Every year the SEC and FINRA publish a letter outlining the primary focuses for examiners. These focuses often set forth the hot topics and frequent deficiency areas for their examination visits throughout the year. Below are some of the more notable FINRA cases of 2019. Each of the matters had differing details and areas of concern, but many firms could have addressed these issues had they revisited and reviewed the strength and effectiveness of their firm’s Written Supervisory Procedures (“WSPs”).
In March 2019, Department of Enforcement v. Accelerated Capital Group, Inc. (2012033566205) was censured and fined when FINRA found that some of the firm’s brokers were executing unauthorized trades, sold unideal investments on behalf of their clients, as well as executing trades on an excessive basis. Brokers further failed to monitor customer pre-signed documents for these trades by utilizing old customer signatures on new documents.[1] The failure was not only on the brokers but also the firm in question. Accelerated Capital’s failure to have supervisory procedures to address and prohibit the broker’s behavior as well as notify FINRA led to a$400,000 fine and punishment of the brokers/representatives.
A Birmingham, Alabama broker-dealer, Pro Equities (2016052179401) was censured due to FINRA findings that the firm was excessively charging their clients who purchased mutual funds through the firm. The firm consented to the findings that their representatives were putting clients into Mutual fund classes that contained a variety of fees and structures, which were overall more expensive – with either higher loads and/or increased service fees. The firm’s failure to supervise, review and report resulted in the censure.
A Fargo, North Dakota ex-broker, Derek A. Sunderland (2016049050801) was barred from association with any FINRA member, as he caused his firm to keep inaccurate books and records. It was found that while Sunderland was a supervisor at his firm, he had marked documents “reviewed” when in fact they were not. When FINRA requested the documents in question in a FINRA 8210 inquiry, the firm filed false documents.[2]
A Florida firm was sanctioned by FINRA in March 2019 during Department of Enforcement v. Dakota Securities International Inc. (2016047565702). During a Hearing Panel FINRA found that a suspended Representative of Record (“RR”) was associated with the firm, engaged in investment activities on behalf of the firm, and the firm failed to adjust, report, or cease his actions regardless of his suspension. On top of that, the firm and the suspended RR also misclassified the identity of the representative on over a hundred of trades in the firm’s books and records.[3] The firm’s failure to take any meaningful action after acknowledging the RR’s suspension status resulted in the RR being barred in all capacities and the firm being expelled.
In May 2019, Wilson-Davis & Co. (2014042949704) was fined and censured due to a lack of supervisory procedures within the firm’s Written Supervisory Procedures (“WSPs”) in regard to adequate email review. According to the to the AWC, “the firm lacked any pertinent WSPs, and its methods for reviewing email messages were ineffective and unreasonable given its business, size, structure and customers. The firm’s WSPs did not include procedures describing how it would conduct its supervisory review of electronic communications sent or received by its registered individuals. In addition, the emails selected randomly by the firm’s email vendor did not constitute a reasonable amount of the firm’s overall electronic communications and the search terms that would flag an email for a principal review were not comprehensive enough to yield a meaningful sample of flagged communications.” [4]
July 2019 featured another matter that addresses WSPs, Midtown Partner & Co. LLC (2016051196101). The firm failed in enforcing the policies and procedures in dealing with trading stocks on the firm’s very own watch list and restricted list. Although, the firm had established policies and procedures policies for the actions for their firm, they didn’t hold all employees accountable- particularly the actions of the CEO. The firm also failed to assign a supervisor to monitor the CEO’s trading activities.
Conclusion: Establishing and Updating Your Policies and Procedures
Although all the matters discussed differ in scenario, they had one overarching solution – updating and addressing weaknesses within their firm’s WSPs. Many of the firms failed having a “reasonably designed” procedure or method for reporting, detecting or supervising transactions among their representatives/brokers. By annually reviewing, testing and updating your firm’s WSPs, risks could’ve been greatly mitigated.
The types of tests to be performed, as well as timing and frequency of such tests, will vary based upon the matter being reviewed. It is important that the testing be meaningful and designed to enhance any gaps that might exist in the firm’s compliance program.
For more information on these and other considerations, please contact us at info@jackolg.com, or (619) 298-2880. Also, please visit our website at www.jackolg.com for additional Legal Risk Management Tips.
Author: David M. Sobel, FINRA Specialist; Editor: Michelle L. Jacko, Esq, Firm Managing Partner, Jacko Law Group, PC. JLG works extensively with investment advisers, broker-dealers, investment companies, hedge funds, banks and corporate clients on securities and corporate counsel matters.
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[1] https://www.finra.org/sites/default/files/fda_documents/2012033566205%20Accelerated%20Capital%20Group%2C%20Inc.%20BD%2041270%20Decision%20jm.pdf
[2] https://www.finra.org/sites/default/files/fda_documents/2016049050801%20Derek%20Allen%20Sunderland%20CRD%202996941%20AWC%20jm.pdf
[3] https://www.finra.org/sites/default/files/fda_documents/2016047565702%20Dakota%20Securities%20International%20Inc%20BD%20132700%20%2B1%20Complaint%20REDACTED%20sl.pdf
[4] https://www.finra.org/sites/default/files/publication_file/Disciplinary_Actions_June_2019.pdf