FINRA - Herskovits PLLC

Violations of FINRA Rule 2010 (high standards of commercial honor and just principles of trade)
Regulation Best Interest (Reg BI) / Exchange Act Rule 15l-1(a)
Unauthorized trading / discretionary authority violations (FINRA Rule 3260,2360)
FINRA Rule 4511 (Recordkeeping / misreporting violation)
Supervisory failures and deficient compliance

Week in Review:

Between November 17 and 21, 2025, FINRA took disciplinary actions against both individual registered representatives and firms for a range of violations, including unsuitable investment recommendations, undisclosed outside business activities, falsified expense reports, unauthorized trading, excessive options trading, supervisory failures, deficient disclosure in research reports, and failure to maintain net capital or proper handling of investor funds. Sanctions imposed included suspensions ranging from one to ten months, fines from $5,000 to $2.5 million, disgorgements, censure, partial restitution, and requirements for firms to implement or certify remedial supervisory measures. These cases highlight FINRA’s continued emphasis on ethical conduct, adherence to Regulation Best Interest, compliance with supervisory and reporting obligations, and maintaining robust firm-level oversight to protect investors and ensure market integrity.

Observation:

FINRA Rule 2010 remains the most frequently cited violation, reflecting FINRA’s emphasis on ethical conduct across a wide range of misconduct. Many cases also highlight failures in disclosure, supervision, or suitability obligations, showing that regulatory oversight targets both individual behaviour and firm-level compliance systems. Recurring compliance challenges for registered representatives include high-risk and unsuitable investment recommendations, unauthorized trading, and undisclosed outside activities. Large firms, such as Deutsche Bank and Laidlaw, are held accountable for systemic deficiencies, underscoring that lapses in oversight can impact thousands of transactions and a broad base of investors.

CASE SUMMARIES

1. Case: Thomas G. Scheiman & Stephen M. Franko

INTRODUCTION:

This summary reviews the disciplinary action against Thomas G. Scheiman and Stephen M. Franko, who recommended unsuitable GWG L Bonds to retail customers in violation of Reg BI and FINRA Rule 2010. The case highlights the obligation of registered representatives to make recommendations that are in the customer’s best interest, consistent with their financial profile, risk tolerance, and investment objectives.

Date of Action: November 17, 2025
Respondent: Thomas G. Scheiman, Stephen M. Franko
Violations:

A. Exchange Act Rule 15l-1(a) of Regulation BI:

This rule states brokers to act in the best interest of retail customers when making securities recommendations. The Care Obligation requires that recommendations be based on reasonable diligence and an evaluation of the customer’s investment profile, including factors such as age, risk tolerance, financial needs, liquidity needs, and investment experience.

Violation: In 2020, Scheiman recommended a $100,000 GWG L Bond to an 83-year-old customer, resulting in over 50% concentration of her liquid net worth in speculative bonds. Franko recommended GWG L Bonds to three retail customers whose investment profiles were inconsistent with the high risks, illiquidity, and speculative nature of the product. Both failed to meet Reg BI’s Care Obligation.

B. FINRA Rule 2010:

This rule states associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: By recommending high-risk, unsuitable securities to retail customers and failing to comply with Reg BI’s best-interest standards, both Scheiman and Franko violated the ethical obligations.

SUMMARY:

Scheiman and Franko recommended GWG L Bonds, speculative and high-risk corporate bonds, to retail customers despite the investments being unsuitable given the customer’s financial profiles and liquidity needs. These recommendations violated Reg BI’s Best Interest and Care Obligations and further constituted misconduct under FINRA Rule 2010. Their failures were particularly consequential given GWG’s ongoing financial losses and eventual default and bankruptcy.

SANCTIONS:

For Thomas G. Scheiman

Two-month suspension.
A fine of $5,000.
$2,600 disgorgement + interest

For Thomas G. Scheiman

Three-month suspension
$5,000 fine
Partial restitution $5,640 + interest

AWC Document:

2022074289901 Thomas G. Scheiman CRD 1508288_Stephen M. Franko CRD 2157707 AWC ks.pdf

CONCLUSION:
This case reinforces FINRA’s mandate that registered representatives must evaluate the risk, liquidity, and suitability of investment products and ensure recommendations meet Reg BI’s best-interest standards. Recommending highly speculative securities without proper diligence or regard for a customer’s financial profile violates both regulatory obligations and fundamental ethical standards.

2. Case: Robert Galloway

INTRODUCTION:

This summary reviews a FINRA disciplinary action against Robert Galloway, who falsified six expense reports to obtain reimbursements not permitted under firm rules. His conduct violated FINRA Rule 2010, which requires adherence to high standards of commercial honor.

Date of Action: November 17, 2025
Respondent: Robert Galloway
Violations:

A. FINRA Rule 2010:

This rule states associated persons to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.

