FINRA Regulation

FINRA Implements New Rule and Procedures to Prevent Financial Exploitation of Seniors

April 11, 2017 | Herskovits, PLLC

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New FINRA Rule 2165 (Financial Exploitation of Specified Adults) and Amendments to FINRA Rule 4512 (Customer Account Information)

America’s population is rapidly aging. The number of US residents over the age of 65 is expected to double over the next 30 years. Today, seniors, specifically baby boomers, control 50% of all existing investable assets across the country.

This portion of the US population has a combined net worth of over $30 trillion. According to a 2016 survey by Public Policy, about one in five Americans over the age of 65 have “been taken advantage of financially in terms of an inappropriate investment, unreasonably high fees for financial services, or outright fraud.”

FINRA Fines Credit Suisse $16.5M for Anti-Money Laundering Program Failures

January 17, 2017 | Herskovits, PLLC

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Credit Suisse Securities U.S.A. LLC has agreed to pay $16.5 million to resolve Financial Industry Regulatory Authority (FINRA) allegations that the firm violated anti-money laundering (AML) program regulations, supervision requirements and other policies, FINRA reported Monday.

Specifically, FINRA found that Credit Suisse’s U.S. division relied solely on registered representatives to report suspicious trading, who then failed to escalate or investigate high-risk activity. In addition, the firm inadequately implemented its automated surveillance system, opted not to use available suspicious activity identification scenarios and failed to investigate suspicious activities that it did detect.

Considering the significant $16.5 million fine and FINRA’s increased focus on AML violations, broker-dealers should take this opportunity to re-examine their own AML programs for potential deficiencies.

FINRA Enforcement Focus 2017: 6 Common Broker-Dealer AML Program Deficiencies

January 9, 2017 | Herskovits, PLLC

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As the Financial Industry Regulatory Authority (FINRA) continues to crack down on broker-dealers with anti-money laundering program (AML)-related deficiencies, broker-dealers and AML compliance officers (AMLCOs) should take note of the most common AML program compliance deficiencies mentioned in recent FINRA enforcement actions. These top six areas of deficiency are the most likely focus areas of FINRA enforcement going into 2017.

1. Ignoring Risks of Low-Priced Securities

The greatest number of FINRA AML-related enforcement actions in the past year revolved around failures to prevent and detect violations involving large volume sales of low-priced securities. FINRA sanctioned firms for failing to supervise new registered representatives bringing in penny stock business and failing to document and/or investigate high-risk activities involving lump penny stock deposits followed by rapid liquidation and proceeds distribution.

Merrill Lynch Pays $7 Million Penalty for Inadequate Brokerage Account Supervision

November 30, 2016 | Herskovits, PLLC

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The Financial Industry Regulatory Authority (FINRA) has fined Merrill Lynch, Pierce, Fenner & Smith Inc. $6.25 million for inadequately supervising its customers’ use of leverage in their Merrill brokerage accounts. The firm has also agreed to pay approximately $780,000 in restitution to 22 customers whose portfolios were over concentrated and highly leveraged in high-risk Puerto Rican securities, FINRA announced Wednesday.

FINRA’s recent sanctions involve Merrill Lynch’s handling of customer “loan management accounts” (LMAs), lines of credit that allow customers to borrow money from affiliated banks using their brokerage account securities as collateral.

FINRA claims that, between January 2010 and November 2014, Merrill Lynch “lacked adequate supervisory systems and procedures regarding its customers’ use of proceeds” from these LMAs.

FINRA Fines VALIC Financial Advisors $1.75M for Compensation Plan Conflicts of Interest

November 28, 2016 | Herskovits, PLLC

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VALIC Financial Advisors Inc. has agreed to pay $1.75 million to resolve Financial Industry Regulatory Authority (FINRA) allegations that the firm failed to implement reasonable systems to address and review conflicts of interest created by its compensation policy, FINRA reported Monday.

The Houston-based subsidiary of American International Group Inc. allegedly paid its representatives financial incentives to encourage clients to transfer their assets into VALIC’s in-house products and denied compensation to representatives who urged customers toward non-VALIC products.

VALIC Compensation Policy Yields 610% Sales Growth

Capital Acquisition Brokers: Is FINRA’s New Broker-Dealer Category a Good Deal?

October 1, 2016 | Herskovits, PLLC

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On August 18, the U.S. Securities and Exchange Commission (SEC) announced it has adopted new rules proposed by the Financial Industry Regulatory Authority (FINRA) that lessen the requirements for “capital acquisition brokers” (CABs) – firms that serve to advise private placements or mergers and acquisitions and aren’t involved with managing customer accounts or trading securities.

CABs are FINRA members and subject to FINRA bylaws, but in return for limiting their activities, they are held to a relaxed set of rules compared with those of traditional broker-dealers.

Around 16% to 19% of firms currently registered with FINRA are solely engaged in advising clients around financial alternatives, mergers and acquisitions or raising equity capital and debt in private placements.

