determined that the conduct violated FINRA Rule 3310 ("Anti-Money Laundering Compliance Program"), FINRA Rule 3110 ("Supervision"), FINRA Rule 6730 ("Transaction Reporting"), FINRA Rule 2232 ("Customer Confirmations") and FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade"), as well as Exchange Act Rule 10b-10 ("Confirmation of Transactions").

The firm consented to a censure and a $610,000 fine and to revising its anti-money laundering, revising its supervisory procedures and adopting an automated trade-surveillance system.