Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
CASES OF NOTE
2011
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.
November 2011
Dennis Lee Grossman (Principal)
OS/2008011672301/November 2011

As the AMLCO and president of his member firm,  Grossman failed to demonstrate that he implemented and followed sufficient AML procedures to adequately detect and investigate potentially suspicious activity

Grossman did not consider the AML procedures and rules to be applicable to the type of accounts held at the firm and therefore did not adequately utilize, monitor or review for red flags listed in the firmís procedures. His daily review of trades executed at the firm and all outgoing cash journals and wires, Grossman did not identify any activity of unusual size, volume or pattern as an AML concern. The firmís registered representatives, who were also assigned responsibility for monitoring their own accounts, failed to report any suspicious activity to Grossman. Until the SEC and/or FINRA alerted Grossman to red flags of suspicious conduct, Grossman did not file any SARs.

Grossman failed to implement adequate procedures reasonably designed to detect and cause the reporting of suspicious transactions and, even with those minimal procedures that he had in place at the firm, he still failed to adequately implement or enforce the firmís own AML program. For example, accounts were opened at the firm within a short period of each other that engaged in similar activity in many of the same penny stocks, and several red flags existed in connection with these accounts that should have triggered Grossmanís obligations to undertake scrutiny of the accounts, as set out in the firmís procedures, including possibly filing a SAR.  Additionally,individuals associated with the accounts had prior disciplinary histories, including securities fraud and/or money laundering. Because of Grossmanís failure to effectively identify and investigate suspicious activity,he often failed to identify transactions potentially meriting reporting through the filing of SARs. Moreover, Grossman failed to implement an adequate AML training program for appropriate personnel; the AML training conducted was not provided to all of the registered representatives at the firm. 

Furthermore, Grossman failed to establish and maintain a supervisory system at the firm to address the firmís responsibilities for determining whether customer securities were properly registered or exempt from registration under Section 5 of the Securities Act of 1933 (Securities Act) and, as a result, Grossman failed to take steps, including conducting a searching inquiry, to ascertain whether these securities were freely tradeable or subject to an exemption from registration and not in contravention of Section 5 of the Securities Act. The firm did not have a system in place, written or unwritten, to determine whether customer securities were properly registered or exempt from registration under Section 5 of the Securities Act; Grossman relied solely upon the clearing firm, assuming that if the stocks were permitted to be sold by the clearing firm, then his firm was compliant with Section 5 of the Securities Act. 

Grossman failed to designate a principal to test and verify the reasonableness of the firmís supervisory system, and failed to establish, maintain and enforce written supervisory control policies and procedures at the firm and failed to designate and specifically identify to FINRA at least one principal to test and verify that the firmís supervisory system was reasonable to establish, maintain and enforce a system of supervisory control policies and procedures.

The firm created a report, which was deficient in several areas, including in its details of the firmís system of supervisory controls, procedures for conducting tests and gaps analysis, and identities of responsible persons or departments for required tests and gaps analysis. Grossman made annual CEO certifications, certifying that the firm had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and registrations; the certifications were deficient in that they failed to include certain information, including whether the firm has in place processes to establish, maintain and review policies and procedures designed to achieve compliance with applicable laws and regulations and whether the firm has in place processes to modify such policies and procedures as business, regulatory and legislative events dictate. 

Grossman failed to ensure that the firmís heightened supervisory procedures placed on a registered representative were reasonably designed and implemented to address the conduct cited within SECís allegations; the additional supervisory steps imposed by Grossman to be taken for the registered representative were no different than ordinary supervisory requirements. Moreover, there was a conflict of interest between the registered representative and the principal assigned to monitor the registered representativeís actions at the firm;namely, the principal had a financial interest in not reprimanding or otherwise hindering the registered representativeís actions. Furthermore,Grossman was aware of this conflict, yet nonetheless assigned the principal to conduct heightened supervision over the registered representative. 

The heightened supervisory procedures Grossman implemented did not contain any explanation of how the supervision was to be evidenced, and the firm failed to provide any evidence that heightened supervision was being conducted on the registered representative. Also, Grossman entered into rebate arrangements with customers without maintaining the firmís required minimum net capital. Similarly, he caused the firm to engage in a securities business when the firmís net capital was below the required minimum and without establishing a reserve bank account or qualifying for an exemption. Grossman was required to perform monthly reserve computations and to make deposits into a special reserve bank account for the exclusive benefit of customers, but failed to do so.

