NASD Rule 3010

Wells Fargo Sanctioned by FINRA Over Allegations of Supervisory Failures

November 25, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Wells Fargo Advisors, LLC (Wells Fargo) and imposed a $150,000 fine over allegations that the firm failed to establish, maintain and enforce a supervisory system that was reasonably designed to adequately review and monitor the transmittal of funds from the accounts of customers to third party accounts in violation of NASD Rules 3010, 3012(a)(2)(B)(i) and FINRA Rule 2010.

Wells Fargo is a FINRA member and a full service broker-dealer with its principal offices located in St. Louis, Missouri. Wells Fargo employs over 20,000 registered individuals and maintains over 7,000 registered locations.

Under FINRA Rule 3010, a brokerage firm owes a duty to properly monitor and supervise its employees. The rule states that “[e]ach member shall establish and maintain a system to supervise the activities of each registered representative…that is reasonably designed to achieve compliance with applicable securities laws and regulations…”

Merrimac Corporate Securities, Inc.’s President and CEO Suspended Over Failure to Supervise Allegations

November 11, 2013 | by Staff Attorney

Stephen Douglas Pizzuti (Puttuti) and David Walton Matthews, Jr. (Matthews) were recently suspended for three months by the Financial Industry Regulatory Authority (FINRA) over allegations that Pizzuti failed to adequately inquire into Richard’s Pizzuti (Richard) and Daniel Voccia’s (Voccia) outside business activities and involvement in private securities transactions despite his knowledge of their activities. To that end, Pizzuti failed to follow up on “red flags” regarding Richard’s and Voccia’s investment activities. In addition, FINRA also found that Matthews, Merrimac’s Chief Compliance Officer, also failed to supervise Richard and Voccia investment activities.

Pizzuti controls Merrimac Corporate Securities, Inc. (Merrimac) and was the firm’s Chef Executive Officer during the relevant period. Pizzuti, as the managing principal of Merrimac and the firm’s CEO, had overall responsibility for the Merrimac’s compliance policies. Matthews became President of Merrimac in early 2004. Matthews was also the Merrimac’s Chief Compliance Officer until mid-2008 but thereafter and remained the Merrimac’s President. Matthews reports directly to Pizzuti.

FINRA found that from at least 2006 to April 2009, Pizzuti failed to reasonably supervise the outside business activities and private securities transactions of Richard and Voccia. Both Richard and Voccia were registered representatives at Merrimac.

Sunset Financial Services Fined By FINRA Over Nontraditional (Leveraged) ETF Sales

October 16, 2013 | by Staff Attorney

Between March 16, 2009, and September 21, 2012, FINRA alleged that Sunset Financial Services, Inc., (Sunset) failed to establish and maintain a supervisory system regarding the sale of leveraged or inverse exchange-traded funds, otherwise known as nontraditional ETFs, that was reasonably designed to comply with NASD Conduct Rule 3010.

Sunset has its principal offices in Kansas City, Missouri and is wholly-owned by Kansas City Life Insurance Company, Inc., an insurance company. Sunset has approximately 302 branch offices, 504 registered individuals and 197 non-registered individuals associated with the firm.

FINRA alleged that Sunset’s written supervisory procedures did not address the selling of nontraditional ETFs in any fashion. A leveraged ETF employs financial debt in order to amplify the returns of an underlying stock position. Leveraged ETFs are generally available for most indexes like the S&P 500 and Nasdaq 100. For example, a leveraged ETF with 300% leverage will return 3% if the underlying index returns 1%. Nontraditional ETFs can also be designed to return the inverse of the benchmark.

FINRA Fines Brokerage Firm Over Misleading Variable Annuities Disclosures and Failure to Supervise

October 12, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) fined brokerage firm Financial West Investment Group, Inc. d/b/a Financial West Group (Financial West Group) over allegations between March 2009 and May 2010, the firm did not provide accurate variable annuity disclosures to customers concerning certain fees and charges. FINRA also alleged that Financial West Group failed to have an adequate written supervisory procedure to ensure that customers received accurate disclosures about these fees and charges. Finally, FINRA alleged that Financial West Group did not adequately enforce its policies for reviewing emails. In resolving these allegations Financial West Group paid a $35,000 fine.

Financial West Group’s main offices are in Westlake Village, California. The firm has approximately 116 registered branch offices and employs 290 registered brokers.

FINRA alleged that between March 2009, and May 2010, the Financial West Group used forms called variable annuity disclosure and investment form, request to switch investments form, and the product comparison worksheet to inform customers of various features of deferred variable annuities. The forms included information concerning the potential surrender period and surrender charge, potential tax penalty if customers sell or redeem deferred variable annuities before reaching the age of 59 1/2, mortality and expense fees, the potential charges for and features of riders, the investment options, death benefits, payment options, and risks disclosures. However, according to FINRA, Financial West Group did not provide accurate disclosures to customers in 28 out of 93 (30%) of the variable annuity transactions and exchanges reviewed by the regulator.