More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
Among recent SEC and FINRA actions were Cantor Fitzgerald being censured and fined and FINRA imposing a $14 million settlement on a Hong Kong-based firm charged with insider trading and fines and censures on findings of supervisory and anti-money-laundering failures; reporting failures; e-mail review; system deficiencies; and research reports.
Cantor Fitzgerald Hit by FINRA on WSPs, Supervisory Failures
Cantor Fitzgerald & Co. was censured by FINRA, fined $150,000, required to revise its WSPs and certify in writing to FINRA that it had adopted and implemented supervisory systems and written procedures reasonably designed to achieve compliance with current Regulation SHO requirements, and provide details of its actions. The firm neither admitted nor denied the findings but consented to their entry.
FINRA found that the firm’s equity trading and marketmaking manual had no compliance or supervisory procedures regarding either Rule 204T or Rule 204 of Regulation SHO; neither did its compliance and supervisory manual contain any compliance or supervisory procedures for SEC Rule 204.
Although the firm’s operations manual contained certain SEC Rule 204 procedures, it had no procedures to monitor fails to deliver in proprietary transactions, and procedures gave no guidance on action(s) to be taken to close out proprietary fails. Findings also stated that operational procedures failed to identify the specific individual(s) responsible for identifying securities that needed to be closed out, and effecting the necessary closeouts and/or buy-ins. Additional failures were found, in execution and in reporting.
Hong Kong Firm to Pay $14 Million SEC Settlement
The SEC announced that a Hong Kong-based firm, Well Advantage, charged with insider trading in July, has agreed to settle the case by paying more than $14 million—double the amount of its alleged illicit profits. The proposed settlement is subject to the approval of Judge Richard Sullivan of the U.S. District Court for the Southern District of New York.
The SEC filed an emergency action against Well Advantage to freeze its assets less than 24 hours after the firm placed an order to liquidate its entire position in Nexen Inc. The SEC alleged that Well Advantage had stockpiled shares of Nexen stock based on confidential information that China-based CNOOC was about to announce an acquisition of Nexen.
Well Advantage is controlled by the prominent Hong Kong businessman Zhang Zhi Rong, who also controls another company that has a “strategic cooperation agreement” with CNOOC. Immediately after the public announcement of the acquisition, Well Advantage sold the shares it allegedly stockpiled for more than $7 million in illicit profits.
Although the firm neither admits nor denies the charges, Well Advantage has agreed to the entry of a final judgment requiring payment of $7.1 million in illegal profits made from trading Nexen stock, and payment of a $7.1 million penalty. The proposed judgment also enjoins Well Advantage from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5.
Sanders Morris Harris, Execs Censured, Fined by FINRA
Houston, Texas-based Sanders Morris Harris (formerly known as SMH Capital) and two of its registered principals, Paul Charles Blackman of Gate Mills, Ohio, and Pak Cheung Fung of Shaker Heights,Ohio, were censured by FINRA and fined. The firm was fined $150,000, $10,000 of which was joint and several with Blackman, $10,000 of which was joint and several with Fung, and $5,000 of which was joint and several with another principal. Blackman was also suspended from association with any FINRA member in any principal capacity for 30 business days.
The firm, Blackman and Fung neither admitted nor denied findings that the firm, acting through Blackman and another principal, failed to reasonably supervise a registered representative. Blackman and the other principal failed to adequately implement the representative’s heightened supervision plan, in that they failed to preapprove low-priced equity transactions he executed, and failed to show they had contacted his customers on a quarterly basis as the supervision plan required.
The findings also stated that the firm failed to establish and maintain a reasonable supervisory system to supervise options trading by its registered representatives at a branch office, instead allowing the branch, at which more than three registered representatives were located, to transact an options business under an unqualified principal supervisor.
The findings also stated that the firm, acting through Fung, its anti-moneylaundering (AML) compliance officer, failed to establish and maintain an adequate compliance program to detect and identify potential “red flags” for suspicious activity, and focused on only one of the four clearing platforms with which the firm had agreements. Fung had no access to trading activity or exception reports for three of the four, and performed no manual review, leaving about 40% of the firm’s business unreviewed. Additional failures were also discovered, including failure to accurately calculate and report the firm’s net capital requirement.
BCG Financial Transaction Reporting Failure Charged by FINRA
BGC Financial was censured and fined $100,000 by FINRA on findings that it failed to report transactions in Trade Reporting and Compliance Engine (TRACE)-eligible corporate and agency debt securities to TRACE within 15 minutes of the execution time, and also reported certain of these transactions to TRACE with an inaccurate trade execution time.
FINRA’s findings also included failure by the firm to transmit all its reportable order events (ROEs) to the Order Audit Trail System (OATS) over numerous business days under one particular market participant identifier (MPID) during a review period. FINRA found that the firm failed to enforce its WSPs related to OATS reporting by failing to identify preferred share transactions effected by the trading desk operating under a particular MPID as ROEs.
The firm consented to the described sanctions and to the entry of findings without admission or denial.
