I.            Background

First Trust has operated as a wholesale distributor of securities issued mainly by affiliated investment companies since 1991. It employs approximately 700 registered representatives across four branch offices nationwide.

   II.            The Violations: What Went Wrong?

A.    Unauthorized and Excessive Gifts

First Trust wholesalers routinely provided lavish perks that far exceeded FINRA’s annual $100 per person non-cash gift limit. These included:

• Multiple instances of courtside basketball tickets valued at around $3,200 per pair, given without an accompanying First Trust employee.
• Tickets to a Broadway musical costing more than $1,800, again without firm accompaniment.
• Bottles of alcohol priced at $400 or higher, given repeatedly to client representatives.
• Luxury suite tickets for NBA and NHL playoff and professional football games worth tens of thousands of dollars.

Additionally, one representative received over $31,000 in tickets and entertainment within 18 months, such as NBA All-Star game luxury suite access. Another was given more than $50,000 in gifts and entertainment over a four-year period, including meals, concerts, and golf outings, with seventeen events exceeding $21,000 in one year.

Furthermore, six wholesalers explicitly linked gifts to sales targets, such as promising hockey game tickets contingent on a broker selling $1 million in Unit Investment Trusts (UITs) or offering to pay for future events if sales goal of $1 million to $10 million were achieved.

These actions violate FINRA Rules 2341(l)(5) and 2010, which prohibit excessive gifts and sales-based inducements.

B.     Falsification of Expense Reports and Records

More than 40 expense reports were falsified involving more than $650,000. Violations included:

• Listing deceased or inactive individuals as attendees.
• Omitting actual attendees from reports to lower apparent costs.
• Coordinating false reports through private texts, evading firm surveillance.

Supervisors occasionally advised wholesalers on how to disguise true expenses, violating FINRA Rules 4511 and 2010, Section 17(a) of the Securities Exchange Act of 1934, and Exchange Act Rule 17a-3.

C.    Failure to Accurately Report to Client Firms

First Trust submitted at least 25 quarterly reports to client firms, understating or omitting non-cash perks benefits over $500,000, including a failure to report luxury suite tickets costing $20,000 for football games in late 2019. Despite improvements after October 2021, some omissions continued, violating FINRA Rule 2010.

D.    Lack of Adequate Supervision Supervisory Failures

Despite having written policies, First Trust failed to supervise the provision and reporting of non-cash compensation properly. The supervisory system relied on wholesalers’ unverified self-reporting and permitted modifying approved reports without internal checks. Notably, the firm failed to supervise Firm-paid tickets prior to October 2021, significantly compounding compliance failures.

These supervisory failures violated FINRA Rules 3110(a), 3110(b), and 2010.

III.            Remedial Actions Taken by First Trust

To address these issues, First Trust implemented several corrective measures, including:

• Establishing a dedicated compliance audit function reporting directly to executive management focused on non-cash compensation and sales practices.
• Enhancing tracking systems for event ticket distributions.
• Disciplining employees through suspensions without pay, fines, and increased supervision.

IV.            Sanctions and Undertakings

First Trust agreed to:

• A censure.
• A $10 million fine.
• An undertaking mandating the firm’s senior management, identified as a registered principal, to certify annually for three years that it complies with FINRA Rules 2010, 2341, 3110, and 4511 as well as Exchange Act 17(a) and Exchange Act Rule 17a-3.

The firm voluntarily waived any right to claim an inability to pay, now or at any time after the execution of this AWC, the monetary sanction imposed in this matter.

   V.            Why This Matters?

This case underscores the importance of ethical practices and cautious supervision in brokerage operations. It reflects FINRA’s dedication to protecting investors by holding firms accountable for improper gift and entertainment practices that may skew financial advice.

For firms operating in the securities industry, First Trust’s penalty is a stark reminder to maintain transparent records, enforce reasonable gift limits, and foster a culture of compliance to ensure trusted client relationships and market integrity. The statements in this blog post are allegations as set forth in the AWC.

Herskovits PLLC represents broker-dealer and registered persons in defense of FINRA investigations and disciplinary actions.  Feel free to contact us for a consultation at (12) 897-5410.

