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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.

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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.

1. How can you become a target of a FINRA investigation?

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.

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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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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.

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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.”

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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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Michael James Malone, a FINRA arbitrator in Detroit, recently denied an expungement request from broker Kathie Lee Foreman. Foreman was seeking expungement of a customer complaint in connection with “unsuitable” investments allegedly leading to the, also alleged, loss of $20,000.

Foreman, formerly of Sigma Financial Corp.; had also been accused by Troy William Johnson of failing to cash him out in spite of several requests to do so. According to the arbitrator, Foreman characterized Johnson as “an unsophisticated, nervous investor,” who had the bad fortune of investing during “the worst quarter since 2011.”

The case of Johnson v. Foreman was settled in December. Barely a day after Johnson withdrew his complaint (in exchange for an undisclosed sum) Foreman decided to file a request for expungement. Johnson did not oppose the request. At this time, neither the claimant nor the respondent opted for legal representation. They made the often ill-advised decision of “appearing pro se.”

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Check cashing businesses are a major focus of anti-money laundering rules and regulations. Investors recently learned that federal and New York prosecutors are currently investigating Capital One Financial Corp.’s anti-money laundering program and “certain check casher clients” from the financial institution’s annual report – offering the perfect opportunity to review the regulatory expectations for check cashing businesses.

Regulators Scrutinize Capital One’s Anti-Money Laundering Program Compliance

Capital One’s annual report released February 23 stated that the U.S. Department of Justice, U.S. Treasury Department’s Financial Crimes Enforcement Network and the Manhattan District Attorney’s office are currently investigating “certain check casher clients” from its commercial banking business and looking into the internal safeguards of its anti-money laundering (AML) program.

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Last April, FINRA announced that it had revised the sanction guidelines that apply when there has been a violation of a FINRA rule. Professionals in the industry whose activities are regulated by FINRA need to be aware of the scope and impact of these changes.

The Sanction Guidelines do not directly prescribe specific penalties or punishments for each particular violation. In essence, their role is to assist FINRA adjudicators to impose sanctions in a fairer and more consistent manner.

They are meant to establish a range of potential sanctions for each type of violation, and they also introduce the concept of aggravating and mitigating factors, which FINRA’s hearing panels and the NAC are expected to consider throughout disciplinary proceedings.

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The SEC is not used to losing a case in-house, but that is precisely what happened on April 18th, when Judge James Grimes dismissed the insider trading allegations against Charles L. Hill of Atlanta. Hill had made a sizable profit by buying shares of Radiant Systems Inc. right before an acquisition by NCR Corp, and selling them right after the deal was announced.

There has been much criticism of the SEC´s administrative proceedings. Critics believe they are not fair to defendants because there are no juries, the number of depositions is limited, and judges are, after all, on the SEC´s payroll. Considering how rare it is for defendants to win a case against the SEC in-house, Hill´s victory may also be seen as a victory for critics of this practice.

Hill had been litigating for over a year to avoid being pursued through an in-house administrative proceeding, but an Atlanta appeals court had allowed the SEC to move forward with its plan.

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