Supervisory failures cost Merrill, Raymond James, and BNP Paribas Securities/Prime Brokerage big bucks!

In one week, the Financial Industry Regulatory Authority (FINRA) fined BNP Paribas Securities Corp. and BNP Paribas Prime Brokerage, Inc. (BNP collectively) $15 million for anti-money-laundering (AML) and supervisory failures. Then, just two weeks later, FINRA ordered Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch), Raymond James & Associates, Inc. (RJA) and Raymond James Financial Services, Inc. (RJFS) to pay more than $12 million in restitution to customers for their supervisory failures involving 529 Plan shares.

How much money did compliance failures cost the BNP companies?

Lots. FINRA found that from February 2013 to March 2017, BNP failed to develop and implement a written AML program for penny stock deposits and resales, and wire transfers that could reasonably be expected to detect and report potentially suspicious transactions.

In fact, until 2016, BNP’s AML program did not include any surveillance targeting potentially suspicious penny stock transactions despite accepting the deposit of nearly 31 billion penny stock shares worth hundreds of millions of dollars from clients, including from so-called “toxic debt financiers.”

Moreover, BNP also did not implement any supervisory systems or written procedures to determine whether resales of securities, including penny stocks deposited by its customers, complied with the Securities Act of 1933 Section 5’s registration requirements. This failure to supervise meant that BNP facilitated the removal of restrictive legends from approximately $12.5 million worth of penny stocks without any review to evaluate the transactions for compliance.

One of FINRA’s Department Member of Supervision examiners flagged the oversight and referred to Enforcement. The sanctions imposed were influenced by BNP’s lengthy failure to address red flags and the volume of potentially suspicious activity not monitored or reported.

“When customers engage in high-risk transactions,” commented Jessica Hopper, FINRA senior vice president and acting head of Enforcement, “involving low-priced securities and foreign currencies, the firm must devote sufficient resources to its AML program, including transaction and wire movement monitoring, to ensure the system is tailored to the business’ unique money laundering risks.”

How much did supervisor failures costs Merrill Lynch and the Raymond James entities?

Also lots. All parties will have to pay a total of nearly $12 million in restitution to customers who incurred excess fees on their investments in 529 plan savings based on the firms’ failures to reasonably supervise 529 plan share-class recommendations.

Merrill Lynch will pay restitution of at least $4 million relating to the sale of Class C shares to 529 plan accounts with young beneficiaries. RJA has agreed to pay more than $3.8 million in restitution, and RJFS will pay $4.2 million in restitution.

According to FINRA, both entities failed to ensure that registered reps considered the various fee structures when making 529 plan recommendations to customers, particularly for accounts that had young beneficiaries and long-term investment horizons. FINRA specifically pointed out that Merrill Lynch and the Raymond James firms failed to establish and maintain a supervisory system and written supervisory procedures reasonably designed to supervise recommendations of share classes of 529 plans. Neither required registered reps or supervisors to evaluate beneficiary age and the number of years until expected withdrawals, combined with different share class fees and expenses in their recommendations.

“FINRA member firms must be cognizant of all costs to their customers when recommending a product,” FINRA’s Hooper emphasized. This is particularly important where an unsuitable recommendation may cause customers to incur higher fees year-after-year, especially in the case of young beneficiaries. Returning the money to harmed investors as quickly and efficiently as possible,” she added,” remains a priority.”

Could Merrill/Raymond James fines have been bigger?

Yes. However, in determining the appropriate monetary sanction, FINRA recognized the companies’ “extraordinary cooperation.”

Preparation trumps cooperation

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