Summary: FINRA Disciplinary Action – Kenneth John Malm

On May 20, 2025, FINRA released an AWC for Matter No. 2023078405601.

Background:

• Kenneth John Malm was registered as a General Securities Representative and Investment Banking Representative with Osaic Wealth, Inc. (formerly Securities America, Inc.).
• In August 2024, Malm was permitted to resign during an internal review after being named as a beneficiary of a client’s estate.
• Malm allegedly accepted and received a bequest of over $1 million from a deceased client (not an immediate family member) without notifying or obtaining approval from his firm.

Alleged Violations:

• FINRA Rule 3241:  Provides that “[a] registered person shall decline being named a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate upon learning of such status” unless: (a) the customer is an immediate family member; or (b) the representative provides written notice to firm, and the firm (after performing a reasonable assessment of the request) approves the request.
• FINRA Rule 2010: Requires high standards of commercial honor and just and equitable principles of trade.

Sanctions:

• Suspension: 7 months from associating with any FINRA member in any capacity.
• Fine: $10,000, payable upon reassociation with a member firm or before seeking relief from any statutory disqualification.

Additional Notes:

• The matter originated from a tip to the FINRA Securities Helpline for Seniors.
• Malm waived his rights to a hearing, appeal, and other procedural protections by accepting the settlement.
• This action will become part of Malm’s permanent disciplinary record and will be publicly disclosed.

Conclusion:
Malm’s case highlights FINRA’s strict stance on conflicts of interest and the importance of disclosure and firm approval when it comes to bequests from clients. Malm’s alleged failure to follow these rules led to a significant suspension and fine, serving as a warning to other brokers in similar situations.

Herskovits PLLC has a nationwide practice representing individuals and entities faced with FINRA investigations or disciplinary actions.  Feel free to contact us at (212) 897-5410.

FINRA recently published an AWC entered into with Richard L. Langer, a registered representative with Planner Securities LLC. FINRA accused Langer of violating FINRA Rules 2210 and 2220. FINRA Rule 2210 governs communications by registered representatives with the public and FINRA Rule 2220 sets forth requirements with respect to options-related communications.

The review of Langer’s communications originated with a cycle examination conducted by FINRA Member Supervision. According to FINRA, between January 2016 and November 2019, Langer maintained a public Facebook page for an investment club he operated. Langer authored 20 posts on the Facebook page regarding the performance, investment returns, industry standing, and purported successes of the investment club and a separate hedge fund at which Langer traded.

For example, on January 9, 2018, Langer posted:

Good Day to all! Hope everyone had a wonderful Holiday season and wishing everyone a healthy and happy 2018! We did it yet again! #2 top performing options hedge fund for November 2017, 1.93% return. With a year to date return on invest of 29.12% We still remain the Top performing options Hedge fund in 2017!! i can tell you that December record breaking return (to be released in 2 weeks) put us over 34% return for 2017 making [Hedge Fund A] the #1 options strategy hedge fund on the street for 2017,, That’s back to back years we took # 1 best performing options strategy hedge fund on the Planet !! interested in putting your money to work for you? Ask us.

FINRA Rule 2210(d)(l)(A) provides that:

[a]II member communications must be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service. No member may omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading.

FINRA found Langer’s Facebook posts violative of Rule 2210 because they provided only positive news about the hedge fund and the investment club and did not disclose any risks associated with these investments. As such, the posts did not, “provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service.”

Langer also published 11 Facebook posts regarding options. FINRA Rule 2220(d)(l)(A) provides that options communications regarding standardized options “must be limited to general descriptions of the options being discussed,” and “must not contain … past or projected performance figures, including annualized rates of return, or names of specific securities.” (emphasis added). Langer’s posts went beyond general descriptions and included performance of certain transactions. Langer also failed to state that options are not suitable for all investors as required by Rule 2220(d)(2)(A).

There are also two requirements to the rule that Langer failed to meet. First, retail options communications, “issued by a member concerning options shall be approved in advance by a Registered Options Principal designated by the member’s written supervisory procedures.” Second, retail options communications shall be submitted to the Advertising Regulation Department of FINRA … at least ten calendar days prior to use.” See FINRA Rule 2210(a)(5); FINRA Rule 2220(a)(l)(C).

