Broker-Dealer Disciplinary Actions: Takeaways From 2024 (So Far)

The U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Exchanges were active across a host of regulatory issues impacting fintech companies and broker-dealers during the first half of 2024. Many of these cases portend ongoing regulatory concerns about market integrity issues; financial crime concerns; firm operation processes; communications and sales activity; and supervision deficiencies.

In each of these settled matters, there are opportunities to observe and implement best practices in anticipation of regulatory scrutiny at year-end and beyond. The selected cases are discussed below, and the attorneys in DWT's financial services practice are available for a more fulsome discussion about the issues and trends addressed herein.

Market Integrity

1. Fair Pricing and Best Execution Issues

Pursuant to a Letter of Acceptance, Waiver and Consent (AWC), FINRA alleged that a broker-dealer charged unfair prices in certain corporate bond and municipal bond transactions with customers and did not have written supervisory procedures (WSPs) reasonably designed to achieve compliance with the firm's fair pricing obligations under FINRA Rule 2121 and Municipal Securities Rulemaking Board (MSRB) Rule G-30. The AWC stated that in certain transactions, the firm used an inter-dealer bid or quotation to determine the prevailing market price rather than a contemporaneous inter-dealer transaction price resulting in price disadvantages to the customers. According to the AWC, the firm's clearing firm had a platform that calculated the prevailing market price, but the firm's WSPs did not provide guidance for determining how prevailing market prices should be calculated when transactions were executed outside of the firm's platform or how such off-platform calculations should be performed in violation of FINRA Rule 3110 and MSRB Rule G-27. According to the AWC, the firm agreed to pay a $90,000 fine and over $44,000 (plus interest) as restitution.

In another AWC, FINRA took disciplinary action against a broker-dealer for allegedly charging unfair markups and markdowns in corporate bond transactions and for failing to comply with its best execution obligations. The firm also allegedly failed to establish and maintain a supervisory system to achieve compliance with FINRA rules for fair pricing and best execution of corporate bond transactions. The AWC stated that the foregoing violated FINRA Rules 2121, 3110, and 5310, among others. According to FINRA, the firm routed all fixed income transactions to its clearing firm without conducting reasonable due diligence. The firm consequently failed to evaluate the best market conditions or ensure favorable pricing for customers and maintained insufficient supervisory systems and procedures. Despite an expansion in their business line, the firm also failed to assess and update its fixed income trading practices and supervisory system to adequately oversee the increased business. The firm agreed to pay a $200,000 fine and over $397,000 (plus interest) as restitution, and to an undertaking to retain an independent consultant.

2. Market Order Timeliness

According to an AWC, FINRA alleged that a broker-dealer failed to reasonably supervise that marketable equity orders entered into the firm's electronic order systems were executed fully and promptly pursuant FINRA Rule 5310. The AWC stated that the firm had a process to perform validation checks of the orders but allegedly did not conduct a review of the time it took the firm's electronic order systems to process and route the orders to a market center. According to the AWC, the firm therefore did not reasonably supervise that marketable customer orders were executed fully and promptly. The AWC, however, did not identify whether any customer orders were actually disadvantaged as a result of the alleged lack of reasonable supervision. In addition, the AWC indicated that the firm did not reasonably conduct supervisory reviews to determine whether the order memoranda for electronic orders were accurate pursuant to SEC Rule 17a-3(a)(6), among others. The firm agreed to pay an $825,000 fine and to an undertaking to implement changes to its supervisory system.

3. Regulation M

Three firms resolved Regulation M and related supervision issues with regulators during the first half of 2024. In one matter, FINRA and several Exchanges alleged that a broker-dealer filed untimely or inaccurate restricted period notifications with FINRA in connection with security distributions where the firm as a participant was in violation of FINRA Rule 5190. According to the AWC, certain notifications did not identify all participants in the distributions (including participants that joined after an initial restricted period notification) or did not identify the participants as FINRA members. In other instances, the firm did not timely file trading notifications or submitted notifications that did not identify all participants or did not identify them as FINRA members. The AWC stated that the firm's supervisory system was deficient with regards to verifying the timeliness and accuracy of required notifications in violation of FINRA Rule 3110. The firm agreed to pay a $90,080 fine, which was resolved simultaneously with other matters.

In another matter, the SEC alleged that a proprietary trading firm violated Rule 105 of Regulation M. According to the Order, the firm purchased equity securities in certain covered offerings and sold short the same securities during Rule 105's restricted period without meeting a Rule 105 exception. The Order acknowledged that the firm took proactive steps to address the issues upon learning about them. The firm agreed to pay a civil money penalty of $812,355.40 and disgorgement of over $593,000 (plus interest), and to several undertakings discussed in the Order.