Violation: Between January and April 2024, Galloway falsified six marketing reports for marketing expenses by claiming he had already incurred and inflated reimbursement amounts. He improperly received approximately $5,000 in reimbursements. This created false records and misled his firm.

SUMMARY:

Galloway submitted six falsified expense reports over a four-month period, seeking reimbursements for marketing expenses that were not yet incurred and overstating the amounts. This dishonest conduct violated FINRA Rule 2010 and resulted in Country Capital terminating his registration. FINRA determined that his actions demonstrated a failure to uphold required standards of commercial honor.

SANCTIONS:

Robert Galloway:

Five-month suspension
a $5,000 fine.

AWC Document:

2025-11-05_AWC_via_DocuSign_Robert_Galloway_2024083324501.pdf

CONCLUSION:
This action underscores FINRA’s expectation that registered representatives maintain integrity and accuracy in all business-related documentation. Falsifying expense reports constitutes unethical conduct and violates the principles of fairness and honesty that Rule 2010 is designed to protect.

3. Case: Evan Von Scales

INTRODUCTION:

This summary reviews FINRA’s disciplinary action against Scales, who engaged in an undisclosed outside business activity (OBA) involving the promotion and sale of a foreign-exchange trading algorithm. By failing to provide required prior written notice to his member firm, Fidelity, Scales violated both FINRA Rule 3270 and FINRA Rule 2010.

Date of Action: November 17, 2025
Respondent: Evan Von Scales
Violations:

A. FINRA Rule 3270:

This rule states registered persons must obtain firm approval before engaging in outside compensated business.

Violation: From October to December 2023, Scales operated an LLC selling an automated trading algorithm. He advertised it on social media and sold the product to nine customers for $2,000 each. He earned $13,000 after refunds and fees. He did not notify or obtain approval from Fidelity and violated the Rule.

B. FINRA Rule 2010:

This rule states associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: Because a violation of Rule 3270 automatically constitutes a breach of ethical conduct, Scale’s undisclosed OBA violated Rule 2010.

SUMMARY:

Scales established and operated a foreign-exchange algorithm business without notifying or receiving approval from Fidelity, despite firm policies and FINRA rules requiring such disclosure. His failure to provide prior written notice, combined with earning compensation from the activity, violated FINRA Rules 3270 and 2010.

SANCTIONS:

Three-month suspension
a $5,000 fine.

AWC Document:

2024083203501 Evan Von Scales CRD 6957770 AWC ks.pdf

CONCLUSION:
Scales established and operated a foreign-exchange algorithm business without notifying or receiving approval from Fidelity, despite firm policies and FINRA rules requiring such disclosure. His failure to provide prior written notice, combined with earning compensation from the activity, violated FINRA Rules 3270 and 2010.

4. Case: Oakwood Capital Securities, Inc.

INTRODUCTION:

This summary reviews FINRA’s disciplinary action against Oakwood Capital Securities, which, under prior management, failed to establish and maintain adequate supervisory systems and written supervisory procedures for monitoring deferred variable annuity exchange rates.

Date of Action: November 18, 2025

Respondent: Oakwood Capital Securities, Inc.
Violations:

A. FINRA Rule 3110:

This rule states members must maintain systems to ensure compliance with securities laws and FINRA rules.

Violation: Oakwood failed to establish and maintain a supervisory system, as well as written supervisory procedures, reasonably designed to supervise deferred variable annuity exchange activity. Although the firm’s procedures broadly stated that surveillance would occur, Oakwood had no actual processes or systems to track exchange rates, review trends, or identify representatives with potentially problematic activity. Its supervision consisted solely of manual transaction-by-transaction reviews, which were insufficient to detect patterns or repeated unsuitable recommendations.

B. FINRA Rule 2330:

This rule states firms must implement written supervisory procedures and surveillance to detect inappropriate annuity exchanges.

Violation: Oakwood also failed to establish specific written supervisory procedures tailored to deferred variable annuities and by failing to implement the required surveillance mechanisms to identify inappropriate or excessive annuity exchanges. The firm did not monitor representative’s exchange activity at all, nor did it maintain any system for tracking exchange rates, which directly caused the firm to overlook a series of short-term and unsuitable variable annuity exchanges recommended by one of its representatives.

B. FINRA Rule 2010:

This rule states associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: Because Oakwood failed to comply with Rules 3110 and 2330(d), it also violated FINRA Rule 2010. Insufficient supervision of complex and high-risk products is considered conduct inconsistent with industry standards.

SUMMARY:

Under prior management, Oakwood Capital Securities failed for more than a year to maintain adequate supervisory systems and procedures for overseeing deferred variable annuity exchanges. The firm had no system for tracking exchange rates or patterns and conducted only basic transactional reviews. As a result, it failed to detect repeated, short-term, and unsuitable variable annuity exchanges recommended by a representative.