“Retail” communications are those made to more than 25 retail investors with a 30-day period. Langer’s posts, which were made on a public Facebook page that had approximately 130 followers, are retail communications but Langer neither got approval from a Registered Options Principal before publishing nor were the communications submitted to the Advertising Regulation Department of FINRA.

For these violations, Langer agreed to a 10 business-day suspension and a $5,000 fine. Langer’s sanctions are at the very low end of the FINRA Sanctions Guidelines and arguably lenient given the number of posts, the three-year period of violative activity and the potential investor harm that could have arisen from this sort of marketing. Notably, the AWC is silent as to whether investors bought or sold securities based on the Facebook posts or whether they were subsequently harmed.

Herskovits PLLC has a nationwide practice defending against FINRA investigations and representing individuals in FINRA arbitration. Feel free to contact us at (212 897-5410.

“Defendant understands and agrees to comply with the [SEC]’s policy ‘not to permit a defendant . . . to consent to a judgment or order that imposes a sanction while denying the allegation in the complaint . . . .’ 17 C.F.R. § 202.5. In compliance with this policy, Defendant agrees not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis. If Defendant breaches this agreement, the [SEC] may petition the Court to vacate the Final Judgment and restore this action to its active docket. Nothing in this paragraph affects Defendant’s: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation in which the [SEC] is not a party.”

Language to this effect is in every consent agreement with the SEC. The CFTC and FINRA also place substantively identical injunctions regarding what defendants can say about their cases once they settle.

Now, almost 20 years later, Mr. Romeril is tired of staying silent and is seeking to have his case heard by the Supreme Court. Romeril’s primary argument is that the judgment which incorporated his consent agreement with the SEC should be voided because it constitutes a prior restraint that infringes his First Amendment rights and that it violated his right to due process.

So far, Romeril has lost at the district court level and lost his appeal to the Second Circuit and is now seeking a writ of certiorari to take this case to the Supreme Court. While Romeril’s case is interesting in its own right, it is also interesting to note the various individuals and institutions that have filed amicus briefs in support of his arguments. The list includes Mark Cuban and Elon Musk who have famously and publicly clashed with the SEC in recent years. Cuban and Musk make the interesting argument that the SEC’s gag orders run contrary to the agency’s mission of market transparency. The amicus brief highlights the SEC’s supposed hypocrisy in insisting on the silencing of settling defendants while at the same time demanding full transparency for settlements between private parties. Their amicus brief notes that,

“[t]he SEC regularly brings enforcement actions against individual and companies based, at least in part, on their failure to provide the investing public sufficient information about their settlements or litigation.”

Musk, in particular, has had a very public bout with the SEC over his First Amendment rights. Musk settled a 2018 case with the SEC in which he was accused of making false and misleading statements about Tesla through his twitter account. Part of the settlement required Musk to have his tweets vetted by a securities lawyer before posting them. Musk has since unsuccessfully sought to overturn his 2018 settlement and has accused the SEC of trying to “muzzle and harass” him.

The Supreme Court has discretion as to when it will grant certiorari and for writs filed by attorneys the success rate of having a case heard is only 6% (the rate is much lower if ­you include pro se applicants). There is some statistical evidence however, that amicus briefs filed at the certiorari stage considerably increase the odds of certiorari being granted.

Presumably, if Mr. Romeril wins the CFTC and FINRA will have to take similar gag orders out of their settlement agreements. In 2015, a study showed that the average cost for a company to respond to an SEC formal investigation was north of $4 million[2] and that is before any litigation has commenced! Surely many innocent companies and executives have decided to settle with the SEC rather than endure the frustration and expense of an SEC investigation and litigation. Maybe someday those same people and companies can settle with the SEC and still publicly proclaim their innocence.

Herskovits PLLC maintains a nationwide practice defending SEC investigations and litigation. Call us for a consultation at (212) 897-5410.