Dennis Lee Grossman (Principal): Fined $75,000; Suspended 4 months in Principal capacity only
Bill Singer's Comment
A concise rendition by FINRA.  Assuming that the allegations are not over-blown, the sanctions here are fair and responsive to the cited misconduct.  With year-end upon us, it would be a worthwhile exercise for many of you to read this case and use it as a checklist -- how do you measure up?
Euro Pacific Capital, Inc.
AWC/2009016300801/November 2011

Euro Pacific failed to timely report quarterly statistical information concerning most of the customer complaints it received to FINRAís then 3070 System.

The firm failed to maintain complete complaint files and did not enforce its WSPs pertaining to customer complaint reporting, and the Uniform Applications for Securities Industry Registration or Transfer (Forms U4) for those representatives who were the subject of the complaints were not timely updated.

The firm failed to enforce its written supervisory control policies and procedures that would test and verify that the firmís supervisory procedures were reasonably designed with respect to the firmís activities to achieve compliance with applicable securities laws, regulations and self-regulatory organization (SRO) rules; the firmís annual NASD Rule 3012 report for one year did not comport with these procedures, and the firm failed to implement its supervisory control procedures to review its producing managersí customer account activity.

The firm prepared a deficient NASD Rule 3013 certification as it did not document the firmís processes for establishing, maintaining, reviewing, testing and modifying compliance policies reasonably designed to achieve compliance with applicable securities laws, regulations and SRO rules. The firm failed to timely file a Financial and Operational Combined Uniform Single (FOCUS) Report and Schedule I Reports.

The firm failed to preserve, in an easily accessible place, electronic emails for one of its representatives for almost a year.

The firm offered and sold precious metal-related products through an entity, but failed to develop, implement and enforce adequate AML procedures related to the business; the firm did not establish and implement policies and procedures reasonably designed to identify, monitor for and, where appropriate, file suspicious activity reports (SARs) for its business processed through its k(2)(i) account. Moreover, the firm failed to implement and enforce its AML procedures and policies related to its fully disclosed business through its then-clearing firm; aspects of its AML program that the firm failed to implement and enforce included monitoring accounts for suspicious activity, monitoring employee conduct and accounts, red flags and control/restricted securities. Furthermore, the firmís procedures provided that monitoring would be conducted by means of exception reports for unusual size, volume, pattern or type of transactions; the firm did not consistently utilize exception reports made available by its then-clearing firm, and the firm did not evidence its review of the reports and did not note findings and appropriate follow-up actions, if any, that were taken. When notified by its clearing firm of possible suspect activity, on at least several occasions, the firm did not promptly and/or fully respond to the clearing firmís inquiries. Such review was required by the procedures for employee accounts, but the firm did not maintain any evidence that such inquiries for employee accounts were conducted. The firmís procedures contained a non-exclusive list of numerous possible red flags that could signal possible money laundering, but the firm did not take consistent steps to ensure the review of red flags in accounts.

The firmís AML procedures reference that SAR-SF filings are required under the Bank Secrecy Act (BSA) for any account activity involving $5,000 or more when the firm knows, suspects, or has reason to suspect that the transaction involves illegal activity or is designed to evade BSA regulation requirements or involves the use of the firm to facilitate criminal activity; because the firm was not consistently reviewing exception reports or red flags, it could not consistently identify and evaluate circumstances that might warrant a SAR-SF filing.

The firm failed to establish and implement risk-based customer identification program (CIP) procedures appropriate to the firmís size and type of business; and the firm failed to provide ongoing training to appropriate personnel regarding the use of its internal monitoring tools as AML program required.

In addition, certain pages of the firmís website contained statements that did not comport with standards in NASD Rule 2210; FINRA previously identified these Web pages as being in violation of NASD Rule 2210, but the firm failed to remove such pages from its website.