SANCTIONS:

a censure and
a $20,000 fine.

AWC Document:

2020065145802 Oakwood Capital Securities, Inc. fka Gardner Financial Services, Inc. CRD 21000 AWC ks.pdf

CONCLUSION:
This action underscores FINRA’s expectation that firms maintain effective supervisory systems especially when overseeing complex products such as variable annuities. A failure to monitor exchange activity exposes investors to unsuitable transactions and violates core supervisory and ethical obligations.

5. Case: Barry L. Buchholz

INTRODUCTION:

This summary reviews the disciplinary action against Barry L. Buchholz for executing unauthorized trades in four customer accounts, violating FINRA Rule 2010. The case highlights the requirement for written or oral customer authorization before placing trades in non-discretionary accounts.

Date of Action: November 18, 2025
Respondent: Barry L. Buchholz.
Violations:

A. FINRA Rule 2010:

This rule states associated persons, in the conduct of their business, to “observe high standards of commercial honor and just and equitable principles of trade.

Violation: Between September and October 2023, Buchholz executed 10 unauthorized trades totalling $590,795 in the accounts of four beneficiaries of a deceased customer. He generated $16,245.63 in commissions. Two customers suffered losses from liquidating the unauthorized positions.

SUMMARY:

Buchholz executed a series of unauthorized trades in four customer accounts shortly after the accounts were funded from their father’s estate. By placing trades without any written or oral approval and later liquidating one customer’s holdings without consent, he violated FINRA Rule 2010. His actions generated significant commissions for himself and resulted in losses for certain customers, prompting formal complaints and regulatory action.

SANCTIONS:

One-month suspension.
$7,500 fine.
$7,480 disgorgement + interest.

AWC Document:

2024081242701 Barry L. Buchholz CRD 1583582 AWC lp.pdf

CONCLUSION:
This case underscores FINRA’s strict prohibition against unauthorized trading in non-discretionary accounts. Registered representatives must obtain explicit customer authorization before executing any transactions. Failure to do so violates the ethical and professional standards embedded in FINRA Rule 2010 and exposes customers to unauthorized risk and financial harm.

6. Case: Luis S. Jean-Bart

INTRODUCTION:

This summary reviews FINRA’s action against former registered representative Jean-Bart, who failed to timely respond to multiple FINRA Rule 8210 requests for information over a prolonged period, violating FINRA’s investigative requirements and conduct standards.

Date of Action: November 19, 2025
Respondent: Luis S. Jean-Bart
Violations:

A. FINRA Rule 8210:

This rule states associated persons to provide information, documents, and records necessary to an investigation, and prohibits failing to comply with such requests.

Violation: Jean-Bart failed to provide complete and timely responses to multiple FINRA Rule 8210 requests issued between October 19, 2023, and January 24, 2025. Despite extensions and repeated follow-up requests, he did not provide all required documents by the established deadlines. Some documents were not produced until more than 15 months after the initial due date. His prolonged lack of cooperation impeded FINRA’s investigation into alleged off-platform crypto-asset activity.

B. FINRA Rule 2010:

This rule requires associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: By failing to timely respond to FINRA Rule 8210 requests, Jean-Bart violated FINRA Rule 2010. An untimely or incomplete response to an 8210 request constitutes a breach of the standards of conduct required of registered persons.

SUMMARY:

Jean-Bart repeatedly failed to comply with FINRA’s Rule 8210 information requests over an extended period, delaying and hindering an active investigation. His failure to timely provide the required documents and information resulted in violations of both FINRA Rules.

SANCTIONS:

Ten-month suspension.
$5000 fine.

AWC Document:

2023080015803 Luis S. Jean-Bart CRD 5472965 AWC ks.pdf

CONCLUSION:
FINRA’s action highlights the critical importance of full and timely compliance with Rule 8210 requests. Failure to cooperate with regulatory investigations undermines FINRA’s ability to protect investors and enforce industry standards, and such conduct constitutes a serious violation of FINRA rules.

7. Case: Deutsche Bank Securities Inc.

INTRODUCTION:

This summary reviews FINRA’s action against Deutsche Bank for longstanding failures to include required conflicts-of-interest disclosures in equity and debt research reports and for failing to maintain supervisory systems designed to ensure compliance with research disclosure rules. These failures occurred over an extended period and affected approximately 110,000 research reports.

Date of Action: November 19, 2025

Respondent: Deutsche Bank Securities Inc.
Violations:

A. FINRA Rule 2241:

This rule governs equity research reports and requires member firms to ensure that such reports include complete and accurate conflicts-of-interest disclosures, such as whether the firm or its affiliates expect to receive investment banking compensation from the subject company, whether the subject company is or has been a client of the firm, and whether the research analyst or household members have a financial interest in the securities discussed..