When settling a FINRA investigation, the Staff drafts a letter of Acceptance, Waiver and Consent (AWC) setting forth the terms of the settlement. In the AWC, FINRA routinely demands the settling party consent to the following restraint on speech:

“Respondent may not take any action or permit to be made any public statement, including in regulatory filings or otherwise, denying directly or indirectly, any finding in this AWC or create the impression that the AWC is without factual basis.”

A matter before the U.S. Supreme Court may upend FINRA’s use of a gag order.

Case In Point

On March 21, 2022, Barry Romeril filed a petition for writ of certiorari (Romeril v. Securities and Exchange Commission). Romeril asks the Court to consider whether First Amendment and due process rights are violated when the SEC forces a settling party to agree to a lifelong prior restraint barring any statement, however truthful, that even suggests that any allegation of the SEC is insupportable.

In 2003, Romeril settled an action initiated by the SEC. As part of the settlement and judgment, the SEC demanded a non-negotiable “consent” clause stating:

“Defendant agrees not take any action or permit to be made any public statement denying directly or indirectly, any allegation in the complaint or create the impression that the complaint is without factual basis.”

It is noteworthy that the SEC and CFTC systematically demand broad restraints on speech as a condition of settlement. See generally James Valvo, The CFTC and SEC Are Demanding Unconstitutional Speech Bans in their Settlement Agreements, Yale J. on Reg.: Notice & Comment Blog (Dec. 4, 2017). In so doing, settling parties are without defense in the court of public opinion.

Would FINRA Abide by an Adverse Ruling in Romeril?

If the Supreme Court accepts Romeril’s petition, the Court would determine the legality of the SEC’s gag order. Although the SEC’s gag order is identical in substance to FINRA’s gag order, FINRA is not a party to Romeril and it is unclear whether FINRA would abide by a ruling striking down the gag order.

FINRA goes to great lengths to proclaim that it is a “private entity” and not a “governmental body” bound by the U.S. Constitution. See e.g., D.L. Cromwell Inv., Inc. v. NASD Regulation, Inc. 279 F.3d 155, 162 (2d Cir. 2002). For example, in reliance upon this distinction, FINRA chooses not to recognize an individual’s right to invoke the Fifth Amendment privilege against self-incrimination in connection with on-the-record interviews. Nonetheless, FINRA does recognize certain Constitution-based rights. For example, in disciplinary proceedings, FINRA’s staff must turn over “Brady material” to the respondent (documents containing exculpatory material). See Dep’t of Enforcement v. Southeast Inv., N.C., Inc., 2019 FINRA Discip. LEXIS 23 *14 (NAC May 23, 2019) (interpreting FINRA Rule 9253).

Given that the gag order contained in an AWC mirrors the language within the SEC’s standard gag order, it would seem appropriate for FINRA to follow any guidance from the Supreme Court in Romeril.

Herskovits PLLC has a nationwide practice defending individuals and entities in FINRA investigations and disciplinary proceedings. Contact us at 212-897-5410.

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.

Court Challenge

The essence of Mohlman’s claims against FINRA were summarized by the Court:

“Plaintiff complains that in entering into the AWC, FINRA allegedly failed to consider mitigating factors such as the death of a friend, the suicide of his brother-in-law and his own medications and medical history. He argues that the failure to consider these factors somehow led FINRA to fraudulently induce him to accept a bar from the securities industry. As result, Plaintiff seeks $891,000 in damages (legal fees, residual fees for lost business opportunities, reputational rehabilitation specialist fees, therapy fees, and punitive damages) against FINRA and Defendants Schroeder and Brown.”

The judge was not impressed by Mohlman’s arguments. The court held that Mohlman should have exhausted his administrative remedies (meaning, Mohlman should have rejected FINRA’s settlement offer and asserted his defenses before FINRA’s Office of Hearing Officers) instead of settling with FINRA and then later complaining about the settlement. According to the court:

“Plaintiff had the opportunity to litigate a FINRA disciplinary complaint and subsequently seek administrative review of any result at the SEC and thereafter in a United States Court of Appeals, which were the administrative remedies available to him under the Exchange Act. Instead, he accepted a settlement resulting in a bar from the securities industry, and he expressly waived his right to administrative review. Plaintiff cannot now ask this Court to reconsider the decision he made, while represented by counsel, several years ago.”

