SEC, FINRA Enforcement Roundup: Cantor Fitzgerald Hit by FINRA

The firm consented to the described sanctions and to the entry of findings without admission or denial. FINRA Censures Deutsche Bank Securities Over Email Review Search

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.