Violation: Deutsche Bank violated FINRA Rule 2241 by publishing approximately 99,000 equity research reports that omitted required disclosures relating to expected investment banking compensation and thousands more that failed to disclose client relationships and analyst ownership interests. The missing disclosures resulted from flawed data feeds, incomplete client information, and inadequate monitoring of analyst trading. These failures spanned from January 2007 through May 2025 and reflect the firm’s inability to ensure that its equity research reports contained accurate, comprehensive, and compliant conflict-of-interest disclosures.

B. FINRA Rule 2242:

This rule governs debt research reports and requires firms to disclose expected investment banking compensation, client relationships, analyst financial interests, and other conflicts that may affect the objectivity of debt research.

Violation: Deutsche Bank violated FINRA Rule 2242 by publishing approximately 9,000 debt research reports containing incomplete or missing conflicts-of-interest disclosures, including failures to disclose expected investment banking compensation, client relationships, and analyst ownership. The firm also released 172 compendium debt research reports lacking the required hyperlink-accessible disclosures due to an incomplete online search tool. These violations, occurring from July 16, 2016, through May 2025, resulted from the firm’s long-standing failure to maintain adequate data systems and supervisory controls to ensure compliance with debt research disclosure requirements.

C. FINRA rule 3110:

This rule states member firms to establish, maintain, and enforce a supervisory system and written supervisory procedures designed to ensure compliance with applicable securities laws and FINRA rules.

Violation: From January 2007 to the present, Deutsche Bank failed to maintain a supervisory system reasonably designed to ensure that its research disclosures were accurate and complete. The firm did not verify the integrity of data feeds used for disclosure triggers and lacked adequate procedures to monitor and restrict research analyst trading in covered securities, including trades in third-party managed accounts. These deficiencies resulted in widespread disclosure omissions and violations of supervision rules.

D. FINRA Rule 2010:

This rule states member firms to observe high standards of commercial honor and just and equitable principles of trade.

Violation: Deutsche Bank’s systemic failures to comply with research disclosure obligations and supervisory requirements constitute violations of Rule 2010, as the firm failed to ensure transparency in areas critical to investor protection and market integrity.

SUMMARY:

For more than a decade, Deutsche Bank operated with defective data systems, inadequate oversight, and incomplete supervisory procedures, resulting in inaccurate or missing conflict-of-interest disclosures in approximately 110,000 research reports. These failures violated multiple research and supervision rules, undermining investor transparency and market integrity.

SANCTIONS:

a censure.
$2.5 million fine.
An undertaking requiring senior management to certify, within 180 days, that Deutsche Bank has remediated the failures and implemented a supervisory system reasonably designed to comply with FINRA Rules.

AWC Document:

2022073416601 Deutsche Bank Securities Inc. CRD 2525 AWC ks.pdf

CONCLUSION:
This action underscores FINRA’s expectation that firms maintain rigorous systems ensuring complete and accurate research disclosures. Effective supervisory controls and transparent conflict-of-interest reporting are essential for investor protection and the integrity of the research process.

8. Case: James Daniel Lang

INTRODUCTION:

This summary reviews FINRA’s action against Lang, who engaged in multiple outside business activities (OBAs) without providing the required prior written notice to his member firms. His failure to disclose compensated trustee and executor roles over several years resulted in violations of FINRA’s OBA and conduct rules.

Date of Action: November 19, 2025
Respondent: James Daniel Lang
Violations:

A. FINRA Rule 3270:

This rule prohibits registered persons from engaging in outside business activities or receiving compensation from any business outside their member firm unless they provide prior written notice to the firm.

Violation: Between October 2016 and December 2022, Lang failed to disclose multiple compensated fiduciary roles, including serving as trustee for two customer trusts and as executor of a customer’s estate. Despite being required to disclose all OBAs through LPL’s electronic system, Lang failed to report his trustee roles until after they were discovered during a branch audit, and even after being instructed to relinquish the positions, he continued acting as trustee. After joining IFG in October 2020, Lang again failed to disclose his ongoing trustee activity until December 2022. He also did not disclose his executor role to either firm. Lang repeatedly certified inaccurately on compliance questionnaires that he had no undisclosed outside activities and no fiduciary roles, rendering his conduct a clear violation of Rule 3270.

B. FINRA Rule 2010:

This rule states associated persons to adhere to high standards of commercial honor and just and equitable principles of trade.

Violation: By knowingly failing to disclose required OBAs, inaccurately completing compliance questionnaires, continuing fiduciary activities after direct firm instructions to cease, and withholding material information from both LPL and IFG, Lang violated FINRA Rule 2010, as nondisclosure of OBAs constitutes misconduct inconsistent with ethical industry standards.