This case highlights the finality associated with a decision to sign an AWC. Before doing so, FA’s would be wise to carefully consider their rights upon consultation with experienced counsel.

Herskovits PLLC has a nationwide practice representing individuals and entities under investigation by FINRA, the SEC and the CFTC. Feel free to call us at 212-897-5410 for a consultation.

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
• Failure to properly investigate exception report alerts
• And here’s the real ugly one: “adjustment” of customers’ risk tolerances and investment objectives without first seeking the customers’ input. Rest assured, it was clever lawyering that got FINRA to delete the word “falsification” and instead use the word “adjustment.”

Well, if the respondent were an individual, as opposed to NY Life, and the broker sold unsuitable securities, disregarded firm policy, and falsified new account forms, what would FINRA do? According to FINRA’s Sanction Guidelines: (a) “recordkeeping violations” can lead to a bar if aggravating factors predominate; and (b) unsuitable recommendations will likely lead to a bar if aggravating factors predominate.

Given that FINRA would wallop an individual, surely they’ll do the same with an institution that can readily pay a sizable fine….right?? Given FINRA’s allegations, we must be talking about a significant seven-figure fine, right?

Well….read on.

Case In Point

In the Matter of NYLIFE Securities LLC, FINRA Matter No. 2016050685102 (click here to read the AWC) Sanctions

• A fine of $250,000
• Restitution and rescission to 28 customers. The restitution amount equals $76,643. The rescission offer pertains to customers with unrealized losses totaling approximately $250,000.
• Censure

Hmmm….it looks to me like NYLIFE cut a sweetheart deal with FINRA.

Underlying Facts

From September 2014 to December 2016, NYLIFE had procedures for supervising the sale of higher-risk mutual funds as measured by volatility. The procedures, as one would expect, required such sales to align with the customers’ risk tolerances and investment objectives. During this time period, NYLIFE’s automated surveillance system flagged potentially unsuitable trades. For example, an alert was generated if a customer with an investment objective of “income with moderate growth” and a risk tolerance of “moderately conservative” sought to purchase a higher-risk mutual fund in an amount that exceeded 30% of the customer’s overall portfolio.

The alerts were reviewed by a group of “reviewers” who, in conjunction with registered persons, offered customers a choice: reallocate the portfolio to reduce risk, or change your investment profile to reflect a higher risk tolerance and more aggressive investment objective.

All of that was well enough; however, NYLIFE apparently didn’t allocate sufficient resources to the “reviewer” department and un-reviewed alerts began to pile up. To rectify this:

“Respondent’s reviewers adjusted customers’ investment profiles to accommodate a sale of higher-risk mutual funds without determining whether a representative had discussed the option of reallocation with the customer and typically without first contacting the customer. In fact, some customers’ investment profiles were changed before Respondent obtained information about the customers’ true risk tolerance and investment objective.”

The upshot of this was that the portfolio for a number of customers (approximately “four dozen” according to FINRA) with relatively conservative investment objectives was excessively weighted with high-risk mutual funds.

Analysis

I get that a $250,000 is not chump change. And I also recognize that the BD has to offer restitution and restitution, and apparently settled other customer complaints prior to FINRA’s intervention. Nonetheless, the allegations present a fairly damning fact pattern. FINRA alleges a complete breakdown of the system of supervision. And brazenly mismarking a customer’s investment objectives is conduct one expects from a bucket shop, not from a highly regarded financial institution.

Based on the facts alleged, along with the guidance in FINRAs Sanction Guidelines, it really seems like NYLIFE got off easily. According to the Sanction Guidelines:

Failure to Supervise – for systemic supervisory failures, the adjudicator should consider imposing an undertaking, such as engaging an independent consultant to revamp the supervisory systems. Where aggravating factors predominate, the adjudicator should consider suspending or even barring the firm. Additionally, the adjudicator should consider a fine of up to $310,000, or higher if aggravating factors predominate.

Suitability – the adjudicator should consider a monetary sanction of up $116,000 and consider suspecting a firm with respect to a set of activities for up to 90 days.

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