Among recent enforcement actions by FINRA were the dismissal of an arbitrator who was found to have falsified his credentials; censure and fine of Charles Schwab & Co. over its anti-money laundering policies and procedures; censure and fines for J.P. Morgan Clearing and J.P. Morgan Securities on improper actions relating to nonmargin equity securities (the former) and inaccuracies in books, records and a FOCUS report (the latter); and censure and fines for PNC Investments LLC for two separate failures—one for rollover and breakpoint charges and one for supervisory failures connected to leveraged ETFs.
FINRA Dropped Arbitrator Over Phony Credentials
One of FINRA’s enforcement actions hit really close to home when the group removed an arbitrator from its roster last year over faked law credentials. News of the removal, however, was not widely known till March 21, when the San Francisco Daily Journal carried the story.
James H. Hardy, who had presided over close to 40 arbitration decisions since 1998 and had seven active cases on his schedule at the time of his removal, is alleged to have “borrowed” the credentials of another James H. Hardy who never served as a FINRA arbitrator.
Former arbitrator Hardy claimed to have obtained his law degree from Southwestern University and passed the bar in California, Florida and New York. However, an investigation by the attorney for a client who lost an arbitration case turned up indications that the arbitrator had never graduated from Southwestern, nor had he ever been admitted to the bar anywhere.
The other James H. Hardy, however, had graduated from Southwestern and practiced in California. The attorney who uncovered the apparent deception, with the aid of a private investigator, had former arbitrator Hardy removed from the case, and now questions are arising about whether the decisions presided over by the former arbitrator can be challenged — even if the normal deadline for appeals has passed.
The former arbitrator has reportedly called the allegations about his credentials inaccurate, and claims that the state bar in California must have lost his records.
This is the second time in less than a year that serious issues about a FINRA arbitrator’s background have surfaced. In the other instance, an arbitrator hearing a case that involved Goldman Sachs was found to have been indicted.
Schwab Censured, Fined on Anti-Money Laundering Measures
Charles Schwab & Co. was censured by FINRA and fined $175,000, as well as ordered to review its AML policies, systems, procedures and training with respect to detecting and reporting suspicious incoming wire transfers. It also must certify in writing to FINRA that policies and procedures are in place to address and correct violations.
According to FINRA, the firm opened accounts for a new investor, through an independent investment advisor, who stated on new account applications that she was an employee of a U.S. financial services firm. The customer sent $96 million in wire transfers from an account the financial services firm owned to the new Schwab accounts, and the wire transfer instructions gave the source of the money as a corporate account in the financial services firm’s name.
However, the customer had initiated the wire transfers from her employer’s account using illicit account access, and no one at Schwab investigated the transfers. The customer then invested some of the funds in mutual funds and money market funds. While she did not make any withdrawals prior to the detection of her theft, she was charged by the U.S. attorney with one count of wire fraud. She pleaded guilty and was sentenced to 63 months in prison.
FINRA said that Schwab relied on a computer system to check accounts for suspicious activity. That system failed to generate any alerts on the incoming wire transfers, and no inquiry was launched because the system also failed to recognize the accounts as related. It also failed to alert on the large dollar amount of the incoming wires, although it should have done that as well — but even if it had, there would not have been enough alerts generated to require an analyst to examine the transactions.
The firm from which the funds were stolen had to notify Schwab that the money was missing, after which Schwab did freeze the accounts and return the money — less approximately $126,000 in investment losses.
Schwab consented to the sanctions but neither admitted nor denied the findings. Nonmargin Equity Securities Cost J.P. Morgan Clearing Corp. $200,000
J.P. Morgan Clearing Corp. was censured by FINRA and fined $200,000 for including nonmargin equity securities in certain portfolio margin accounts and improperly applied strategy-based maintenance margin requirements that were not permitted for positions held in a portfolio margin account.
FINRA pointed out that because nonmargin equity securities couldn’t be held within a portfolio margin account unless the firm applied a 100% regulatory maintenance requirement on a daily basis, the accounts holding those nonmargin securities were undermargined.
The firm neither admitted nor denied the findings, but consented to the sanctions.
J.P. Morgan Securities Censured, Fined on Accuracy Failures
FINRA censured and fined J.P. Morgan Securities LLC $175,000 after it found that the firm failed to maintain accurate books and records and filed an inaccurate Financial and Operational Combined Uniform Single (FOCUS) report. While the firm neither admitted nor denied the findings, it consented to the sanctions.
According to FINRA, the firm’s fixed income settlement system failed to properly account for the cancellation of some forward-settling transactions, instead continuing to post forward adjustment entries for them. While the firm uncovered this failure, it failed to manually correct it until later.
As a result, the firm created erroneous general ledger balances between the trade cancellation and the settlement date, which in turn resulted in incorrect data being fed to the firm’s subledger, causing inaccuracies in FOCUS reports.
Other inaccuracies FINRA found were failure of the firm’s fixed income settlement system to reconcile with its general ledger for hedging portions of two of its high-yield index bond books. These portions of the books were also not captured in the firm’s risk management system, but instead were incorrectly captured in the risk management infrastructure of a firm affiliate. That meant that the firm’s value-at-risk (VaR) calculation was overstated. In addition, FINRA found supervisory review failures.
PNC Investments Hit on Two Separate Violations
PNC Investments LLC found itself the target of two separate FINRA actions. It faces a fine, censure and restitution to customers.
In the first instance, PNC was fined $275,000 and ordered to pay $33,183.72, plus interest, in restitution to customers after FINRA found it failed to maintain a supervisory system that would keep it from violations in the sale of leveraged, inverse and inverse-leveraged (nontraditional) ETFs. Instead, the firm treated nontraditional ETFs in the same way it handled traditional ETFs, regardless of the additional risk and differing behavior between the two types of products.
The firm failed to train personnel to adequately understand the risks and features of nontraditional ETFs, and allowed certain registered representatives to recommend such products to its customers without the appropriate due diligence regarding those products’ risks and features.
In the second instance, PNC was fined $90,000 and has paid restitution to all its customers after FINRA found that the firm failed to apply an appropriate rollover or breakpoint discounts to eligible unit investment trust (UIT) purchases for customers. As a result, the firm overcharged customers a total of $52,040.12.
FINRA also found that the firm failed to adequately enforce its existing written supervisory procedures concerning rollover and breakpoint sales charge discounts to make sure that discounts were properly applied to all eligible UIT purchases by customers.
The firm neither admitted nor denied FINRA’s findings, but consented to the sanctions.
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