Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
CASES OF NOTE
2010
NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.
December 2010
Randall Walter Hess (Principal)
AWC/2007008310201/December 2010
Hess's member firmís written supervisory procedures required all of its registered representatives to submit a weekly correspondence log, along with copies of the correspondence, to the compliance department. Hess did not submit any of his correspondence to and from a public customer to a principal of his firm for review prior to mailing, and did not submit the correspondence to his firmís compliance department as its written supervisory procedures required.
Randall Walter Hess (Principal): Fined $5,000; Suspended 10 business days
Tags:  Correspondence     |    In: Cases of Note : FINRA
Bill Singer's Comment
Can't recall seeing this one before.
April 2010
Merrill Lynch, Pierce, Fenner & Smith Incorporated
AWC/2008012391401/April 2010

Through several of its employees at the branch office level and employees of an affiliate in the Office of General Counsel, the Firm made material misstatements to NYSE Regulation examiners relating to an on-site branch office examination relating to non-registered cold callers by

  • providing the NYSE with inaccurate and deceptive information in response to various regulatory examination requests,
  • instructing staff that an unapproved facsimile machine be hidden or removed, and
  • by providing an inaccurate written statement in response to requests for information during an ongoing investigation.

Unlicensed Attorney

The Firm failed to properly supervise a registered person with the firm who held himself out as an attorney on firm stationery and business cards even though he was not licensed or admitted to practice before any state or federal bar.

Away Accounts

The Firm failed to

  • provide letters from outside broker dealers, whose employees maintained accounts at the firm, confirming that they were aware of such accounts;
  • receive and review duplicate confirmations and monthly account statements for accounts that employees maintained outside the firm;
  • evidence the approval of such accounts; and
  • send duplicate statement and confirmations to other firms whose employees had accounts at the firm.

Communications and Computers

The Firm failed to

  • evidence review and supervision of incoming or outgoing written communications and facsimiles at certain branches;
  • evidence the approval for certain employees to maintain computers and software; and
  • review, supervise and/or evidence supervisory review of communications that employees sent and received with non-firm issued computers.

The Firm failed to place certain accounts on 90-day restrictions; evidence the review, approval and/or supervision of order errors and account designation changes; and date or properly date corrections for order errors and account designation changes. Also, the Firm failed to evidence the review, approval and/or supervision of certain personal computer forms that had been backdated at a branch; failed to approve and/or timely approve seminars that firm employees conducted, and maintain certain seminar-related materials; failed to review, approve and/or retain certain facsimiles, including Fax-2-Mail correspondence and/or evidence its review and approval; and failed to maintain its "control" fax machine in a secure location in one branch.

Merrill Lynch, Pierce, Fenner & Smith Incorporated : Censured; Fined $300,000
Tags:  Fax    Away Accounts    Communications    Computers    Correspondence     |    In: Cases of Note : FINRA
Bill Singer's Comment

I mean, wow!  The breadth of these allegations is simply stunning.  First, I'm still trying to digest that nugget about Merrill's Office of General Counsel -- FINRA's allegations are amazing: inaccurate and deceptive responses, and instructing staff to hide/remove an unapproved FAX machine.

Then there are the whole host of compliance policies and procedures that just seem to have been overlooked.  You know, those types of policies and procedures that if, say, a smaller firm than the once mighty Merrill Lynch disregarded, well, you know, we would expect to see names and suspensions and massive fines.

You gotta love how FINRA deals with the financial superstores -- or should I say the once-and-mighty?  I wonder what percentage of Merrill's annual revenues $300,000 represents?  Maybe I could cut a similar deal for one of my indie/regional brokerage firm clients?  Hey, I almost forgot, isn't it just wonderful how no human being is referenced or named in this case.  Remind me to ask for the concession in the future too.

Michael Scott Heslep
AWC/2008011629602/April 2010
Heslap engaged in an email marketing campaign through which he distributed correspondence and/or sales literature to prospective customers via unsolicited emails. Many of the emails failed to provide a sound basis for evaluating the facts, provided exaggerated or unwarranted claims that are prohibited and/or contained performance claims that imply that past performance will recur.
Michael Scott Heslep: Censured; Suspended 10 business days
Tags:  Email    Correspondence         |    In: Cases of Note : FINRA
Valores Finamex International, Inc. and Vincent Anthony Buchanan (Principal)
AWC/2009016196001/April 2010

Acting through Buchanan, Valores Finamex failed to produce evidence of Buchananís review of a registered representativeís correspondence. The Firmís written supervisory procedures failed to

  • identify the registered representative as a producing manager,
  • contain procedures reasonably designed to provide heightened supervision over the activities of each producing manager who is responsible for generating 20 percent or more of the revenue of the business units supervised by the producing managerís supervisor, and 
  • assign a qualified supervisor to supervise the registered representative.