FINRA censured Deutsche Bank Securities and fined the firm $100,000 on findings that the firm failed to develop and enforce reasonably designed written procedures for the review of electronic correspondence in its private client services division. The firm used a lexicon-based search system to flag electronic messages for supervisory review.
This system was designed to capture emails related to certain topics, such as customer complaints or violations of gift and gratuity rules, but it failed to include any search terms to detect communications concerning loans, liens, personal bankruptcies, delinquent payments, bounced checks or other indications that a registered representative might be experiencing financial difficulties and/or violating certain applicable laws, regulations and rules. As a result of its failure to include such search terms in the lexicon, the firm did not review numerous client advisor emails that contained evidence of red flags regarding the misconduct of a client advisor.
According to the findings, the firm lacked an effective system for responding to certain red flags of client advisors’ potential misconduct. As a result, although firm supervisors noted red flags of a specific client advisor’s misconduct, which were communicated to other principals and discussed to a limited degree with the client advisor, the firm failed to detect his ongoing misconduct or provide for reasonable supervision of the client advisor.
The findings also stated that the firm was aware of concerns about the client advisor’s financial situation and his use of a corporate credit card for personal expenses, and that he had placed approximately $60,000 of personal expenses on his corporate credit card, including $30,000 worth of tickets to professional basketball games, failed to pay those charges, bounced personal checks to the credit card company, and had bounced a personal check he had written to another firm client advisor. The client advisor was also generating little revenue at the firm.
FINRA also found that the client advisor’s direct supervisor had raised all of these issues to her management, as well as to individuals in the firm’s branch supervisory office and human resources department. The firm took insufficient action regarding the client advisor’s conduct with respect to bouncing checks, and as a result, his misconduct continued. In addition, the firm took insufficient supervisory steps to ensure that the client advisor was not violating other FINRA rules or harming firm customers. Virtually all of the client advisor’s misconduct could have been revealed by a review of his firm emails or by obtaining and reviewing his checking account statements.
Without admitting or denying the findings, the firm consented to their entry and to the sanctions, and has agreed to undertakings to revise the firm’s lexicon-based search system for electronic message review to include the aforementioned requirements. In addition, an officer of the firm will certify to FINRA in writing that the firm has added such terms to its lexicon-based search system, and reviewed its supervisory system and procedures with respect to its review of electronic correspondence and with respect to responding to red flags of potential misconduct by its client advisors relating to such personal financial difficulties.
The firm will then use its revised lexicon-based search system to review all of the incoming and outgoing electronic correspondence of its client advisors since Jan. 1, 2012, and will report the results of that review, including a summary of any previously unreported required disclosure items or any other findings of violations of NASD or FINRA rules that become apparent as a result of that review, to FINRA.
FINRA Fines, Censures PFS Investments on Deficiencies
FINRA censured Duluth, Georgia-based PFS Investments, Inc., fined it $100,000 and required it to correct deficiencies and submit written certification to FINRA that the deficiencies have been corrected on an impaired system to effect its procedures for compliance. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of FINRA’s findings/
The firm established procedures to comply with the SEC requirement to provide customers with a copy of their account record, or an alternate document with the information within 30 days of the opening of the account and at least every 36 months thereafter for those accounts requiring a suitability determination. Prior to recommending any mutual fund purchases, firm registered representatives obtained customer background information and recorded it on an account application-client profile form. The firm implemented a new system to effect its procedures for compliance, but, according to FINRA’s findings, due to programming, design and human errors, the system failed to detect that certain customers were not provided with a copy of their account record, or an alternate document, within 30 days of the account and at least every 36 months thereafter.
The findings also stated that the impaired system was limited to use for only nonplatform customers, including customers with 529 plans, variable annuities and a subset of customers with mutual funds held at a nonaffiliated transfer agent, which constituted approximately 10% of the firm’s customers. Because the firm was unable to determine which accounts did not receive the account information, it sent account records to all the nonplatform clients.
FINRA found that the firm’s supervisory system and WSPs did not uncover the omission and therefore did not achieve compliance with securities laws and regulations, in that the supervisory system did not reveal that letters for nonplatform transactions had not been sent as required. FINRA also found that in limited instances, customers indicated on their investment profile questionnaire that they had a short investment time horizon but nevertheless made a mutual fund investment. The firm’s records omitted to further document the customers’ rationale for investing in mutual funds so that the firm did not have a record of specific investment rationale for these instances.
Tejas Securities Group Censured, Fined on Research Reports
Tejas Securities Group, Inc. ofAustin,Tex., was censured and fined $100,000 by FINRA on findings that it published several fixed-income research reports on several different issuers that were distributed to institutional clients, and these reports all failed to include the analyst certifications required under SEC Regulation AC.
FINRA found that each of the reports at issue contained a misleading statement that the material and commentary contained in the report represented a sales perspective only and should not be construed as research. This statement was also repeated in the accompanying transmittal message. The findings also stated that the firm failed to establish, maintain and enforce adequate WSPs pertaining to its supervision of fixed income research report activity. Notably, there wasn’t any reference to Regulation AC in regards to fixed income research reports within the firm’s WSPs.
Without admitting or denying the findings, the firm consented to the sanctions and entry of the findings.