Euro Pacific Capital, Inc.: Censured; Fined $150,000
Tags:  Producing Manager    FOCUS    Email    Futures    AML    CIP    SAR     |    In: Cases of Note : FINRA
September 2011
H. Beck, Inc.
AWC/2009016150001/September 2011

H. Beck Inc. failed to maintain and preserve certain of its business-related electronic and written communications.

Most of the firmís registered representatives are independent contractors operating from ďone-manĒ branch office locations throughout the country; the firmís representatives were allowed to maintain written correspondence at their branch offices; and the firm permitted representatives to send emails from their personal computers. The firm did not have an electronic system to capture emails, but instead required representatives to print and make copies of their emails, which along with their written correspondence were reviewed during annual branch inspections; representatives were required to send emails and written correspondence involving the solicitation of products to compliance for pre-approval. The firm did not have prior system or procedures in place to retain all other emails and written correspondence after the representatives terminated from the firm. and, as a result, the firm did not subsequently retain most of the emails and written correspondence for representatives who terminated from the firm.

Also, the firm did not establish and implement policies and procedures that could be reasonably expected to detect and cause the reporting of suspicious transactions. In addition, the firmís WSPs relating to the reporting of suspicious activity failed to provide reasonable detail, such as the specific reports and documents to be reviewed, the timing and frequency of such reviews, the specific persons to conduct the reviews, and a description of how the reviews would be conducted and evidenced. Moreover, the firmís supervisory procedures did not provide adequate guidelines regarding the reporting of suspicious activity, including when a suspicious activity report should be filed and what documentation should be maintained. Furthermore, although the firm had 140,000 active accounts, it used only a minimal number of exception reports, relying instead on its clearing firms to assist in the review of suspicious activity. The firm failed to conduct adequate independent tests of its AML compliance program (AMLCP), failed to sufficiently test topics and failed to adequately memorialize what was reviewed. The findings also included that with respect to a sample of corporate bond transactions and municipal securities transactions the firm executed, it failed to accurately disclose the receipt time on the majority of the order tickets.

H. Beck, Inc. : Censured; Fined $150,000; Firm's President required to certify to FINRA in writing within 30 days of the issuance of the AWC that the firm currently has in place systems and procedures reasonably designed to achieve compliance with the laws, regulations and rules concerning the preservation of electronic mail communications.
Tags:  AML    SAR    Electronic Communications    Email     |    In: Cases of Note : FINRA
July 2011
Prestige Financial Center, Inc. and Lawrence Gary Kirshbaum (Principal)
AWC/2009016405902/July 2011

Prestige, acting through Kirshbaum and at least one other firm principal, were involved in a fraudulent trading scheme through which the then-Chief Compliance Officer (CCO) and head trader for the firm concealed improper markups and denied customers best execution.

As part of this scheme, the CCO falsified order tickets and created inaccurate trade confirmations, and the hidden profits were captured in a firm account Kirshbaum and another firm principal controlled; some of the profits were then shared with the CCO and another individual.

The trading scheme took advantage of customers placing large orders to buy or sell equities. Rather than effecting the trades in the customersí accounts, the CCO placed the order in a firm proprietary account where he would increase or decrease the price per share for the securities purchased or sold before allocating the shares or proceeds to the customersí accounts; this improper price change was not disclosed to, or authorized by, the customers, and this fraudulent trading scheme generated approximately $1.3 million in profits for the firmís proprietary accounts. Kirshbaum was aware of and permitted the trading. In an account that Kirshbaum and another firm principal controlled. 47 percent of the profits from the scheme were retained. In furtherance of the fraudulent trading scheme, the CCO entered false information on the corresponding order tickets regarding the share price and the time the customer order ticket was received, entered and executed; the corresponding trade confirmations inaccurately reflected the price, markup and/or commission charged and the order capacity.

In addition, acting through Kirshbaum, Prestige entered into an agreement to sell the personal, confidential and non-public information of thousands of customers to an unaffiliated member firm in exchange for transaction-based compensation from any future trading activity in those accounts. In connection with that agreement, Kirshbaum provided the unaffiliated member firm with the name, account number, value and holdings on spreadsheets via electronic mail. Furthermore, Kirshbaum granted certain representatives of that firm live access to the firmís computer systems, including access to systems provided by the firmís clearing firm, which provided access to other non-public confidential customer information such as Social Security numbers, dates of birth and home addresses. Prestige and Kirshbaum did not provide any of the customers with the required notice or opportunity to opt out of such disclosure before the firm disclosed the information, as Securities and Exchange Commission (SEC) Regulation S-P requires.