The Firm permitted Buchanan to conduct a securities business while he was ďContinuing Education Inactive.Ē  Also, the Firm failed to

  • send an annual privacy notice to its customers;
  • provide an explanation to its customers of their right to opt out of disclosure of nonpublic personal information to nonaffiliated third parties; and
  • establish policies and procedures that address and review administrative, technical and physical safeguards for the protection of customer records and information involved in the outsourcing of compliance and operations functions to nonaffiliated third parties.

The Firm effected Trade Reporting and Compliance Engine-eligible securities trades and failed to report, or properly report, those transactions.

Valores Finamex International, Inc.: Censured; Fined $27,500 ($10,000 of which was jointly and severally with Buchanan).

Vincent Anthony Buchanan: Fined $10,000 jointly and severally with Valores Finamex; Suspended in Principal capacity only for 20 business days. 

Tags:  Producing Manager    WSP    Supervision    Correspondence     |    In: Cases of Note : FINRA
February 2010
Eric Lowell Small (Principal)
AWC/2007007345601/February 2010
While associated with his former member firm as a registered principal but not registered as a research analyst or a research principal, Small supervised the conduct of the firmís research analysts, including approving research reports they prepared and that his firm issued.

Small failed to establish and maintain adequate supervisory procedures concerning the review of
  • email correspondence,
  • incoming and outgoing hard copy correspondence at the firmís branch offices that he was in charge of, and
  • outside investment activity of registered representatives at the firm.
The Firm's procedures indicated that a supervisory principal must review all correspondence, but these procedures were not reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules. The procedures were inadequate in that they contained insufficient detail concerning how and when such reviews were to occur, and the firm had no written supervisory procedures addressing the review of outside brokerage accounts. Small failed to establish, maintain and enforce adequate written supervisory control procedures relating to
  • NASD Rule 3012(a)(2)(B) and its requirement that members establish, maintain and enforce procedures reasonably designed to review and monitor transmittals of funds or securities between customers and registered representatives, and
  • NASD Rule 3012(a)(2)(C) and its requirement of an analysis and determination of whether producing branch office managers should have been subjected to heightened supervision.
Eric Lowell Small (Principal): Fined $17,500; Suspended 10 business days in Principal capacity only
Tags:  Unregistered Principal    Supervision    Supervisory System    Email    Correspondence    WSP    Producing Manager     |    In: Cases of Note : FINRA
Bill Singer's Comment
A well-presented case and a timely warning.  First off, many firms simply patched together a supervisory system because some veteran left or someone was supposed to implement more specific policies (or hire another Principal) and, well, you know how those things tend to dribble away and get forgotten.  Next thing you know, FINRA comes in and -- OMG!, we forgot to take care of this!!

I urge all my clients to pick at least an annual date when they give their policies and procedures a "cold review;" i.e., you take a rule and literally go line by line through your WSPs, memos, and other policies and confirm that what's written is what is in effect.  Concurrent with that run-through, you should also confirm that you are up-to-date with any new or amended rules.  Similarly, confirm that all folks who require a specific registration are duly registered (you would be surprised how often it's "assumed" that a registration application went through only to learn the FINRA shows no record of the filing -- or that someone was supposed to sit for an exam but postponed it and never satisfied the requirement.

All of which leads to another punchlist item:  If you have set forth policies and procedures in writing, are they being observed?  It's bad enough to run afoul of a FINRA rule, but to impose upon yourself a given task (which FINRA staff will note in your WSPs) and then to not properly implement that task is idiotic.  Similarly, as so many in-house Compliance folks love to spend hours on the computer drawing up all sorts of fancy organizational charts showing who reports to whom, it's probably a good idea to actually look at those charts once in a while and make sure that everyone so listed is still working at your firm and still supervising or reporting to those designated.
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