Even Relatively Small Fines Hurt

SEC Hits Morningstar
May 20, 2020
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June 2, 2020

Even small regulatory fines, penalties, and suspensions hurt

Not every fine issued by the financial services industry regulators is a significant dollar fine. That doesn’t mean they don’t hurt – particularly when the company on the receiving end is not a mega-firm, but a solo or boutique operation.

Even during the pandemic, FINRA is busy

The month of May isn’t over yet, but the Financial Industry ReguRellatory Authority (FINRA) is hardly slowing down. Most of the targets prior to Memorial Day were small organizations charged, fined, and penalized for easily-remedied inactions, oversights.

Here are just a handful of companies and individuals caught in FINRA’s crosshairs – mostly for supervisory shortcomings:

Crest Partners, LLC – $67,000

FINRA censured and fined Crest Partners, LLC $67,000, and required to revise its WSPs. FINRA reports that the firm failed to properly qualify and register its chief compliance officer (CCO) as a Securities Trader Principal with FINRA. The CCO, a firm principal by virtue of her position as an officer of the company, had supervisory responsibility over the securities trading activities of the firm’s securities traders. Moreover, FINRA also found Crest Partners’ market access controls and supervisory procedures were unreasonable. Risk management controls were found not reasonably designed to prevent the entry of orders that exceeded appropriate pre-set credit thresholds in the aggregate for each customer by rejecting orders if those orders would exceed the applicable credit thresholds. The firm relied solely on customers’ trading activity in selecting customer credit thresholds. But the thresholds the firm implemented were not reasonably related to customers’ actual trading activity. The firm failed to establish risk management controls and supervisory procedures reasonably designed to prevent the entry of erroneous orders, by rejecting orders that exceeded appropriate price or size parameters, on an order-by-order basis or that indicated duplicative orders. The findings also included that the firm failed to publish accurate and complete reports regarding its routing of customer orders and failed to conduct supervisory reviews of the reports. The firm also failed to notify its customers in writing at least annually of the availability of the firm’s order routing statistics.

Citigroup Global Markets Inc. – $160,000

FINRA censured and fined Citigroup Global Markets $160,00 for failing to transmit Reportable Order Events (ROEs) to the Order Audit Trail System (OATS™) and improperly submitted route reports to OATS that it was not required to report. The firm submitted corresponding trade reports to FINRA’s transaction reporting facility (TRF) and over-the-counter reporting facility (OTCRF) that failed to include execution timestamps in milliseconds when the firm’s system captured time in milliseconds. FINRA also found Citigroup Global Markets failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.

MML Investors Services, LLC – $75,0000

MML Investors was censured and hit with a $75,000 FINRA fine for failing to prevent terminated registered and associated members from continuing to access customer records and information, including non-public personal information. The firm’s parent company had apparently entered into an agreement and acquired a FINRA member firm from its parent insurance company but failed to ensure that access to a third-party system was limited to only those former representatives of the acquired firm for whom access was agreed to be given. As a result, additional unauthorized persons had access to the third-party system after the acquisition. Because MML was unaware that these individuals had access to the third-party system after the acquisition, it did not notify the parent insurance company when those former members had left the firm. As a result, the parent insurance company did not shut off their access to the third-party system in a sufficiently timely manner.

First Manhattan Co. – $100,000

FINRA censured and fined First Manhattan $100,000 and paid restitution to customers in the total amount of $48,220.64, plus interest for failing to purchase municipal securities for its customers at prices that were fair and reasonable in relation to the prevailing market conditions. First Manhattan acquired the securities from a single broker-dealer, without considering the prices of other competitive offers. FINRA also found that the firm failed to adopt, maintain, and enforce WSPs reasonably designed to achieve compliance with Municipal Securities Rulemaking Board (MSRB) Rule G-30.

There were more FINRA fines and censures, but we think you get the point

Could the lack of internal oversight have been avoided? Yes. A vigilant, well-run compliance system can spot irregularities and give an attentive compliance team a chance to nip exposures before they get out of hand. Patrina can help. We’ve built our business based on helping organizations keep track of “bad apples,” and stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective systems specifically designed for the financial services and insurance industries. Be smart. Be covered. Let’s talk.

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