TAG | compliance records for brokers
Comments off · Posted by Securities Lawyer in FINRA
Success Trade Securities, Inc. (CRD #46027, Washington, DC) and
Fuad Ahmed (CRD #2404244, Registered Principal, Washington, DC)
submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $100,000. Ahmed was fined $10,000, suspended from association with any FINRA member in any principal capacity for 60 days, and must complete 16 hours of continuing education related to AML compliance in a program acceptable to FINRA. The training must be completed within six months after the issuance of this AWC. Within 30 days following completion of the training, Ahmed must provide FINRA with written proof of completion.
Without admitting or denying the findings, the firm and Ahmed consented to the described sanctions and to the entry of findings that the firm and Ahmed, the firm’s president, CEO, CCO, AML compliance officer (AMLCO) and financial and operations principal (FINOP), did not implement an adequate customer identification program (CIP). The findings stated that out of a sample of accounts, the firm could not produce any customer information, and in fact, did not have an account record at all (such as a new account form) for some of the accounts. The firm could also not evidence that it had verified the identity of these accounts. For the accounts that did have proper identification paperwork, some of the customer identification paperwork provided to the firm and placed in the customer files was completely illegible. The findings also stated that there was little to no surveillance of accounts for suspicious activity. The firm did not utilize any exception reports. Ahmed obtained and manually reviewed biweekly reports from his clearing firm that included all incoming and outgoing wire activity at the firm for a two-week period, but were not conducive to detecting any patterns or to identifying exceptions. The findings also included that although Ahmed initialed the reports, there wasn’t a date to evidence that the reports were reviewed in a timely manner, and there weren’t any notes or other documents to indicate he had reviewed or looked into any wires. Ahmed sampled and reviewed firm accounts on a monthly basis, but did not do so based on a relevant assessment of risk.
The account review did not include customer accounts and was delegated to another principal of the firm who did not understand the review he was supposed to undertake and, therefore, did not conduct any meaningful review.
FINRA found that the firm’s procedures outlined red flags that required a follow-up review. These included transactions that lacked a business purpose, customers with questionable backgrounds, customers that exhibited a lack of concern for transaction costs, customers maintaining multiple accounts for no apparent reason, unexplained wire activity, wires to countries presenting a money-laundering risk, deposits followed by requests to withdraw the funds without apparent purpose, and inflows of funds beyond the customer’s known resources. FINRA also found that the firm did not follow up on any of the red flags noted in its AML compliance program (AMLCP), did not maintain a list of high-risk customers, and did not monitor a sufficient amount of account activity to permit identification of patterns of unusual size, volume, geographic factors, etc. The firm and Ahmed failed to detect and follow up on these red flags indicating that a customer might be engaging in improper and/or illegal activities. In addition, FINRA determined that the firm failed to maintain evidence that an AMLCP was approved in writing by a member of firm management as required. For two years, the firm AMLCP testing was patently inadequate. The test failed to review for suspicious activity, high-risk accounts, red flags or customer account verification; indicated that several areas were not applicable when they clearly were; failed to include an independent sample to ensure that the firm was conducting adequate reviews for AML activity; failed to identify any accounts that were missing customer identification verification; and failed to indicate that the firm was not utilizing any AML exception reports even though the clearing firm made available AML-related exception reports.
Also, FINRA found that in a year, the firm failed to conduct any independent testing of its AML program whatsoever. The firm failed to have an adequate training program for firm personnel with respect to AML issues for two years. Although a year’s annual compliance meeting superficially touched on AML, it was not adequately tailored to the firm’s business.
Furthermore, FINRA found that the firm conducted a securities business despite the fact that it failed to maintain its required minimum net capital. The firm failed to conduct accurate net capital computations and consequently maintained deficient net capital. The inaccurate computations were primarily due to inaccurate net capital treatment of a clearing firm deposit upon termination of the clearing relationship, improper booking of expenses and liabilities, and the firm’s failure to accurately classify allowable versus non-allowable assets. The findings also stated that because of these discrepancies, the firm failed to prepare an accurate general ledger and trial balance and quarterly Financial and Operational Combined Single (FOCUS) report for the quarters associated with the net capital deficiencies. As the firm’s FINOP, Ahmed was at all times responsible for ensuring that the firm complied with its net capital and books and records obligations, and therefore, caused the firm’s violations. The findings also included that during a sample review, the firm failed to report relevant customer complaints and failed to accurately and timely file some customer complaints.
FINRA found that the firm implemented material changes to its business model without obtaining prior FINRA approval; the firm engaged in municipal securities trades without obtaining the appropriate approval from FINRA. FINRA also found that the firm and Ahmed failed to establish and implement an adequate supervisory system and enforce its written procedures; the firm and Ahmed failed to maintain current information regarding Uniform Applications for Securities Industry Registration or Transfer (Forms U4) and Uniform Branch Office Registration (Forms BR), failed to obtain fingerprints when required to do so, and failed to prevent non-registered individuals from acting in a registered capacity. Unlicensed individuals had day-to-day responsibilities that required the firm to take their fingerprints, yet the firm failed to do so. In addition, FINRA determined that the firm and Ahmed failed to maintain advertising material, failed to timely file advertising material with FINRA Advertising Regulation, and failed to comply with the content standards for advertising material. Moreover, FINRA found that the firm failed to establish WSPs governing variable annuity (VA) exchanges.
