Cetera Fined $1.1M Over AML, Other Failures: FINRA

For these violations, the Cetera firms are censured, fined $1.1 million. The firms' principals have agreed to certify within 180 days that the issues have been remediated.

In an emailed statement Tuesday, Cetera said that the matter "relates to historical supervisory processes from several years ago and was resolved through a standard FINRA settlement with no admission of wrongdoing. The issues identified have already been remediated, and we have further strengthened our supervisory and compliance programs since that time. We take our regulatory responsibilities seriously and continue to invest in robust controls to support our advisors and protect clients."

Order Details

From at least March 2019 through August 2021, the Cetera firms’ supervisory systems were not reasonably designed to achieve compliance with Section 5 of the Securities Act.

The firms required representatives to complete a questionnaire that asked about registration status for deposits of low-priced securities in physical certificate form.

Before April 2021, however, the firms did not require reps "to complete questionnaires for electronic deposits of low-priced securities, unless trading activity was flagged, notwithstanding that most of the low-priced securities the Cetera Firms received during the relevant period were deposited electronically," the order states.

"As a result, customers were frequently able to liquidate low-priced securities before the Cetera Firms received or fully reviewed a completed questionnaire," according to the order.

As FINRA explains, Section 5 of the Securities Act prohibits the offer or sale of any security unless there is a registration statement in effect as to that security or there is an exemption available for that securities transaction.

"Firms that accept delivery of low-priced securities, either in certificate form or by electronic transfer, and effect sales in these securities, are required to have reasonable written procedures and controls in place to prevent participation in an illegal, unregistered distribution of securities," the order states.

"Although the firms reviewed reports with basic information about low-priced security deposits (e.g., account, deposit date, symbol, share price, quantity), the firms’ procedures did not provide reasonable guidance as to how to determine whether the deposited shares were restricted or control securities nor did the procedures provide reasonable guidance on how to determine whether sales of restricted and control securities were exempt from registration requirements," according to the order.

"In practice, the firms did not evaluate Section 5 compliance where securities did not bear a restrictive legend, relying on the representation of the parties who removed it," the order states.

"As a result, the firms allowed customers to deposit and sell millions of shares of low-priced securities during the relevant period, and wire out the proceeds, without detecting or reasonably investigating red flags," FINRA said.

AML Failures

From at least March 2019 through August 2021, the Cetera firms failed to establish and implement policies and procedures that could be reasonably expected to detect and cause the reporting of suspicious transactions involving low-priced securities.

During the relevant period, the firms’ customers collectively sold about 800 million shares of low-priced securities. Low-priced securities transactions generated less than 0.1% of each firm’s total revenue during this period.

Before December 2019, the firms’ written policies and procedures required monthly reviews of low-priced securities deposits and transactions, but not for suspicious activity, FINRA said.

"Nor did the firms’ policies and procedures provide any guidance regarding how to identify suspicious transactions in low-priced securities," FINRA's order states. "The firms’ policies and procedures did not list, nor have any mechanism for monitoring, red flags of suspicious activity in low-priced securities," including those red flags identified in guidance relevant to the firms’ business.

Cetera Advisors also failed to establish, maintain and enforce a reasonable supervisory system, including WSPs, concerning consolidated reports.

The firm’s written procedures required reps to verify any manually entered data on consolidated reports, according to the order.

"However, the firm did not require supervisors to confirm whether reps were complying with this responsibility or verify the accuracy of information that reps manually entered into consolidated reports (for example, by reviewing supporting documents)," the order states.