Feb 11, 2019 | News

Broker Dealers: Update Compliance Program

In order to improve and update Broker Dealer compliance programs, we have put together a brief summary of new and amended FINRA regulations, enforcement actions, and overall regulatory developments that occurred in 2018.

2018 Enforcement Actions

  • FINRA determined that Wedbush Securities Inc was incorrectly calculating its net capital requirement resulting in a 5 month period of deficiency.  Moreover, it was found Wedbush failed to calculate its required customer reserves causing significant underfunding.  The result was a $1.5M fine for Customer Protection and Net Capital Rule Violations.
  • SEC settled with Ameriprise Financial Services Inc related to a Mutual Fund Share-Class Sales.  Per SEC, Ameriprise was charged with failing to determine whether its clients could be eligible for less expensive mutual fund share classes resulting in overcharging their retail retirement clients.  Ameriprise agreed to pay clients $1.97 million and paid a fine of $230,000.
  • FINRA determined that Aegis Capital Corp was not designed to meet its monitoring or investigation obligation when trading in delivery versus payment accounts.  This resulted in a violation of Anti-Money Laundering and Supervision Rule violations and a $550,000 fine.
  • FINRA found Fifth Third Securities Inc had failed to fulfill its obligations under a previous letter of acceptance, waiver, and consent related to its variable annuity business. It had been cited for making unsuitable variable annuity exchanges and failing to supervise VA sales.  In 2018, FINRA found that Fifth Third’s process for VA exchanges did not correct deficiencies.  FINRA also found Fifth Third did not provide adequate training to its principals and registered representives on how to perform a comparative analysis of the material features of the VAs.  The rule violated related to fee disclosure failure and unsuitable recommendations. Fifth Third was required to pay $2M  in restitution and fined $4M.

Cryptocurrency Updates 2018

  • FINRA has issued an alert regarding cryptocurrency related activities urging investors to use caution before buying shares of companies that advertise high returns.  Investors need to perform detailed due diligence before investing.
  • On that note, FINRA charged broker Rocky Mountain Ayre Inc with Unlawful Distribution of Unregistered Cryptocurrency.  The broker attempted to lure public investment in HempCoin and made fraudulent statements about business and finances. This was the first disciplinary action taking by FINRA regarding cryptocurrency.
  • FINRA Notice – Digital Assets.  Firms are encouraged to notify FINRA if its associates persons engage in any activities related to digital assets, cryptocurrencies, or other virtual coins.  Until July 31, 2019 FINRA is asking each member to keep their Regulatory Coordinator aware of any digital asset activity.

FINRA – New and Amended Rules

  • FINRA amended Rule 3310 to more closely align with FinCEN’s Customer Due Diligence Requirement for Financial Institutions.  The rule requires Broker dealers to develop procedures to identify and verify the identy of beneficial owners of accounts of legal entity customers on or after May 11, 2018 and understand the nature and purpose of a customer relationship to develop a customer risk profile.
  • MSRB Rule G-15 was amended to require brokers, dealers, and municipal securities dealers to disclose additional information, including mark-ups and mark downs to retain customers on certain principal transactions.
  • Effective May 14, 2018, FINRA amended MSRB Rule G-30 to provide guidance on prevailing market price to determine mark-ups and mark-downs and other Rule G-30 determinations.  This amendment establishes factors that must be considered for reasonably determining the PMP which is used to calculate the compensation to be received.  The purpose of the amendment is to enhance transparency for retail investors regarding costs of their transactions in municipal securities.
  • A rule regarding Customer Account information, FINRA Rule 4512) was updated to require firms to make reasonable efforts to obtain the name of and contact information of a Trusted Contact Person for client accounts.

Remaining in compliance with all aspects of your business is the ideal way to avoid hefty fines.  To be aware of constant changes and updates from FINRA, click here.