Ahmed’s suspension is in effect from March 19, 2012, through May 17, 2012.
(FINRA Case #2009016309801)
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Comments off · Posted by Securities Lawyer in FINRA
In a March 1st, 2012, article from InvestmentNews.com, Dan Jamieson writes that Finra is considering giving up its proprietary lock on BrokerCheck data, opening the way for a higher level of scrutiny of brokers’ disciplinary information, observers said.
Finra, the Financial Industry Regulatory Authority Inc., earlier this month requested comments on the idea of giving private vendors access to an expanded database of licensing and disciplinary information. With the wider access to raw BrokerCheck data, commercial users could make the famously dense BrokerCheck reports, which disclose customer complaints, arbitrations and regulatory actions, much more user-friendly. Vendors also could create industrywide comparison data, which does not exist now. Also, some firm-level complaint data could be revealed for the first time.
“We’re talking about exponentially increasing the value of this data,” said Edward Siedle, founder of Benchmark Financial Services Inc., who investigates advisers for institutional investors.
Jamieson wites that the request for comments, Finra Regulatory Notice 12-10, is part of a larger review of BrokerCheck mandated by the Dodd-Frank financial reform law. Among other things, Finra wants to add ZIP code searches and disclose items such as broker termination information, exam scores and more historical data. All comments are due by April 6.
The InvestmentNews.com article goes on to say that up until now, Finra has guarded its disciplinary data carefully, limiting use to one-off data requests by individuals. It blocks the BrokerCheck database from automated downloading technology like screen-scraping. Critics believe this restriction has helped the industry avoid embarrassing revelations about troublesome brokers and firms. Release of the data is “clearly sensitive for member firms,” said Mike Alfred, founder of Brightscope Inc., which last year launched a broker-rating service that includes disciplinary information.
“If you’re an adviser with 12 complaints, you don’t want that information to be easy to find,” Mr. Alfred said.
“Do brokers at [The Goldman Sachs Group Inc.] have more or less bad behavior than [brokers] at [Bank of America] Merrill Lynch?” Mr. Siedle asked.
This particular type of data sort isn’t possible with the current system of access.
“That’s the number one complaint we hear — the [database] doesn’t allow for any grouping or aggregation of the data,” said Mr. Alfred, who along with Mr. Siedle charges that Finra has stymied efforts to allow access to the entire database.
Finra is not trying to protect the industry, Finra spokeswoman Nancy Condon said in an e-mail.
“We have steadily expanded the information released through BrokerCheck over the years and made it easier for investors to access,” she wrote, adding that Finra recently enhanced BrokerCheck reports by adding links to disciplinary actions and arbitration awards.
“If you’ve been in business 30 years and been sued three times, where do you fall on the risk curve?” he asked, noting that such a figure may be quite normal for an industry veteran.
Having better comparison data might help the industry’s image, Mr. Siedle said. “Now, the system doesn’t establish behavorial norms,” adds Mr. Siedle.
Jamieson writes that Brightscope’s listing of advisers incorporates a conduct rating, using a horizontal bar to graph an adviser’s disciplinary record in one glance. A full-length bar shows no past problems, but shortens with each dispute or termination.
The Paladin Registry, which lists a limited number of advisers it certifies, checks all of its advisers’ compliance records before admitting them into the service, said Jack Waymire, Paladin founder. Both services charge advisers monthly fees.
Also, Mr. Siedle said it is a challenge for private providers to use the massive amount of disciplinary information found in BrokerCheck.
“They have to use a scalable business model” that limits how much investigation they can do on any one broker, he said.
Brightscope takes BrokerCheck information as Finra provides it, Mr. Alfred said.
There is a general consensus that the system needs to be more user-friendly. BrokerCheck data is “convoluted” with jargon and difficult for investors to interpret, Mr. Waymire said. He said his surveys show that less than 5% of investors check the compliance records of advisers before they hire them.
A 2009 survey by the Finra Investor Education Foundation found that just 15% of surveyed investors checked up on their broker’s background. In the end, Mr. Alfred doubts Finra will open up its database to commercial vendors.
“They would have done [that] years ago, if they were genuinely interested in protecting the best interests of investors,” Mr. Alfred said.
Finra is under the gun to unify BrokerCheck search results with the Investment Adviser Public Disclosure (IAPD) database, which is based on Form ADV information filed with the Securities and Exchange Commission. Since it is public information, the IAPD data is not blocked from automated downloads, as is BrokerCheck data. IAPD data on individuals has only been available since 2010, however. Finra may have to resolve the differences in access policies.
The InvestmentNews.com article says that in a January 2011 report, the SEC floated the idea of merging the two systems into a single public database, but for practical reasons, recommended that for now the two databases be maintained separately and search results unified. Ms. Condon said Finra welcomes comments on how to handle the access issue.
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