FINRA issued its summary of disciplinary actions reported for June 2012. Certain actions are noteworthy and are indicative of regulatory trends effecting broker-dealers and registered representatives.
Herskovits PLLC comments on the following regulatory actions:
Net Cap Violations
Freedom Investors Corp. (CRD #23714, Brookfield, Wisconsin), Joel ReidBlumenschein (CRD #1372334, Registered Principal, Pewaukee, Washington) and Gary Lee Gossett (CRD #1939514, Registered Principal, Spokane, Washington) – FINRA Case # 2010025132201
Among other findings, FINRA found that the firm entered into a settlement with a customer that exceeded $15,000, and through its CCO, failed to timely disclose the receipt of the written complaint and the settlement to FINRA within 10 days. Furthermore, FINRA found that because the firm failed to accrue the liability resulting from the loss guarantee it made to the customer, its net capital was reduced. This resulted in it conducting a securities business without the required net capital for four months so that the firm’s books and records and Financial and Operational Combined Single (FOCUS) filings were inaccurate. The firm then failed to provide timely notice of its net capital deficiency to the Securities Exchange Commission (SEC) and FINRA.
Resolved by Offer of Settlement with a censure, fine and suspension for certain employees.
This matter highlights the importance of timely complaint reporting via Forms U4, U5 and in accordance with FINRA Rule 4530 (Reporting Requirements). Furthermore, this matter highlights FINRA’s ongoing effort to discipline members concerning net cap violations; here, resulting from the member’s “loss guarantee” to its customer. The “loss guarantee” arose from a peculiar circumstance in which a registered representative settled with a customer pursuant to an agreement which if, after a period of 18 months, the prior losses sustained in the account were not recovered, the firm would pay customer the difference plus 5% interest.
Anti-Money Laundering Violations
First Kentucky Securities Corporation (CRD #7524, Frankfort, Kentucky) and Frederick Jennings Kramer (CRD #2299599, Registered Principal, Owensboro, Kentucky) – FINRA Case # 2010021314101
The Member’s 2009 independent AML test was inadequate because it was limited to the review of deposit slips for one branch office, rather than sampling different transactions at all branch locations. The findings stated that the test did not include a review of the firm’s AML procedures, nor did it include a review of the overall adequacy of the firm’s AML compliance program. Moreover, the test did not include a sample of all of the firm’s business lines, review of the firm’s AML training program and its customer identification program (CIP), and whether its representatives were complying with the CIP.
Resolved by Acceptance, Waiver and Consent with a censure and fine of $15,000.
AML continues to be an area of focus for FINRA. Here, FINRA fined the firm and the FINOP for the violations referenced in the AWC. This matter highlights that FINRA will enforce its AML Compliance Program Rule (FINRA Rule 3310) even as against small broker-dealers. Therefore, small broker-dealers would be well served to ensure that a procedure exists for independent testing (e.g., testing by a professional not employed by the firm) along with the annual certification by the CEO (Rule 3130).