Articles Tagged with supervision

shutterstock_93851422The Financial Industry Regulatory Authority (FINRA) brought and enforcement action against broker Jonathan Williams (Williams) (FINRA No. 20150452689) resulting in a bar from the securities industry alleging that Williams failed to provide FINRA staff with information and documents requested. The failure to provide those documents and information to FINRA resulted in an automatic bar from the industry. FINRA’s document requests related to the regulators investigation into claims the Williams falsified certain bank records and potentially commingled client funds in a bank account under his control.

FINRA’s investigation appears to stem from Williams’ termination from NYLife Securities LLC (NYLife) in March 2015. At that time NYLife filed a Form U5 termination notice with FINRA stating in part that the firm discharged Williams under circumstances where there was allegations that Williams commingled client funds. It is unclear the nature of the outside business activities from publicly available information at this time. However, from the three customer complaints filed against Williams potentially relating to these activities, the clients allege that Williams sold those customers CDs that were issued by Mid-Atlantic Financial and that the funds used to purchase these CDs were withdrawn from accounts with NYLife.

Williams entered the securities industry in 2000. From February 2006, until April 2015, Williams was associated with NYLife out of the firm’s Timonium, Maryland office.

The Financial Industry Regulatory Authority (FINRA) fined broker-dealer, Berthel Fisher & Co. Financial Services and its affiliate, Securities Management & Research, Inc., a combined $775,000. FINRA alleged supervisory deficiencies, including Berthel Fisher’s failure to supervise the sale of alternative investments. FINRA also found that Berthel Fisher’s failure to supervise extended to non-traditional exchange traded funds (ETFs).

FINRA found that from January 2008 to February 2012, Berthel Fisher had inadequate supervisory systems and lacked proper written supervisory procedures with regards to the sales of these alternative investments, namely non-traded real estate investment trusts (REITs), managed futures, oil and gas programs, equipment leasing programs, and business development companies. In its report, FINRA also alleged that some investors were sold these products at a level of concentration that exceeded their respective investment objectives, making the sales and recommendations unsuitable. FINRA also claims that Berthel Fisher failed to train its employees on individual state suitability standards.

FINRA also found that from April 2009 to April 2012, Berthel Fisher did not have a reasonable basis for the sale of leveraged and inverse ETF’s. Before a registered firm may allow its registered representatives to recommend such products to its customers, it must conduct adequate research and review. Through its investigation, FINRA learned that Berthel Fisher representatives recommended approximately $49 million in these nontraditional ETF’s. Leveraged and inverse ETF’s expose holders to amplified movements that tend to deviate from their related benchmarks over extended periods of time. These products are often focused on short-term investment returns and subject to extreme movements during volatile markets, with the potential for significant loss of principal. According to FINRA, Berthel sold these products to conservative, buy-and-hold investors, sales that FINRA ultimately deemed unsuitable.

The Financial Industry Regulatory Authority (FINRA) fined Barclays Capital Inc. (Barclays) $3.75 million for systemic failures relating to the failure to preserve electronic records, emails, and instant messages in the manner required for a period of at least 10 years.  The retention of electronic correspondence and records is critical for the proper supervision of brokerage activities.  Without a proper record retention system, brokerage firms are essentially blind to certain types of securities misconduct.

Federal securities laws and FINRA rules require that business electronic records must be kept in non-rewritable, non-erasable format — also referred to as “Write-Once, Read-Many” or “WORM” format — to prevent alteration.  The Securities and Exchange Commission (SEC) has stated that a firm’s books and records are the primary means of monitoring compliance with the securities laws.

FINRA found that from at least 2002 to 2012, Barclays failed to preserve many of its required electronic books and records—including order and trade ticket data, trade confirmations, blotters, and account records in WORM format.  FINRA found that Barclays retention failures were widespread and included all of the firm’s business areas.  Thus, FINRA alleged that Barclays was unable to determine whether all of its electronic books and records were maintained in an unaltered condition.

As we have reported, claims of churning, excessive trading, and failure to supervise have plagued J.P. Turner & Company, L.L.C. (JP Turner) brokers, among other misconduct.  Recently, the Financial Industry Regulatory Authority (FINRA) imposed sanctions against Herman Mannings (Mannings), a JP Turner supervisor, concerning allegations that from February 2009, through October 2011, Mannings failed to reasonably supervise the activities of a registered representative to prevent unsuitable mutual fund switching.

On August 20, 2002, Mannings became registered with JP Turner.  On February 10, 2003, Mannings was registered as a General Securities Principal at JP Turner.  FINRA’s supervisory rule provides that each brokerage firm must establish, maintain, and enforce written procedures to supervise the types of business it engages in.  Supervision of registered representatives, registered principals, and other associated persons must be reasonably designed to achieve compliance with applicable securities laws and regulations.

FINRA found that from February 2009, through October 2011, Mannings was an Area Vice President for JP Turner and his responsibilities included the supervision of at least 30 branch offices and as many as 60 representatives. According to FINRA, a registered representative referred to as only by the initials “LG” was one of the representatives that Mannings supervised. FINRA found that LG effected approximately 335 unsuitable mutual fund switches in the accounts of 54 customers without having reasonable grounds for believing that such transactions were suitable for those customers.

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Center Street Securities, Inc. (Center Street) concerning allegations that the firm failed to establish, maintain, and enforce adequate supervisory systems and written supervisory procedures to monitor the use of external email accounts to conduct firm-related business by the firm’s registered representatives.  The firm was fined $30,000.

Center Street has been a FlNRA member since February 7, 1991 and employs approximately 84 registered persons out of 74 branch offices.  Center Street’s principal office is in Nashville, Tennessee.  Center Street sells variable life insurance and annuities, mutual funds, private placements, options, corporate equities, debt securities, U.S. government securities and municipal securities.

The duty to supervise is a critical component of the securities regulatory scheme.  The duty to supervise is an affirmative responsibility of all brokerage firms.  The SEC has found that effective supervision by a broker-dealer must provide effective staffing, efficient resources and a system of follow-up and review to determine that any responsibility to supervise is being diligently exercised.  Evidence that there is a variance between the conduct called for by a firm’s procedures and the actions actually undertaken by a firm supports a finding of liability and failure to supervise.

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