Articles Posted in FINRA Regulation

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On March 11, 2020, FINRA charged an FA with structuring cash transactions in his personal bank account so as to evade reporting requirements.  This case is worth a read because it highlights FINRAs commitment to pursue AML and AML-like cases.

Case in Point

In Department of Enforcement v. David R. Oakes, Disciplinary Proceeding No. 2018057755201, FINRA charged the FA with violating Rule 2010 (FINRAs catchall rule) for allegedly structuring three $9,000 deposits (total of $27,000) of currency to his personal bank account between December 27 and December 29, 2017; (2) structuring two $6,500 (total of $13,000) withdrawals of currency from his personal bank account on August 23, 2017; and (3) structuring four withdrawals (total of $21,500) of currency from his personal bank account between August 1 and August 4, 2016.  According to FINRA, each of these series of transactions was for the purpose of avoiding the filing of a Currency Transaction Report.

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This is a classic case of buyer’s remorse.  In the case at hand, FA Jeffrey Mohlman settled with FINRA by executing a letter of Acceptance, Waiver and Consent (called an AWC) and, in so doing, agreed to a bar from the securities industry.  Apparently displeased with his decision, he filed an action in court seeking almost $900,000 in damages by claiming that FINRA “committed fraud by inducing Plaintiff to fail to testify at a second disciplinary interview, thus allegedly fraudulently avoiding an alleged requirement that Defendants consider mitigating factors in the Plaintiff’s disciplinary case…”   Mohlman’s claims received a chilly reception by the U.S. District Court for the Southern District of Ohio (Mohlman v. FINRA, et al., Case No. 19-cv-154), which granted FINRA’s motion to dismiss on February 24, 2020.

Background

Mohlman entered the securities industry in 2001.  In March 2015, Mohlman’s then-employer, Questar Capital Corporation, terminated his registration and filed a Form U5 claiming that Mohlman “resigned while under internal review for failure to follow firm policies and procedures regarding his participation in private securities transactions.”  FINRA then launched an investigation and requested his appearance at an on-the-record interview (OTR) on September 11, 2015.  On September 9, 2015, Mohlman’s lawyer informed FINRA that Mohlman received the OTR request but would be declining to appear.  On September 17, 2015, Mohlman signed an AWC in which he agreed to a bar from the securities industry and waived various procedural rights.

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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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When a registered representative leaves a broker-dealer, there are many different service and compliance issues that emerge. There are also competing interests between the firm and the representative, each of whom want to keep the customer’s business. At the same time, the customer wants to maintain steady and uninterrupted service. FINRA Regulatory Notice 19-10 sets forth obligations that members must follow when a registered representative departs a firm. Herskovits PLLC can assist firms and registered representatives that need assistance in understanding or implementing FINRA’s directives.

It is common in the industry for registered representatives to move between firms. FINRA expects that the firms and representatives continue to prioritize the customers’ interests when a registered representative leaves the firm. First and foremost, the firm must inform the customer how their account will continue to be serviced after the representatives moves from the firm. Then, the firm must provide its customers with full and complete answers when the firm is asked about the representative who is leaving.

Firms must ensure that the customers know that they have the option to keep their account at the firm and have the account serviced by a new representative. They must also provide the contact of the departing representative to the customer if the representative has given their consent to their contact information being distributed. In other words, customers must be able to make their own choice about what to do with their account.

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FINRA has announced it will increase its scrutiny of the cryptocurrency market. As several regulatory bodies endeavor to establish their jurisdiction over the crypto space, FINRA will now boost its oversight of registered firms’ participation in its burgeoning market.

In a new regulatory notice, the self-regulatory organization asked its 3,700 member firms to notify it if they trade in cryptocurrency, accept cryptocurrency from clients, manage crypto funds, participate in the sale of digital tokens, or even offer advice relating to cryptocurrency.

FINRA will also monitor virtual currency mining and any other related use of blockchain technology.

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As Merrill Lynch brokers appear to lag behind their competitors at Morgan Stanley, some FAs at the firm are probably not looking forward to seeing their paychecks this summer season.

Based on Merrill’s new compensation program, FAs who do not hit specific targets are going to endure punishment in the shape of a pay cut, compliments of the firm’s parent company, Bank of America.

There is much controversy about the management’s plans, mainly because it rewards practices like cross-selling. The fact that they are going to apply the new compensation program retroactively is not sitting well with brokers either. Actually, the FAs have referred to this particular element as a “clawback” tactic.

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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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