More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
Among recent enforcement actions taken by FINRA were the censure, fine and order to pay restitution of a firm that charged its customers bogus markups; censure and fine of a firm over supervisory failures related to nontraditional ETFs; censure and fine of a firm on short sale violations; and censure and fine of another firm over supervisory failures.
Morgan Keegan Censured, Fined Over Nontraditional ETFs
Memphis, Tenn.-based Morgan Keegan & Co. was censured and fined $365,000 on findings of failure to establish and maintain a supervisory system to achieve compliance in connection with the sale of nontraditional ETFs in accounts where the firm provided brokerage services.
The firm, now part of Raymond James, neither admitted nor denied those findings, as well as findings that it failed to adequately train registered representatives and supervisors regarding nontraditional ETFs. Instead, the firm supervised nontraditional ETFs the same as it did traditional ETFs, until the issuance of FINRA’s June 2009 Regulatory Notice. The firm also allowed some of its registered representatives to recommend nontraditional ETFs without having performed reasonable diligence regarding their risks and features.
Max International Censured, Fined, Ordered to Pay Restitution
FINRA came down hard on Max International Broker/Dealer Corp. In addition to censure and a fine of $335,000, the firm was ordered to pay $482,111.27, plus accrued interest, in restitution to its customers. The firm appealed FINRA’s decision to the NAC, but later withdrew the appeal.
According to FINRA’s findings, Max International willfully charged fraudulent, excessive, undisclosed markups to customers who bought large volumes of penny stocks in the firm’s proprietary account. In addition, it did not record trade details on order tickets or on other records, did not accurately record sale terms, and did not report trades as required, keeping both customers and regulators from discovering the fraudulent markups.
Numerous other failures in recording, reporting and blotter creation contributed to keeping prices, commissions, and other details of transactions obscured. Other failures cited in FINRA’s findings were failures in electronic storage media (ESM) use, including the moving, changing and/or deletion of electronic files, reuse of backup tapes, and a lack of compliant maintenance of e-mail communications.
There were also failures to enforce supervisory procedures or to preserve evidence of those procedures’ testing and verification; failure to identify the CCO on Form BD in a timely manner; and late filing of the firm’s annual certification.
FINRA censured New York-based ITG Inc. on findings that it violated an SEC Emergency Order period by the execution of short sale orders. In addition, the firm was fined $300,000, which includes disgorgement of approximately $14,000 in commissions received.
ITG neither admitted nor denied FINRA findings that it executed short sale orders in the securities of financial services companies covered by the Emergency Order but had neither borrowed nor preborrowed the shares before it did so. Instead, it misapplied exceptions to SEC Regulation SHO’s locate requirement in its trading systems by improperly designating customer accounts as XMPT, so that they would be treated as exempt from the requirement.
Those accounts thus had the capability to carry out short sale transactions without having to satisfy the locate requirement, and as a result, some of those accounts were submitted for execution short sale orders without a valid locate.
The firm’s supervisory system was also found to have failed in achieving compliance with the Emergency Order and with locate requirements, as well as failing to have WSPs that would have ensured compliance.
HTK Fined by FINRA on Supervisory Failures
Hornor, Townsend & Kent was censured and fined $150,000 by FINRA for failure to establish and maintain a supervisory system, as well as failures regarding WSPs aimed at compliance on direct application business involving previously purchased mutual funds.
The firm neither admitted nor denied FINRA findings that a registered principal’s review of all direct application subsequent transactions involving previously purchased mutual funds, including those in 529 plans, was not provided for in the firm’s system and procedures. In addition, there was no provision for a suitability review of funds in such transactions, nor were procedures in place to review sales charges (breakpoints) or the source of funds.
FINRA found that the firm, instead of supervising in such instances, relied on representatives instead of principals to make suitability determinations on subsequent transactions, and regarded the fact that a principal had carried out a supervisory review for the initial direct application mutual fund transaction as sufficient. No principal of the firm carried out a supervisory review of later transactions, and firm principals didn’t receive or review account statements for direct application products.
The firm also failed to prepare adequate blotters; instead, registered representatives were allowed to keep their own Checks Received and Forwarded blotters, which were processed once a week.