BD Law Blog - by Georgia Securities Lawyer Joel Beck

Review of FINRA Disciplinary Actions Reported for February

FINRA recently released its reported disciplinary actions for February 2009.  There were a couple of noteworthy cases.

In a case involving Firth Third Securities, Inc. and one of its registered persons, the firm was censured and fined $20,000 ($5,000 joint and several with the individual) and the individual was suspended in all capacities for two months for alleged improper use of the WebCRD system.  FINRA found that the firm and individual failed to obtain written consent from folks seeking to become registered with the firm prior to conducting WebCRD checks on them.  Further, during the search process, the respondents falsely stated that they had obtained such written consent.  FINRA also found that the firm failed to have adequate written supervisory procedures elating to the use of WebCRD, including conducting searches on WebCRD.  This is the first case I can recall where a firm is getting hit for inadequate WSPs relating to this.  I imagine that many firms do not have procedures relating to the use of WebCRD in their WSPs.  (FINRA Case No. 200700733001).

In another case, AXA Advisors, LLC was censured and fined $350,000 (FINRA Case No. EAF0401030001) for failing to maintain email and instant messages.  FINRA found that the firm's systems allowed representatives to modify the settings on their desktop computers to stop outgoing emails from being archived, and to move incoming emails to their desktops to prevent them from being archived by the firm. Email and instant message retention has been a hot topic for the regulators for many years.  Though it looks like this case was opened in 2004, there are likely firms out there today that still have inadequate systems and procedures for preserving electronic communications.  Those who still fail to be compliant in this area will pay a high price when the regulators come knocking.

Finally, FINRA announced settlements with two firms relating to sales of auction-rate securities.  WaMu Investments, inc. (Case 2008013057401) and First Southwest Co. (Case 2008014569701) were both censured and were fined $250,000 and $300,000, respectively, for violations relating to sales of auction-rate securities.  We'll see more of these cases as all of the regulators (SEC, FINRA, and the States) work through these cases to get their pound of flesh.

Are Your Firm's Auditors PCAOB Registered?

FINRA's Information Notice earlier this year reminds firms that even non-public broker-dealers must utilize auditors that are registered with the Public Company Accounting Oversight Board (PCAOB) beginning in fiscal year 2009.  Previously, the SEC had exempted non-public company's from this requirement, but such exemption expired in 2008.  Going forward, firm's financial statements must be audited by a PCAOB registered auditor.

Is Your 2009 Compliance Program Plan Planned?

February 2009 is here already.  Soon, we'll be commenting on how its already December 2009 and the year is almost over.  Before that happens, lets make sure to plan, and execute, your 2009 compliance plan.

As compliance officers and principals should know, each firm must implement an annual compliance plan, to include a continuing education needs assessment, continuing education program, an annual compliance meeting, as well as periodic inspections of OSJs (Office of Supervisory Jurisdiction), branch and non-branch locations.  Go ahead now and get those required action steps planned and on the calendar to ensure sufficient time to perform all necessary assessments and inspections.  And, be sure to contact Joel Beck at The Beck Law Firm if you need a speaker for your annual compliance meeting to discuss current legal and compliance news, disciplinary actions and tips to avoid complaints and arbitrations. 

More on Recent FINRA Enforcement Cases - Supervision and Conversion of Funds

I posted yesterday about my review of FINRA's January published disciplinary actions and the quarterly review of actions.  Two more cases there caught my eye. 

Supervision.  The first one involved a former principal in Arizona.  He was suspended as a principal for one year and fined $15,000 after FINRA found that he failed to properly supervise a broker  and to review trades for suitability.  FINRA explains that the broker made unsuitable recommendations in inverse floaters to public customers who were inexperienced investors with conservative investment objectives.  As a result of the unsuitable recommendations, the customers lost millions of dollars, FINRA says.  (FINRA Case No. 2006005546006).  From the case number beginning with 2006, we know that the exam that led to this action was initiated in 2006, so the conduct is not very recent.  But, especially given the current economic times, supervisors should take note of this. 

Whenever a broker or customer wants to use non-traditional investments, supervision must be stepped up.  Supervisors must be diligent to ensure that any recommendations by the broker are suitable, that the customer is informed about the risks involved and reasonably understands them.  When investors want to trade in securities not suited for them, perhaps its time to fire the client or to, at the least, document that the firm and brokers are not making such recommendations.  Remember, not only are there regulatory ramifications for failing to supervise, but investors often point to deficient supervision in their arbitration claims as well.

Conversion.  The quarterly summary highlighted a conversion case that is just pathetic.  Here's what it says:

FINRA settled a matter that involved a registered representative who
misappropriated $50 from a customer. The customer had earned a
$50 credit by referring two new customers to the representative’s
employer bank. The representative obtained the $50 from the bank
but never deposited the funds into the customer’s account. Instead,
the representative kept the money for himself.
FINRA concluded that this conduct violated NASD Rule 2110 (ethical

standards) and, as a result, barred the representative in all capacities.

What was this dude thinking?  As a former enforcement lawyer, I've handled my share of conversion cases, some large, some small, and some with some pretty complicated cover-ups, but I've never seen one for just $50.  Wow.

FINRA Releases January 2009 Disciplinary Information - Improper Loans on the Rise

FINRA recently released its monthly summary of disciplinary actions for January 2009.  There are many of the routine cases involving private securities transactions, outside business activities, omissions on Forms U-4, improper use of discretion, and forgery.  I noticed an increase in cases involving brokers making or receiving loans to/from customers.   There were 4 cases involving loans with customers reported for this one month. 

Brokers should beware of not only FINRA's Rule on loans with customers, NASD Rule 2370, but also their own firm's procedures on borrowing from or lending to customers.  Under Rule 2370, a broker may not borrow from, or lend to, a customer unless his or her firm's procedures authorize such loan.  in some cases as set forth in the Rule, the broker must have the lending arrangement pre-approved by the firm.  Of course, some firms outright prohibit such loans, and breaking the firm's policy could also be grounds for disciplinary action under NASD Rule 2110.   Regardless of whether its allowed, its not necessarily the best idea, and brokers should consider the consequences of undertaking such an agreement carefully.