Acting through Kirshbaum, Prestige failed to establish and maintain a supervisory system, and establish, maintain and enforce written supervisory procedures to supervise each registered personís activities that are reasonably designed to achieve compliance with the applicable rules and regulations regarding interpositioning, front-running, supervisory branch office inspections, supervisory controls, annual compliance meeting, maintenance and periodic review of electronic communications, NASD Rule 3012 annual report to senior management, review and retention of electronic and other correspondence, SEC Regulation S-P, anti-money laundering (AML), Uniform Application for Securities Industry Registration or Transfer (Form U4) and Uniform Termination Notice for Securities Industry Registration (Form U5) amendments, and NASD Rule 3070 reporting. FINRA found that the firm failed to enforce its procedures requiring review of its registered representativesí written and electronic correspondence relating to the firmís securities business. In addition, the firm failed to establish, maintain and enforce a system of supervisory control policies and procedures that tested and verified that its supervisory procedures were reasonably designed with respect to the activities of the firm and its registered representatives and associated persons to achieve compliance with applicable securities laws and regulations, and created additional or amended supervisory procedures where testing and verification identified such a need. Moreover, the firm failed to enforce the written supervisory control policies and procedures it has with respect to review and supervision of the customer account activity conducted by the firmís branch office managers, review and monitoring of customer changes of address and the validation of such changes, and review and monitoring of customer changes of investment objectives and the validation of such changes. Furthermore, firm failed to establish written supervisory control policies and procedures reasonably designed to provide heightened supervision over the activities of each producing manager responsible for generating 20 percent or more of the revenue of the business units supervised by that producing managerís supervisor; as a result, the firm did not determine whether it had any such producing managers and, to the extent that it did, subject those managers to heightened supervision.

Acting through one of its designated principals, Prestige falsely certified that it had the requisite processes in place and that those processes were evidenced in a report review by its Chief Executive Officer (CEO), CCO and other officers,and the firm failed to file an annual certification one year. The findings also included that the firm failed to implement a reasonably designed AML compliance program (AMLCP). Although the firm had developed an AMLCP, it failed to implement policies and procedures to detect and cause the reporting of suspicious activity and transactions; implement policies, procedures and internal controls reasonably designed to obtain and verify necessary customer information through its Customer Identification Program (CIP); and provide relevant training for firm employeesóthe firm failed to conduct independent tests of its AMLCP for several years. Acting through Kirshbaum and another firm principal, the firm failed to implement policies and procedures reasonably designed to ensure compliance with the Bank Secrecy Act by failing to enforce its procedures requiring the firm to review all Section 314(a) requests it received from the U.S. Department of the Treasuryís Financial Crimes Enforcement Network (FinCEN); as a result, the firm failed to review such requests. In addition, Kirshbaum and another principal were responsible for accessing the system to review the FinCEN messages but failed to do so. Moreover, FINRA found that the firm permitted certain registered representatives to use personal email accounts for business-related communications, but failed to retain those messages.

Furthermore, the firm failed to maintain and preserve all of its business-related electronic communications as required by Rule 17a-4 of the Securities Exchange Act of 1934, and failed to maintain copies of all of its registered representativesí written business communications. The  firm failed to file summary and statistical information for customer complaints by the 15th day of the month following the calendar quarter in which the firm received them. The findings also included that the customer complaints were not disclosed, or not timely disclosed, on the subject registered representativeís Form U4 or U5, as applicable.The Firm failed to provide some of the information FINRA requested concerning trading and other matters.

Prestige Financial Center, Inc. : Expelled

Lawrence Gary Kirshbaum (Principal): Barred

Bill Singer's Comment

Whoa -- one of the all-time, most comprehensive FINRA disciplinary actions. Frankly, not much that could be done wrong wasn't, according to the terms of the settlement. One of the few times when a FINRA member firm is expelled. Also, one of the few times when a CCO is barred. A powerful case. Well written and presented.

Keep in mind that registered persons from this firm may trip your Taping Rule threshold.