SUMMARY:

Lang engaged for years in undisclosed outside business activities, including compensated trustee and executor roles for a long-time customer, despite firm requirements to report all external activities. His failure to disclose these roles and his inaccurate compliance certifications violated FINRA Rules 3270 and 2010.

SANCTIONS:

Four-month suspension.
$5000 fine.

AWC Document:

2020067065101 James Daniel Lang CRD 2959057 AWC lp.pdf

CONCLUSION:
This action reaffirms FINRA’s expectation that registered persons fully and accurately disclose all outside business activities. Failure to provide prior written notice undermines firm oversight, introduces undisclosed conflicts, and violates fundamental conduct standards.

9. Case: Mark A. Carter

INTRODUCTION:

This summary reviews FINRA’s action against Carter, who engaged in excessive and unsuitable options trading, exercised discretion without authorization, and mismarked trades in two retail customer accounts while associated with Pruco Securities. His actions resulted in violations of Regulation Best Interest (Reg BI) and multiple FINRA rules.

Date of Action: November 19, 2025
Respondent: Mark A. Carter
Violations:

A. Exchange Act Rule 15l-1(a) of Regulation BI:

This rule states brokers to act in the best interest of retail customers when making recommendations, without placing their own interests ahead of the customer’s. It requires reasonable diligence to ensure the recommendation is suitable and not excessive in light of the customer’s investment profile.

Violation: From January to December 2023, Carter recommended more than 2,200 options trades to two retail customers whose profiles reflected long-term, capital-appreciation objectives making highly active and risky options strategies deeply unsuitable. His trading caused over $600,000 in losses, representing more than 99% of the customers’ account value, while generating commissions of $6,773 for himself. Annualized cost-to-equity ratios averaged 42%, demonstrating excessive trading far outside the customer’s best interest. Carter therefore wilfully violated Reg BI’s Best Interest Obligation and FINRA Rule.

B. FINRA Rule 3260:

This rule prohibits the exercise of discretionary trading authority in a customer’s account unless the customer provides prior written authorization and the member firm approves the discretionary arrangement in writing.

Violation: Carter exercised discretion in the customer’s accounts without obtaining any written authorization. Over the course of twelve months, he placed 2,314 options trades without speaking to the customers, violating the rule and exceeding both customer and firm authority.

C. FINRA Rule 2360:

This rule prohibits discretionary trading in options accounts unless it complies with Rule 3260 and specifically authorizes options trading.

Violation: Because Carter lacked written discretionary authority for options transactions, each discretionary trade he placed in the customers’ accounts constituted a separate violation of Rule 2360(b)(18)(A)(i). His extensive pattern of unauthorized discretionary options trades violated this rule repeatedly.

D. FINRA Rule 4511:

This Rule states members and associated persons to maintain accurate books and records, including properly marking whether trades are solicited or unsolicited.

Violation: Carter mismarked all 2,314 solicited options trades as unsolicited. These false markings caused the firm to maintain inaccurate books and records and concealed the magnitude of his excessive trading activity, constituting a direct violation of Rule 4511.

D. FINRA Rule 2010:

This Rule states associated persons to observe high standards of commercial honor and just and equitable principles of trade.

Violation: Because Carter engaged in unsuitable trading, exercised unauthorized discretion, and mismarked order tickets, he failed to meet the high standards of conduct required under Rule 2010. Each underlying violation independently supports a violation of this rule.

SUMMARY:

Carter’s trading activity was excessive, unsuitable, and unauthorized. He breached Regulation Best Interest, FINRA’s suitability rules, discretionary trading rules, and books-and-records requirements. His conduct resulted in severe customer harm and violated multiple FINRA rules.

SANCTIONS:

Nine-month suspension.
$20,000 fine.
Disgorgement of $6,773 plus interest.

AWC Document:

2024081675801 Mark A. Carter CRD 6387371 AWC vr.pdf

CONCLUSION:
Carter’s misconduct demonstrates serious breaches of both suitability and supervisory standards. By recommending excessive and high-risk options trades that were not in the best interest of his retail customers, exercising discretion without proper authorization, and creating inaccurate trade records, Carter violated multiple FINRA rules and Regulation Best Interest. These actions caused significant financial harm to the customers and undermined the integrity of the brokerage process. FINRA’s sanctions including suspension, fines, and disgorgement underscore the critical importance of adhering to suitability obligations, obtaining proper authorizations, and maintaining accurate records to protect investors and uphold market integrity.

10. Case: Laidlaw & Company (UK) Ltd.

INTRODUCTION:

This summary reviews FINRA’s actions against Laidlaw, which involved failures to maintain minimum net capital, deficient supervisory procedures, and improper handling of investor funds in a contingency offering. These deficiencies violated multiple SEC and FINRA rules, posing risks to investors and the integrity of the securities market.

