Articles Posted in FINRA AWC

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On January 3, 2020, FINRA released an AWC for Robert James D’Andria, Case No. 2017056579502.  At first blush the AWC seems rather plain vanilla.  The FA recommended high-risk products, in this case leveraged and inverse exchange-traded notes and funds, to retail investors and FINRA deemed those recommendations to be unsuitable.  FINRA suspended the FA for 2 months and fined him $5,000.

In a typical suitability case, FINRA would claim that the account was over-concentrated in a given sector, or the position was too large relative to the portfolio as a whole, or the account was over-traded, or the investment was inconsistent with the investor’s stated investment objectives.  And, in a typical case, FINRA would claim that the customer suffered meaningful losses.

In this AWC, however, FINRA does not claim that the investments were inconsistent with the customers’ investment objectives.  Nor does FINRA claim that the investors were unsophisticated or otherwise lacked the ability to assess the merits of these investments.  So, this begs the question:  where’s the violation?

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On December 20, 2019, FINRA announced a settlement with John Carneglia.  According to the AWC, Carneglia violated FINRA Rule 3210 for failing to notify his member firm of a brokerage account and violated FINRA Rule 3270 for failing to timely disclose an outside business activity.

Underlying Facts

Carenglia was registered with BNP Paribas from June 2006 through July 2017.  According to FINRA, Carneglia didn’t inform BNP of his wife’s brokerage account and likewise failed to inform the firm that maintained his wife’s account of his association with BNP.  Further, FINRA alleges that Carneglia was a member of an LLC that owned an income-generating rental property (ski-resort condominium), yet failed to timely notify BNP of that outside business activity.

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On December 16, 2019, FINRA released the AWC in Matter No. 2018060843801 (In re Molteni) [click here to read the AWC].  At first blush, the AWC seems to concern a garden variety violation in which the FA failed to amend his Form U4 to disclose two federal tax liens.  This doesn’t seem to be the violation of the century, right?  Even FINRA’s Sanction Guidelines suggest a regulatory slap on the wrist of a modest fine and 10 day suspension.

So here is where things get interesting.  FINRA more or less sanctioned Molteni in accordance with the Sanction Guidelines.  They hit him with a $5,000 fine and a 3 month suspension.  However, FINRA also found that he “willfully” failed to disclose the federal tax liens.  In the world of FINRA regulation, the word “willful” carries an awful lot of weight.

What does it mean to act “willfully”?

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FINRA wants a member firm to enforce its written supervisory procedures.  And FINRA wants a member firm to recommend securities that fit within the customer’s investment objectives.  And certainly FINRA wants a member firm to avoid falsification of business records.  So what happens when a member firm doesn’t quite live up to FINRA’s expectations?  Let’s play the over / under game and try to guess the size of the FINRA sanction when a member engages in the following misconduct:

  • Failure to enforce WSPs governing the sale of high-risk mutual funds subject to significant volatility
  • Failure to reallocate portfolios to reduce risk or otherwise update investment objectives to correspond with the assumption of additional risk

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FINRA is on the look-out for violations of Rule 3280, which prohibits an FA from participating in a private securities transactions without giving written notice to the broker-dealer and receiving written approval.  A “private securities transaction” is any securities transaction outside the scope of the FA’s employment with the broker-dealer.  Private securities transactions remain a regulatory focus for FINRA.  As noted by FINRAs CEO, Robert Cook, in the 2019 Risk Monitoring and Examination Priorities Letter:  “we are particularly concerned about fundraising activities for entities that the associated persons control or in which they have an interest…”

Case In Point

In the Matter of Michael Jason Collins, FINRA Matter No. 2017056104801 (see the AWC itself)

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FINRA has fined Aegis Capital Corp. $550,000 for failing to implement required anti-money laundering (AML) and supervisory programs designed to prevent fraudulent activity.

The violations specifically affected low-priced securities transactions involving DVP (delivery versus payment) accounts. According to the outcome of FINRA’s investigation, the supervisory system Aegis used “was not reasonably designed to satisfy its obligation to monitor and investigate trading.”

There are certain aspects of DVP accounts that make them vulnerable to money laundering schemes if they are not appropriately supervised.

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FINRA recently announced monetary sanctions against Wedbush Securities in the amount of. $1.5 million for SEC rule violations and associated compliance failures.

According to FINRA, Wedbush violated the SEC Customer Protection Rule, which requires broker-dealers to maintain a certain degree of physical possession and control over customer securities.

The object of the rule is to facilitate recovery of customer assets if the broker-dealer becomes insolvent. Firms are also required to keep these securities in what is called a control location, free of any liens.

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FINRA recently sanctioned Citigroup Global Markets Inc. $11.5 million over inaccurate research rating displays. The sanction includes a $5.5 million in fines and $6 million in compensation for wronged retail customers.

According to the SRO’s findings, over at least five years, Citigroup displayed inaccurate research ratings for a large number of equity securities, also incurring several related violations.

Firms communicate their equity research ratings to share their opinion about the projected performance of public securities. The ratings are included in emails to customers, account statements, and official websites. They are also disseminated internally, to inform brokers’ recommendations to customers.

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Last month, Deutsche Bank Securities Inc., Citigroup Global Markets Inc., JP Morgan Securities LLC and Interactive Brokers LLC agreed to pay a collective $4.8 million to end FINRA´s probe over inadequate risk controls.

According to FINRA´s allegations, the financial institutions violated the Market Access Rule, which establishes requirements for maintaining risk management controls that supervise clients’ access to the market.

FINRA sources explained that, “The purpose of this requirement is to prevent firms from jeopardizing their own financial condition and that of other market participants, while also ensuring the stability and integrity of the financial system and the securities markets.”

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FINRA’s Department of Enforcement recently made public a Letter of Acceptance, Waiver and Consent (AWC) by which former LPL broker Mark Tyler Bonds agreed to a one month suspension and a $5,000 fine to resolve allegations that he borrowed money from a customer of his firm, in violation of FINRA rule 3240.

In the AWC, Tyler also acknowledged that he had lied in a questionnaire he submitted to LPL in December 2015. To the question, “Have you, or any related person or entity, borrowed or loaned any money or securities from or to another individual or entity?” Tyler answered, “No,” although he had indeed borrowed from a customer of LPL. This submission of false information constitutes a violation of FINRA Rule 2010.

Bonds, who had no previous disciplinary history with FINRA, had been with LPL since 2006. In 2016, when the issue of the rule 3240 violation came to light, he agreed with his firm on voluntary resignation. His termination is listed on Brokercheck as, “Employment Separation After Allegations.”

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