FINRA’s enforcement program is big business.
In 2008, FINRA levied fines totaling $28 million. By 2016, that number jumped to $176 million. In 2008, FINRA ordered restitution payments to investors totaling $6 million. By 2015, that number jumped to $96 million.
Each year, FINRA initiates approximately 1,500 disciplinary actions against member firms and employees. FINRA’s Office of Hearing Officers resolves approximately 400 proceedings per year.
Regulatory compliance is often less costly than FINRA’s steep fines. Yet companies continue to face millions of dollars in penalties for not complying with FINRA’s regulations. In this particular time, there is a clear intent from FINRA to hold such companies accountable. Unfortunately, many of them have learned this the hard way.
FINRA has just fined State Street Global Markets and Acorns Securities $2 million for an easily avoidable violation: improper retention of customer records. FINRA has very specific requirements for record-keeping, which should be done in a manner that prevents them from being altered or destroyed.
For State Street, this is the second blow in a row, after Richard Boomgaardt, a former executive with the company pleaded guilty to securities fraud and wire fraud involving secret commissions on billions of dollars of trades. Edward Pennings, another former State Street exec also pleaded guilty in the same case.
At a recent event hosted by the American Bar Association’s Securities Litigation Committee, three Chief Counsel from the Financial Industry Regulatory Authority’s Enforcement division discussed the agency’s current priorities.
Chief Counsel Sue Light, Gina Petrocelli, and Lara Thyagarajan shed light on the areas that FINRA will be scrutinizing more closely through the second half of 2017.
As per FINRA’s 2017 Priorities Letter, the Regulatory Authority is shifting its focus from a “culture of compliance” to a “blocking and tackling” model, emphasizing on watching brokers with a track record of disciplinary actions.
In its quest for investor protection and market integrity, FINRA diligently seeks out firm representatives who are in violation of its strict rules. Recently, the regulatory authority decided to bar California-based Jim Jinkook Seol from the industry.
A former employee of Ameriprise Financial Inc.; Seol was found to have sold $100 million worth of EB-5, permanent residency-eligible, investments without disclosing the transactions to his employer.
The EB-5 visa program offers permanent residency to foreign nationals who invest between $500,000 and $1 million and create 10 jobs in a new business venture in the US. The program is especially attractive to wealthy individuals from emerging economies like China and India, and, as such, it holds an enormous profit potential for securities industry professionals.
The U.S. Securities and Exchange Commission appears to be increasing its scrutiny of broker-dealers who fail to comply with the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) reporting requirements.
Traditionally this type of violations remained off the SEC’s radar, being usually pursued by the DOJ, FinCEN, the IRS, and other federal agencies. After SEC’s former enforcement director said in a statement that the SEC must “pursue stand-alone BSA violations to send a clear message about the need for compliance,” the Commission has, on more than one occasion, charged broker-dealers with failing to file Suspicious Activity Reports.
In line with this trend, the SEC has just filed suit against Salt Lake City broker-dealer Alpine Securities over its failure to report transactions it had flagged as suspicious.
With the increase in FINRA enforcement activity in the last year, we hear daily from concerned RAs and other financial industry professionals – this post is intended to decode the basics of the process and offer some cautions to avoid pitfalls awaiting the unwary.
The Financial Industry Regulatory Authority (FINRA) is a self-regulating organization. Although it is not a government agency, its primary mission is to protect investors by regulating its members. All broker-dealers, down to the last firm employee, must abide by FINRA’s rules.
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.”
Barclays Capital has reached a $97 million settlement with the Securities and Exchange Commission to resolve allegations that its Wealth and Investment Management Americas (WIMA) unit overcharged clients by $50 million between 2010 and 2015.
The SEC’s investigation determined that Barclays Capital, which sold its WIMA unit in 2015, incurred violations of multiple sections of the Advisers Act, the Exchange Act, and the Securities Act.
The $97 million penalty to be paid by Barclays includes fines in the amount of $30 million fine and $63.8 million in disgorgement and interest. Another $3.5 million will serve to refund specific clients with underperforming accounts.
Purshe Kaplan Sterling Investments (PKS) of Albany, New York, recently agreed to pay $3.4 million to a Native American tribe to resolve allegations that one of its brokers, Gopi Krishna Vungarala, took millions of dollars in undisclosed commissions on the tribe’s investments.
Vungarala was not only a financial advisor to the tribe; he was also employed as its Treasury Investment Manager, which allowed him to participate in investment decisions. Vungarala allegedly used his position for his own personal gain, although he was purportedly aware that employees of the tribe were banned from engaging in any business activities that might imply a conflict of interest.
According to a statement by FINRA,“Vungarala was able to misrepresent to the tribe that neither PKS nor he would receive commissions on its purchases, and he was therefore able to induce the tribe to invest more than $190 million in non-traded REITs and BDCs. In fact, Vungarala personally received at least $9 million in commissions from the tribe’s investments.”
Kevin Richard Graetz, a former broker from New York, recently settled a FINRA complaint relating to his alleged failure to report $1 Million in tax liens over the course of seven years.
FINRA requires registered personnel to disclose tax liens and any other unsatisfied judgments in their Form U4.
As per FINRA’s settlement documents, in his Form U4 filings between February, 2013 and February, 2014, Graetz failed to mention the unsatisfied tax liens he was subject to.
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