Date of Action: November 20, 2025
Respondent: Laidlaw & Company (UK) Ltd.
Violations:

A. Exchange Act §§ 15(c)(3), Exchange Act Rule 15c3-1:

This rule states the minimum net capital standard that must be continuously met by all registered broker-dealers.

Violation: Between September 2022 and March 2023, Laidlaw operated while undercapitalized on at least 108 days, with deficiencies ranging from $53,000 to $1.26 million, sometimes exceeding $1 million. These deficiencies occurred because the firm failed to reconcile bank statements and general ledger entries consistently. By conducting business while undercapitalized, Laidlaw violated the minimum net capital requirements set forth in Exchange Act § 15(c)(3) and Rule 15c3-1.

B. Exchange Act § 17(a) and Exchange Act Rule 17a-11:

This rule states firms to notify FINRA and the SEC immediately if net capital falls below required minimums.

Violation: Laidlaw filed two inaccurate deficiency notices in December 2022 and January 2023, misreporting the start and end dates of net capital deficiencies. Additionally, an April 2023 notice overstated compliance. By failing to provide accurate and timely net capital deficiency notices, Laidlaw violated Exchange Act § 17(a) and Rule 17a-11.

C. FINRA Rule 4110:

This rule states a member firm to suspend all business operations during any period in which it is not in compliance with applicable net capital requirements.

Violation: Laidlaw continued to conduct securities business during the periods it was undercapitalized. By failing to suspend operations during these times.

D. FINRA Rules 3110:

This rule states member firms to establish, maintain, and enforce supervisory systems and written supervisory procedures (WSPs) reasonably designed to ensure compliance with applicable laws and rules.

Violation: Between September 2022 and June 2023, Laidlaw failed to maintain WSPs for general ledger maintenance, reconciliation, intercompany transactions, and net capital calculations. Staffing shortages exacerbated these deficiencies, and no remedial steps were taken until July 2023.

E. Exchange Act § 15(c)(2) and Rule 15c2-4(b)

This rule sates that in contingency offerings, broker-dealers either deposit investor funds into a separate account or transmit funds to an independent escrow agent when the broker is affiliated with the issuer.

Violation: Between November 2020 and January 2021, Laidlaw participated in a contingency offering for an affiliated issuer but failed to establish an independent escrow account, instructing investors to send funds directly to the issuer.

SUMMARY:

Laidlaw’s failures to maintain net capital, submit accurate deficiency notices, establish supervisory systems, and properly handle investor funds in a contingency offering violated multiple SEC and FINRA rules. These lapses created regulatory and investor risks and demonstrate significant supervisory and compliance deficiencies.

SANCTIONS:

a censure
$200,000 fine.

AWC Document:

2023077061201 Laidlaw & Company (UK) Ltd. CRD 119037 AWC ks.pdf

CONCLUSION:
Laidlaw’s conduct demonstrates significant failures in financial and supervisory controls. By operating while undercapitalized, submitting inaccurate net capital deficiency notices, failing to suspend business during periods of deficiency, neglecting to maintain adequate supervisory procedures, and mishandling investor funds in a contingency offering, the firm violated multiple SEC and FINRA rules. These violations exposed investors and the marketplace to risk and reflect a breakdown in both compliance and operational oversight. FINRA’s sanctions, including censure and a $200,000 fine, underscore the importance of maintaining adequate capital, accurate reporting, robust supervisory systems, and proper handling of investor funds to protect investors and uphold market integrity.

FINRA’s 2024 Regulatory Oversight

Herskovits, PLLC — Tue, 03 Sep 2024 16:56:00 GMT

The 2024 FINRA Annual Regulatory Oversight Report provides a detailed overview of FINRA’s regulatory activities, priorities, and key initiatives for the year. The report covers areas such as market regulation, member supervision, enforcement actions, and rulemaking efforts. It also highlights trends in the financial industry, emerging risks, and FINRA’s response strategies. The document emphasizes the importance of protecting investors, ensuring market integrity, and maintaining fair and efficient markets.

Financial Crimes

The financial crime section of the report details FINRA’s focus on combating activities such as money laundering, fraud, and market manipulation. Key initiatives include the use of advanced surveillance technologies and data analytics to detect suspicious activities. FINRA also emphasizes the importance of firms adhering to Anti-Money Laundering (AML) regulations, including thorough customer due diligence and suspicious activity reporting. The report highlights several enforcement actions taken against firms and individuals involved in financial crimes, showcasing FINRA’s commitment to maintaining market integrity and protecting investors.

Crypto Assets Developments

FINRA addresses the growing involvement of member firms in crypto-related activities and the associated risks. The report emphasizes the need for firms to have robust compliance frameworks to manage the unique risks of crypto assets, including fraud and market manipulation. FINRA is focused on ensuring that firms adhere to existing regulations while also adapting to the evolving landscape of digital assets. This includes enhanced due diligence, investor protection measures, and the proper disclosure of risks associated with crypto products.