May 2011
Grand Capital Corp. and Eliezer Gross Homnick (Principal)
AWC/2007008158203/May 2011

Acting through Homnick, the firmís president, chief compliance officer (CCO) and AML compliance officer (AMLCO), the Firm failed to comply with AML requirements. The Firmís AML compliance program, which Homnick implemented, did not fully comply with the requirements of the Bank Secrecy Act (BSA) or the regulations thereunder, and violated NASDģ Rules 3011(a) and (b). The AML procedures in effect required the firm to make a preliminary risk assessment for each existing and potential customer of the firm, and the firmís representatives were required to document any significant information they learned pursuant to such risk assessment, but the firm did not create or maintain written risk assessments for its customers.

The firmís AML procedures required scrutiny of the activities of each firm customer organized as a limited liability company (LLC); specifically, for LLC customers, the firm and its registered representatives were to assess the correlation between their business activities and their formation documents and to conduct further investigations to determine the customerís risk profile. These assessments and determinations of risk profiles were not conducted. Several accounts that were LLCs that engaged in suspicious transactions did not provide formation documents.

The AML procedures had a section that described the process firm employees were to use to report suspicious customer activities, but these procedures were not followed. In addition, registered representatives were required, upon detection of suspicious activity in customer accounts, to consult with one of the firmís designated principals, one of whom was Homnick; no firm representative reported to, or consulted with, the firm principals about suspicious customer activities. Moreover, the firmís procedures identified a form called the Preliminary Suspicious Activity Report (P-SAR); the purpose of the form was to identify, in writing, suspicious activities for Homnickís internal review, but no P-SARs were completed or submitted. Furthermore,Homnick was assigned the responsibility for filing Suspicious Activity Reports (SARs) and was responsible for drafting, implementing and maintaining the AML program and procedures at the firm, but he did not file any SARs and did not consider filing any SARs. FINRA also found that numerous suspicious transactions were conducted by firm customers, and the firm, acting through Homnick, did not conduct a reasonable investigation, in that they failed to file a SAR, consider filing a SAR or document rationale for not filing a SAR.

Grand Capital Corp.: Censured; Fined $20,000 (In light of the firmís revenues and financial resources, among other things, a lower fine was imposed.)

Eliezer Gross Homnick:  Fined $10,000, Suspended in Principal capacity only for 1 month;  and Required to complete eight hours of anti-money laundering (AML) training.

Tags:  CCO    AML    SAR     |    In: Cases of Note : FINRA
March 2011
First Clearing, LLC
AWC/2008012791101/March 2011

The Firm's anti-money laundering (AML) program was inadequate, in that the firm reviewed transactions covering only a limited amount of potentially suspicious activity. The firm generated many exception reports and alerts dealing with potentially suspicious securities transactions and money movements in customer accounts that were introduced by unaffiliated broker-dealers to the firm; however, these reports were tools that the firm provided to its correspondent brokers to satisfy the introducing brokersí AML obligations. The firm did not consistently review reports for suspicious activity reporting, and the firm reviewed only a limited number and type of transaction for its own suspicious activity report (SAR) reporting obligation.

The firm failed to establish and implement an adequate AML compliance program for detecting, reviewing and reporting suspicious activity. The firm did not review or monitor suspicious activity in most of the exception reports that it prepared for, and distributed to, the introducing broker-dealers or otherwise conduct sufficient risk-based monitoring of activity in accounts its unaffiliated introducing broker-dealers introduced. The firm reviewed a limited amount of potentially suspicious money movements and penny stock activity and, as a result, it failed to establish and implement a transaction monitoring program reasonably designed to achieve compliance with the SAR reporting provisions of 31 U.S.C. 5318(g) and the implementing regulations as required by NASD Rule 3011(a).

First Clearing, LLC : Censured; Fined $400,000
Tags:  AML    SAR     |    In: Cases of Note : FINRA
Bill Singer's Comment
Essentially, what statisticians would call a "sampling error." If you're going to transactions, you need to utilize and wide enough and deep enough sample so as to give you a chance at uncovering something. Also, FINRA doesn't quite like the idea that the Firm was producing reports but not quite delving into them and, to some extent, passing the buck to unaffiliated BDs. 
February 2011
Chapin, Davis
AWC/2010021065701/February 2011

The Firm failed to develop and implement a reasonably designed anti-money laundering (AML) compliance program (AMLCP).

