The Financial Industry Regulatory Authority (FINRA) is on a roll and it’s only the middle of January! The Authority already has published its January 2017 update of disciplinary actions against dozens of firms and individuals for violations of FINRA rules; federal securities laws, rules and regulations; and the rules of the Municipal Securities Rulemaking Board (MSRB). Many of those fines and censures were for a lack of adequate written supervisory policies and procedures (WSPs).
Big firms = big fines and big censures
J.P. Morgan Securities LLC was censured, fined $500,000 and required to certify to FINRA, within 90 days of the issuance of the AWC, that it has adopted and implemented written supervisory policies and procedures reasonably designed to supervise the execution and approval of powers of attorney (POAs) for private bank customer accounts submitted by non-U.S. resident customers.
The firm consented to the sanctions and to the entry of findings that it failed to adequately supervise the execution and approval of POAs for its private bank customer accounts submitted to the firm by non-U.S. resident customers. The findings stated that the firm failed to detect and investigate “red flags” and/or other irregularities in hundreds of these POAs, including instances where the POAs lacked information required by the firm’s procedures, such as certain dates and signatures. FINRA also found that the firm further failed to detect and prevent the practice by some of its representatives and associates of signing the POA forms as witnesses, despite not having actually witnessed the signatures. Moreover, once a POA was executed, it was submitted to the private bank’s account opening group (AOG) for review, including whether the POA had been executed according to the firm’s procedures. The AOG’s review included checking to see whether the POAs were properly dated, witnessed and notarized, as applicable. Two account-opening specialists reviewed each POA. For brokerage accounts, a third review was conducted by a private bank supervisory manager who held a securities license.
Despite this review, the firm failed to enforce its own procedures and failed to properly follow-up and investigate red flags and/or other irregularities in hundreds of the POAs, including but not limited to instances where a non-notary acting as a witness signed on the notarization line, where the signature and/or witness dates were blank or in conflict, and where a signature required by firm procedures was missing. The findings also included that by failing to adequately supervise the execution and approval of customer POAs for private bank accounts, the firm kept and maintained POAs in its records that contained inaccurate information.
FINRA found that once the firm identified the problem, it required relevant personnel to undergo additional training. Despite such training, although their frequency did diminish, irregularities in the POAs continued through the end of 2015.
Capital One Investing, LLC also submitted an AWC in which the firm was censured, fined $500,000, and required to review its supervisory systems and procedures regarding recordkeeping and the accuracy of information displayed to customers to ensure that current systems and procedures are reasonably designed to achieve compliance with all securities laws and regulations, including Rule 17a-3(a)(17) under the Securities Exchange Act of 1934 (Exchange Act) and FINRA Rules 2010, 2210(d)(1)(A) and 4511. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it collected suitability information and made suitability determinations for approximately 730,000 customers who used an online tool Capital One Investing provided. The findings stated that the firm failed to send and create a record that it sent certain account information to these customers within 30 days of opening the accounts, and to approximately 650,000 of these customers at 36-month intervals after the accounts were opened.
FINRA found that the firm failed to establish and maintain a supervisory system that was reasonably designed to achieve compliance with Securities and Exchange Commission (SEC) and FINRA recordkeeping rules, and FINRA advertising rules.
FINRA targets smaller firms too
One lucky ducky, Aperture, LLC (dba OptionsHouse fka tradeMONSTER) was censured and fined $25,000. Not a lot, but not chump change either!
Without admitting or denying FINRA’s findings, Aperture consented to the sanctions and to the entry of findings that very shortly after entering an erroneous order, a firm customer realized his error and contacted the firm within the time permitted under the relevant exchange’s rules to request a review and bust of his trade due to obvious error. Aperture failed to timely contact that exchange about the customer’s request and the trade was not busted. The lack of “bust” led to a loss for the customer that was ultimately settled between Aperture and its client. However, the customer filed a complaint and FINRA’s examination of the firm revealed that the firm did not have adequate systems and procedures, including WSPs, to handle customer bust requests until more than three years after the customer contacted the firm.
Are you taking care of your regulatory business?
Okay. It’s clear that for the foreseeable future, the regulators are still coming. Will you be ready? All of us — broker-dealers, RIAs, futures traders, muni bond dealers, etc. are still in the regulator gun sights.
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