Firm Operations

This section highlights the importance of strong operational risk management practices, especially in the context of technological advancements and increased cyber threats. FINRA underscores the need for firms to maintain comprehensive business continuity plans, implement effective cybersecurity measures, and ensure the proper management of third-party vendors. The report also discusses the importance of ongoing training and awareness programs for staff to mitigate operational risks, particularly in a remote or hybrid work environment.

Communications and Sales

FINRA focuses on the regulation of communications between firms and their customers, particularly in the context of digital platforms and social media. The report stresses the importance of transparency and accuracy in marketing materials and customer communications. Firms are encouraged to establish strong supervisory systems to oversee sales practices, ensuring that they are fair and not misleading. The section also touches on the use of new communication technologies and the need for firms to adapt their compliance programs accordingly.

Market Integrity

The report outlines FINRA’s efforts to uphold market integrity through vigilant surveillance, examinations, and enforcement actions. Key areas of focus include detecting and preventing market manipulation, insider trading, and other illicit activities. FINRA employs advanced analytics and technology to monitor trading activity and identify suspicious behavior. The organization also works closely with other regulators to ensure coordinated responses to potential threats to market integrity.

Financial Management

FINRA emphasizes the importance of sound financial management practices within member firms, particularly in areas such as capital adequacy, liquidity management, and financial risk management. The report discusses the need for firms to comply with financial responsibility rules and to maintain sufficient capital reserves to withstand economic stress. Additionally, FINRA highlights the importance of regular financial reporting and audits to ensure transparency and accountability.

For more in-depth information, you can review the full report here.

FINRA PROVIDES GUIDANCE ON FINANCIAL ADVISOR SUCCESSION PLANS

Herskovits, PLLC — Thu, 10 Nov 2022 20:58:38 GMT

FINRA recently released Regulatory Notice 22-23 providing guidance on what firms should consider when constructing succession plans for Financial Advisors (“FAs”) who will no longer service their customers do to expected or unexpected life events.

The Need for a Plan

The Notice begins by listing the various cost/benefits of having or not having a succession plan, which would seem obvious to all. It takes no great imagination to see the benefits of a sound succession plan in the event of an FA’s sudden death or the consequent difficulties of not having such a plan. The Notice, however, provides some interesting real-life anecdotes that FINRA Staff have witnessed of the years regarding succession failures and successes.

The Notice also addresses the much trickier issue of an FA’s possible diminished capacity. FINRA noted that some firms have implemented comprehensive policies regarding possible diminished capacity among employees. These include:

training on signs of cognitive decline,
having a formalized escalation process to raise concerns,
establishing a diminished capacity committee to evaluate and decide next steps,
developing a committee to evaluate representatives’ limitations, engage their physicians, protect their privacy and implement working arrangements that comply with relevant employment laws and accommodated their disabilities; and
engaging with representatives and, depending on the circumstances, supporting the representatives with implementing a new working arrangement, developing a succession plan, providing assistance with performance issues or recommending termination.

Types of Plans

FINRA notes that there is no set way to craft a succession plan and that the complexity and details of any plan may vary greatly based on the firm but, in general, plans can broadly be divided into two categories: (1) internal programs, or (2) an external sale or other transaction.

Internal programs can come in many forms. One answer to the succession problem is for firms to encourage teams of FA’s to work together. Many large firms are actively encouraging FA’s to join teams and actively discouraging solo FA’s. The team can come in different forms. For example, it could consist of two or more FA’s of similar seniority who put a plan in place to purchase the others book of business should the need or desire arise. The team could also involve the hiring of younger FA’s with the goal of developing them to someday take over the more senior FAs book.

An FA, not with a team, might designate in advance an FA as his successor or the firm may make such designation, in each case informing customers of the new arrangement. Many, if not all, of these transition plans incorporate agreements to pay retiring representatives commissions once they leave.

External plans generally consist of a sale of the book of business to another firm or an FA at another firm or a merger of two firms. In the case of an external succession plan, the retiring FA often agrees to continue to work for a certain amount of time to help transition the clients to the new FA.

Relevant FINRA Rules

FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information) requires firms to adopt Business Continuity Plans (“BCPs”) designed to ensure that firms continue to meet customers’ needs in the event of an emergency or significant business disruption. Depending on the size of the firms and role of an individual FA, a succession plan may need to be part of the BCP.

A member firm’s succession plan may involve the Membership Application Program rules, FINRA Rules 1011 – 1019, that could include filing a Continuing Membership Application (CMA), or engaging in the materiality consultation process (MatCon). A change in ownership could trigger an obligation for member firms to file a CMA under FINRA Rule 1017 (Application for Approval of Change in Ownership, Control, or Business Operations). Rule 1017(a) specifies the changes in firms’ ownership, control or business operations that require a CMA, such as a merger with another member firm; an acquisition or transfer of 25 percent or more of the member firm’s assets; or a material change in business operations as defined in FINRA Rule 1011(m). In general, the Notice encourages firms to work closely with their Risk Monitoring Analysts at FINRA and share relevant succession planning for control person.