The firmís written procedures, which contained information primarily relating to customer identification procedures (CIP),

  • offered little or no guidance on how to comply with most requirements of the Bank Secrecy Act;
  • contained no provisions on conducting customer due diligence and enhanced due diligence, and insufficient guidance on responding to, and properly documenting responses to, information requests the United States Department of Treasuryís Financial Crimes Enforcement Network (FinCEN) issued pursuant to Section 314(a) of the U.S.A. PATRIOT Act; and
  • did not address how to monitor for and report suspicious activity, and the firm failed to conduct an adequate independent test of its AMLCP. FINRA found that the testing, which an independent auditor performed, was deficient by failing to test the firmís implementation of a suspicious activity report (SAR) surveillance program, AML training program and Bank Secrecy Act requirements, including customer identification procedures.

FINRA also found that the firm failed to

  • establish, maintain and/ or enforce a supervisory system and written procedures reasonably designed to record and supervise private securities transactions, and failed to record such transactions; and
  • make and keep current all account forms in compliance with Securities Exchange Act Rule 17a-3(17), and NASD Rules 3110(a) and (c).
Chapin, Davis : Censured; Fined $50,000
Tags:  AML    CIP    SAR     |    In: Cases of Note : FINRA
January 2011
Janney Montgomery Scott, LLC
AWC/2007009458001/January 2011

The Firm failed to

  • establish certain elements of an adequate AML program reasonably designed to achieve and monitor its compliance with the requirements of the Bank Secrecy Act and implementing regulations promulgated by the Department of Treasury;
  • establish policies and procedures reasonably expected to detect and cause the reporting of transactions required under 31 USC 5318(g) by failing to provide branch office managers with reports that contained adequate information to monitor for potential money-laundering and red flag activity; and for the firmís compliance department to perform periodic reviews of wire transfer activity, require either branch managers or the AML compliance officers to document reviews of AML alerts in accordance with firm procedures, identify the beneficial owners and/or agents for service of process for some foreign correspondent banks accounts, and establish adequate written policies and procedures that provided guidelines for suspicious activity that would require the filing of a Form SAR-SF;
  • establish policies and procedures that required ongoing AML training of appropriate personnel related to margin issues, entering new account information, verifying physical securities and handling wire activity;
  • ensure that its third-party vendor verified new customersí identities by using credit and other database cross-references, and after the firm determined that the vendorís lapse was resolved, it failed to retroactively verify customer information not previously subjected to the verification process;
  • establish procedures reasonably expected to detect and cause the reporting of suspicious transactions required under 31 USC 5318(g), in that it failed to include in its AML review the activity in retail accounts institutional account registered representatives serviced;
  • review accounts that a producing branch office manager serviced under joint production numbers;
  • evidence in certain instances timely review of letters of authorization, correspondence, account designation changes, trade blotters, branch manager weekly review forms and branch manager monthly reviews; failed to follow procedures intended to prevent producing branch office managers from approving their own errors;
  • follow procedures intended to prevent a branch office operations manager from approving transactions in her own account and an assistant branch office manager from reviewing transactions in accounts he serviced;
  • establish procedures for the approval and supervision related to employee use of personal computers and, during one year, permitted certain employees to use personal computers the firm did not approve or supervise,
  • include a question on thefirmís annual acknowledgement form for one year that required its registered representatives to disclose outside securities accounts and the firm could not determine how many remained unreported due to the supervisory lapse;
  • follow policies and procedures requiring the pre-approval and review of the content of employeesí radio broadcasts, television appearances, seminars and dinners, and materials distributed at the seminars and dinners; representatives conducted seminars that were not pre-approved by the firmís advertising principal as required by its written procedures; the firm failed to maintain in a separate file all advertisements, sales literature and independently prepared reprints for three years from date of last use; and a branch office manager failed to review a registered representativeís radio broadcast. A branch office manager failed to maintain a log of a registered representativeís radio broadcasts and failed to tape and/or maintain a transcript of the broadcasts and there was no evidence a qualified principal reviewed or approved the registered representativeís statements. Branch office managers did not retain documents reflecting the nature of seminars, materials distributed to attendees or supervisory pre-approval of the seminars; retain transcripts of a representativeís local radio program and TV appearances or document supervisory review or approval of materials used; and retain documents reflecting the nature of a dinner or seminar conducted by representatives or materials distributed;
  • record the identity of the person who accepted each customer order because it failed to update its order ticket form to reflect the identity of the person who accepted the order; and

  • to review Bloomberg emails and some firm employeesí instant messages

The Firm distributed a document, Characteristics and Risks of Standardized Options, that was not current, and the firm lacked procedures for advising customers with respect to changes to the document and failed to document the date on which it was sent to certain customers who had recently opened options accounts. Also, the firmís compliance registered options principal did not document weekly reviews of trading in discretionary options accounts.