FINRA’s Top 5 Enforcement Action Sanctions Of 2015

January 6, 2016 | Herskovits, PLLC

In 2015 alone, the Financial Industry Regulatory Authority (FINRA) brought more than 1,510 disciplinary actions, charged $95.1 million in fines and ordered $96.6 million in restitution payments.

Those violations resulting in the largest fines and monetary sanctions imposed in 2015 provide a good indication of the deficiencies FINRA takes most seriously and plans to target in the future. FINRA members will want to pay particular attention to these areas in 2016.

FINRA imposed its top five fine and restitution amounts in 2015 for (1) failing to waive mutual fund sales charges, (2) supervisory failures in Puerto Rico securities, (3) engaging in unsuitable mutual fund transactions, (4) supervisory failures related to trade surveillance, trade confirmations delivery and complex product sales, and (5) selling unregistered microcap shares and related AML violations.

FINRA Identifies “Red Flags” for AML Compliance

May 8, 2013 | Herskovits, PLLC

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FINRA recently entered into a settlement with Gar Wood Securities LLC (the “AWC”) concerning allegations that Gar Wood facilitated the sale of restricted securities in violation of the Section 5 of the 1933 Act, and the Firm failed to identify “suspicious” activity in a customer’s account that should have warranted the filing of a Form SAR-SF. The customer, identified as ICG, was apparently in business of issuing loans secured by low-priced stock. Over a two-year period, ICG supposedly deposited penny stocks into its Gar Wood brokerage account and immediately liquidated the positions and wire transferred the proceeds. ICG’s activity caught the attention of FINRA, which identified the following “red flags” that Gar Wood apparently failed to act upon:

ICG opened a new account and delivered physical certificates representing a large block of thinly traded or low priced securities; • ICG had a pattern of depositing physical share certificates, immediately selling the shares and then wiring out the proceeds of the sale; • ICG deposited share certificates that were recently issued or represented a large percentage of the float for the security; • The lack of a restrictive legend on deposited shares seemed inconsistent with the date the customer acquired the securities or the nature of the transaction in which the securities were acquired; • ICG had limited assets but received an electronic transfer or journal transaction of large amounts of low priced unlisted securities; • Issuers’ SEC filings were not current, were incomplete or nonexistent; and ” Some of the company stocks deposited and sold in the ICG account involved shell companies that issued shares; and • JP Morgan, the original clearing firm for the ICG account, closed the ICG account after JP Morgan identified several red flags related to ICG’s operations.

The AWC is worthwhile reading for attorneys who counsel broker-dealers on anti-money laundering compliance.

FINRA Hits Lincoln Financial With Failure to Supervise Concerning a Ponzi Scheme

February 11, 2013 | Herskovits, PLLC

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Lincoln Financial Securities Corp. recently settled with FINRA concerning supervisory deficiencies over a now-deceased rep (Kenneth Wayne McLeod) who purportedly ran a Ponzi scheme targeting retired government employees (Department of Enforcement v. Lincoln Financial Services Corp. – Case No. 2010025074101). A copy of the FINRA AWC can be accessed here: (FINRA AWC). FINRAs case is a follow-up to an SEC action which charged Kenneth Wayne McLeod’s estate and entities run by Kenneth Wayne McLeod with operating a Ponzi scheme promising investors with tax-free returns of 8% to 10% per year (Securities and Exchange Commission v. Estate of Kenneth Wayne McLeod, F&S Asset Management Group, Inc. and Federal Employee Benefits Group, Inc. – Case No. 10-22078, U.S. District Court, Southern District of Florida). A copy of the SEC Complaint can be accessed here: (SEC Complaint). The supervisory deficiencies noted by FINRA were:

Lincoln Financial failed to place McLeod on heightened supervision given that Lincoln Financial hired McLeod while a state securities regulator had an open investigation.
Lincoln Financial’s registration department failed to inform McLeod’s supervisor of the pending state investigation and the advertising review department failed to inform the supervisor of concerns over McLeod’s advertising.

FINRA Is Looking for Additional Disclosure on Up Front Loans to Reps

January 15, 2013 | Herskovits, PLLC

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It is commonplace in the securities industry for reps to transition from one broker-dealer to another. If the rep is a big producer, it is typical for the hiring firm to offer the rep a “forgivable loan” as an inducement to join. Depending upon the size of the producer’s book, the forgivable loan can equal 100% to 200% of the producer’s trailing 12 month’s of production, and is typically forgiven in equal increments annually over a 7 to 9 year period.

FINRA just published Regulatory Notice 13-02, seeking comments on a proposed rule to require disclosure of “conflicts of interest” relating to recruitment compensation practices. The proposed rule, called “Enhanced Compensation”, has the following components:

For one year following the rep’s start date, the “recruiting” broker-dealer must disclose the “details” of the enhanced compensation “at the time of first individualized contact by the recruiting member or registered person with the former customer after the registered person has terminated his or her association with the previous firm.” That should make for an interesting first conversation with the customer.