More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Goldman Sachs Execution & Trading has been fined $800,000 by FINRA on trade-through failures, and FINRA also took action against ETF prospectus delivery failures by Investors Capital and supervisory failures related to the maintenance of private wealth management customer accounts maintained at a Swiss bank affiliate rather than in house at Morgan Stanley.
FINRA Fines Goldman Sachs Execution & Trading $800,000
Failure to prevent trade-throughs in its alternative trading system have gotten Goldman Sachs Execution & Trading a FINRA fine of $800,000.
According to FINRA, the firm, which neither admitted nor denied the charges, failed to have reasonably designed written policies and procedures in place to prevent trade-throughs of protected quotations in NMS stocks from November 2008 through August 2011 in connection with trading in its proprietary alternative trading system, SIGMA-X.
While the Order Protection Rule generally requires trading centers to trade at the best-quoted prices or route orders to the trading centers quoting the best prices, FINRA found that Goldman did neither. According to the agency, from July 29, 2011, through Aug. 9, 2011, there were more than 395,000 transactions executed in SIGMA-X where the execution traded through a protected quotation at a price inferior to the National Best Bid and Offer (NBBO).
During those eight days of trading, Goldman Sachs was unaware that in these instances it was trading through a protected quotation. The trade-throughs were caused by market data latencies at SIGMA-X and were not detected in a timely manner.
Goldman Sachs, said FINRA, failed to establish, maintain, and enforce written policies and procedures reasonably designed to prevent trade-throughs of protected quotations in NMS stocks. The firm also failed to regularly surveil to be sure its policies and procedures were effective in that manner.
In connection with the approximately 395,000 trade-throughs, Goldman Sachs has returned $1.67 million to disadvantaged customers.
FINRA Fines, Censures Investors Capital for ETF Prospectus Delivery Failures
Investors Capital Corp. was censured by FINRA and fined $100,000 for failure to ensure the delivery of prospectuses to customers of ETFs.
According to FINRA, the firm failed to supervise the sale of ETFs and the firm’s obligations to provide ETF prospectuses to customers. It also had no procedures directly concerning the sale of ETFs or prospectus delivery obligations, and even allowed its representatives to sell ETFs before completing any firm-mandated training.
The firm neither admitted nor denied FINRA’s findings.
Morgan Stanley & Co. LLC was censured by FINRA and fined $100,000 after the agency’s findings revealed that the firm failed to supervise the firm’s private wealth management (PWM) investment representatives on their servicing of bank accounts maintained at a nonmember affiliate.
According to FINRA, non-U.S. individuals and entities opened accounts that were maintained at a Swiss affiliate bank of the firm and serviced by the firm’s PWM investment representatives in the U.S. All bank account holders signed portfolio management agreements that explicitly permitted the bank to delegate asset management to the firm.
The PWM investment representatives’ conduct and supervision was governed by the firm’s policies and procedures applicable to PWM offices. However, there were differences between how those bank accounts were supervised compared with accounts maintained at the firm. No separate supervisory system or procedures were in place to specifically govern the supervision of investment representatives’ servicing of the bank accounts.
While neither admitting nor denying the findings, the firm ended the arrangement that had allowed PWM investment representatives to service the bank accounts.
FINRA Bars Former Equity Trader for Insider Trading in Japanese Securities
FINRA recently barred Kenneth Ronald Allen, a former equity trader at First New York Securities LLC, from the securities industry for trading Japanese securities on the basis of material, nonpublic information that he received from a corporate insider.
Cameron K. Funkhouser, EVP of FINRA's Office of Fraud Detection and Market Intelligence, said in a statement, "Individuals who are registered with FINRA are expected to observe high ethical standards and conduct themselves in accordance with just and equitable principles of trade regardless of where securities are listed."
FINRA's investigation found that in September 2010, Allen placed orders using a firm proprietary trading account from New York City to short sell shares of Tokyo Electric Power Co. Inc. (TEPCO), which is listed on the Tokyo Stock Exchange. Allen created a short position in TEPCO shares while he was in possession of material, nonpublic information that TEPCO was close to announcing a secondary public offering of its securities. Allen obtained the information from a consultant whose source was a Tokyo-based employee of Nomura Securities Co. Ltd., a large Japanese broker-dealer, which underwrote the TEPCO offering.
After receiving the inside information, Allen traded in TEPCO shares between Sept. 15, 2010, and Sept. 28, 2010. TEPCO publicly announced the secondary offering on Sept. 29, 2010, and the market price for its shares declined. Allen covered the short position after the announcement, realizing a profit of approximately $206,000.
FINRA found that Allen's conduct violated FINRA rules to observe high standards of commercial honor and just and equitable principles of trade.
In settling the matter, Allen neither admitted nor denied the charges, but consented to the entry of FINRA's findings.