The Notice also highlights the concern of a succession being necessitated by the lengthy suspension or bar of an FA. In these situations, FINRA sees a heighted risk that the disciplined FA may sell his book of business to another FA who will improperly act as a proxy while sharing commission with the former FA. FINRA suggests that firm’s monitor for, “an unusually high degree of engagement between the representative and former representative or an unusually low degree of engagement between the new representative and that representative’s customers . . . .” FINRA also suggests that firm’s conduct customer “check-in calls” to determine of the terminated FA is improperly engaging with former customers.

Firms will also have to consider the payment of commissions to an unregistered person if that is part of the succession plan. FINRA Rule 2040 governs the payment of transaction-based compensation by member firms to unregistered persons. Subject to conditions, under Rule 2040(b), member firms can pay continuing commissions to their “retiring registered representatives,” after they cease to be associated with the firms, derived from accounts held for continuing customers of the retiring registered representative regardless of whether customer funds or securities are added to the accounts during the period of retirement.

Rule 2040(b) incorporates guidance from prior SEC no-action letters on the payment of commissions to retired registered representatives (referred to herein as SEC Staff Retired Representatives Guidance). Accordingly, firms and representatives who are drafting, reviewing or executing agreements for continuing commission payments to retired representatives should consider the requirements of Rule 2040 and the prior SEC Staff Retired Representatives Guidance. See SEC No-Action Letter to the Securities Industry and Financial Markets Association and SEC No-Action Letter to Amy Lee, Chief Compliance Officer, Co-CEO, Packerland Brokerage Services Questions for Consideration

The Notice concludes with a lengthy set of “Questions for Consideration” with regard to succession planning. For example, FINRA urges firms to consider such things as:

Does the firm have a plan that addresses both retirement as well as unplanned life events?
Does the plan account for both external and internal transitions?
Are there different procedures for key personnel?
Does the firm’s plan address risks of diminished capacity?
Are written succession agreements required? Can they be customized?
Does the plan address FAs’ disciplinary histories and other regulatory risks?
Does the plan address continuing commissions in a way that complies with FINRA Rule 2040?
Does the plan protect nonpublic customer information?
Does the plan address the required customer communications necessary upon transition?

These are only a small sample of the questions that FINRA poses and suggests that firms consider when constructing a succession plan. What the Notice makes abundantly clear is that, given that over 16% of all FAs are over the age of 60, the issue of succession is only going to grow in the coming years and firms would be wise to be prepared for the many pitfalls involved.

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FINRA HITS AN FA FOR FAILING TO DISCLOSE BENEFICIAL OWNERSHIP OF AN ACCOUNT

Herskovits, PLLC — Sun, 29 Dec 2019 20:41:08 GMT

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.

Relevant Rules FINRA Rule 3210

This rule is called “Accounts At Other Broker-Dealers and Financial Institutions.” The basic requirements of this rule are:

You need written permission from your member firm to open or maintain an account at another institution in which securities transaction can be effected.
You need to inform the executing member of your association with an employing member.
This rule applies to any account “in which the associated person has a beneficial interest.” Beneficial ownership is presumed for accounts of the FA held by:
- The spouse of the FA;
- The children of the FA;
- Any other related individual over whose accounts the FA has control; or
- Any other individual over whose account the FA control and to whom the FA offers material financial support.

FINRA Rule 3270

This rule is called “Outside Business Activities of Registered Persons.” The basic requirements of this rule are:

You need to give your employer prior written notice of any business activity outside the scope of the relationship with your firm.
This includes being an employee, independent contractor, sole proprietor, officer, director or partner of any business from which you receive compensation or expect to receive compensation.
EXEMPTED from this rule are passive investments and activities subject to the requirements of Rule 3280 (private securities transactions of an associated person).

Sanction Guidelines

According to FINRA’s Sanction Guidelines, failing to comply with Rule 3210 can result in a fine between $1,000 and $39,000 and “in egregious cases” a suspension up to 2 years or a bar. For undisclosed outside business activities, the Sanction Guidelines provide for a fine between $2,500 and $77,000 and a suspension of 10 days to 3 months.

Upshot of Carneglia’s Alleged Violations

FINRA suspended Carneglia for 2 months and fined him $15,000.

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FINRA ACCUSES NY LIFE OF FALSIFYING CUSTOMERS’ INVESTMENT OBJECTIVES: OUCH

Herskovits, PLLC — Thu, 21 Nov 2019 21:26:03 GMT

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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