Janney Montgomery Scott, LLC : Censured; Fined $175,000
Tags:  Annual Compliance Certification    Email    Instant Messaging    SAR    AML    Bank    Third Party Vendor    Away Accounts    Broadcast    Producing Manager     |    In: Cases of Note : FINRA
Bill Singer's Comment
What can I say -- even I'm impressed!
NEXT Financial Group, Inc.
AWC/2009016272902/January 2011

NEXT Financial Group did not have a reasonable system for reviewing its registered representativesí transactions for excessive trading. The firm relied upon its OSJ branch managers to review its registered representativesí transactions and home office compliance personnel to review its OSJ branch managersí transactions, but the firm failed to utilize exception reports or another system, and the supervisors and compliance personnel only reviewed transactions on weekly paper blotters or electronic blotters.

The monthly account statements and contingent deferred sales charge reports for mutual fund activity were also available for review and could be indicators of excessive trading, however, given the volume of trading certain principals reviewed, and in certain cases, the large number of representatives for which the principal was responsible, it was not reasonable to expect principals to be able to track excessive trading on a weekly sales blotter, let alone through monthly account statements or mutual fund sales charge reports.

Due to the lack of a reasonable supervisory system, the firm failed to detect a registered representativeís excessive trading, which resulted in about $102,376 in unnecessary sales charges; the firm failed to identify or follow up on other transactions that suggested other registered representativesí excessive trading in additional customer accounts. 

The Firm did not have a reasonable system for ensuring that it obtained and documented principal review of its registered representativesí transactions, including sales of complicated products such as variable annuities, and the firm should have been particularly attentive to maintaining books and records that established that the transactions had been properly reviewed. The firm failed to provide reasonable supervision of municipal bond markups and markdowns to ensure that its registered representatives charged its customers reasonable markups and markdowns. In addition,  the firmís branch office examination program was unreasonable because it was not designed to carry out its intended purpose of detecting and preventing violations of, and achieving compliance with, federal, state and FINRA securities regulations, as well as its own policies.

The firm failed to have a reasonable supervisory system to oversee implementation of its heightened supervision policies and procedures for its registered representatives as it failed to comply with the terms of its heightened supervision for its registered representatives regarding client complaints, regulatory actions or internal reviews, therefore it had a deficient implementation of heightened supervision policies and procedures.

The firm failed to have a reasonable supervisory control system or to have in place Supervisory Control Procedures as required by FINRA Rule 3012, and it failed to perform adequate 3012 testing or prepare adequate 3012 reports. Moreover,the firm failed to have a reasonable system and procedures in place to review and approve investment advisorsí private securities transactions.

Furthermore, the firm filed inaccurate and late Rule 3070 reports relevant to customer complaints, and did not file or amend Form U4 and Uniform Termination Notice for Securities Industry Registration (Form U5) reports in a timely manner.

The Firm's AML systems and procedures were unreasonable, as the firm failed to establish and implement an AML Compliance Program reasonably designed to achieve compliance with NASD Rule 3011. Although the firm utilized a money movement report, its supervisors did not detect red flags involving numerous instances of potentially suspicious activities relating to the trading of a companyís stock and the transfers of proceeds relating to the trading of a stock, and thus failed to investigate and report these activities in accordance with its own procedures and the requirements of the Bank Secrecy Act and the implementing regulations.

In addition, over 1.3 million shares of a companyís stock were traded in customer accounts a registered representative serviced; during a one-week period, the firmís only AML exception report that monitored large money movement flagged the customerís account, but the firm took no action and failed to file any SARs as appropriate.

NEXT Financial Group, Inc.: Censured; Fined $400,000; Ordered to pay $103,179.84, plus interest, in restitution to customers.
Tags:  Bank    AML    SAR    Mutual Funds    Annuity    Mark-Up Mark-Down     |    In: Cases of Note : FINRA
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