FINRA hits MBSC with $1 million + for first-time WSP failure
MBSC Securities Corporation has been registered with the Financial Industry Regulatory Authority (FINRA) or its predecessor agencies since 1947 and until now has had no relevant disciplinary history with the Securities & Exchange Commission or any self-regulatory organization, or state securities regulator…until now.
At issue, according to FINRA is the firm’s failure from January 2008 through April 2017 to establish, maintain, and enforce a supervisory system and written supervisory procedures to monitor the movement of funds from customer accounts to third parties. The result was that MBSC paid out $971,289.07 in fees from the accounts of nearly 75 clients to two, third-party advisors on the instruction of those advisors. Worse yet, the fees MBSC paid out exceeded those the advisors were entitled to.
Missteps in a sea of transactions
At the time of this misstep, MBSC managed nearly 17,000 retail customer accounts of which more than 100 had relationships with the two, third-party investment advisors WC and VGA The accounts were opened with MBSC and trading authorization was granted to WC and VGA. The customers provided MBSC with copies of their management agreements which authorized management fee charges from their accounts in accordance with the fee schedule agreed to by each customer. While MBSC generally prohibits wire transfers from customer accounts to third parties, these transfers were permitted at the advisors’ instruction.
Where did things go wrong? MBSC regularly received spreadsheets from WC and VGA listing all customer accounts to be debited management fees and the amounts to be debited. These were journaled to accounts that the advisors held at MBSC and then later transmitted from those accounts to third-party bank accounts per standing instructions. Those spreadsheets were forwarded to MBSC’s clearing firm and executed.
However, WC and VGA routinely submitted fee payment requests in excess of what they were entitled to under their management agreements. The error is that MBSC processed those outsized requests without review or verification. Worse yet, MBSC continued to process requests from VGA after VGA’s state regulator prohibited the advisor from working as a registered advisor.
FINRA determined that MBSC’s supervisory systems and written supervisory procedures were not “reasonably designed to review and monitor the transmittal of funds from customers to third-party accounts.” It had no systems or procedures to review and monitor those transfers, nor procedures for the review of instructions. Moreover, MBSC did not test or verify its procedures relating to the transmittal of funds from customers to third-party accounts as required by NASD Rule 3012(a)(1) and FINRA Rule 310(c)(2).
It wasn’t until April 2017 that MBSC learned that VGA was barred from advising and it immediately suspended all VGA’s trading activities. The firm noted that it had continued to disburse funds because it was unaware of VGA’s registration termination. As part of its settlement with FINRA, MBSC has agreed to pay $971,289.07, plus $242,955.65 in interest to those customers harmed as restitution. MBSC also will no longer permit third-party investment advisors to act or transact on behalf of its customers and has revised its policies and procedures accordingly, but…is that sufficient?
Who is watching your WSPs?
MBSC had written supervisory policies and procedures. Now, following the WC/VGA debacle, it has more. What’s missing is oversight. That’s where Patrina comes in. We’ve built our business based on helping organizations 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 and comprehensive, 8-module compliance solution, and compliant data capture, file storage, records archiving, and designated third-party services specifically designed for the financial services community. Be smart. Be covered.