In a third matter involving a broker-dealer, the SEC alleged that the firm violated Rule 105 of Regulation M in two separate offerings. According to the Order, the firm purchased shares in the public offerings for its advisory clients after short sales were effected during the restricted period, with these short sales resulting from the exercise and assignment of call options that the firm had sold for its clients prior to the restricted period. The firm also was credited for undertaking remedial actions, which included revising its procedures and conducting a look-back review of its trading history for compliance with Rule 105. The firm also agreed to pay disgorgement of over $351,000 (plus interest) and a civil money penalty of $140,000.

4. Regulation SHO

According to FINRA, a broker-dealer allegedly executed certain sell orders that contained a quantity of shares that the firm did not own, and for which the firm did not obtain a locate, in violation of Reg. SHO Rule 203(b)(1). In addition, the AWC alleged that the sell orders were incorrectly marked as "agent" even though a portion of the orders were executed in a principal capacity, in violation of Reg. SHO Rule 200(g), among others. Finally, the AWC alleged that the firm's WSPs were deficient because they did not provide sufficient guidance to supervisors about how to comply with Rule 200(g)'s order marking requirements, among other things, in violation of FINRA Rule 3110. The firm agreed to pay a $400,000 fine and to an undertaking to update its WSPs to comply with Reg. SHO.

According to a FINRA AWC, an executing broker-dealer executed at least 10 million short sales to facilitate net trading for its broker-dealer clients without obtaining locates in violation of Reg. SHO Rule 203(b)(1). FINRA alleged that the firm incorrectly relied on a broker-dealer client's locate when effecting short sales for the firm's account. The AWC also alleged that the firm's WSPs did not implement any surveillance or reviews to monitor the firm's compliance with the locate requirements in violation of FINRA Rule 3110. The firm agreed to pay a $250,000 fine and to an undertaking to update its WSPs to address the issues identified in the AWC.

5. Trade Reporting

According to FINRA, a broker-dealer overstated its advertised trade volume on Bloomberg in about 377,000 instances by approximately 2.1 billion shares as a result of an error in the firm's automatic trade configuration system in violation of FINRA Rule 5210. As a result of the issue, the firm mistakenly advertised the orders it received from its parent twice – once as high-touch volume and once as low-touch volume, which the firm has since remediated. According to the AWC, the firm also failed to test whether the trade volume data being reported was accurate when communicated to Bloomberg or to incorporate reasonable reviews of this data in violation of FINRA Rule 3110. The firm agreed to pay a $475,000 fine.

According to a FINRA AWC, a broker-dealer failed to include the Non-Transaction-Based Compensation (NTBC) indicator when reporting 91,059 municipal securities transactions to the Real-Time Transaction Reporting System (RTRS), thereby violating MSRB Rule G-14. The AWC stated that the transactions occurred in non-managed accounts. According to the AWC, the firm's supervisory system was deficient because the firm incorrectly excluded the NTBC indicator for all transactions in non-managed accounts when designing its electronic reporting system. The firm also allegedly lacked WSPs concerning the NTBC indicator in violation of MSRB Rule G-27. The firm was credited for taking steps to enhance its systems and procedures and agreed to pay a $100,000 fine.

6. Municipal Shorts/Close Out Issues

According to a FINRA AWC, a broker-dealer failed to cancel or close certain failed inter-dealer municipal securities transactions within 20 days after settlement as required by MSRB Rule G-12(h). The AWC stated that the firm over-relied on buy-in attempts to resolve the failed transactions even when these attempts were unsuccessful during the 20-day period. The AWC also alleged that the firm did not take prompt remedial steps to obtain physical possession or control of certain short positions resulting from failed inter-dealer municipal securities transactions per Exchange Act Rule 15c3-3(d)(2). The firm also allegedly engaged in repeated buy-in attempts to obtain possession or control even when the firm knew those attempts were unsuccessful.

The firm's WSPs were allegedly deficient because they did not require timely close out of failed transactions under MSRB Rule G-12. According to the AWC, the WSPs did not require the firm to track whether failed inter-dealer municipal securities transactions were closed out timely, among other things. The WSPs also allegedly did not require the firm to take prompt steps to obtain physical possession or control of municipal securities aged more than 30 calendar days that the firm failed to receive. The AWC stated that the firm continued to file extension requests for short positions caused by fails to receive over 30 calendar days despite prior notice from FINRA that such extensions would not be granted. The firm updated its supervisory system, including its WSPs, to address these issues. The firm agreed to pay a $1.6 million fine to resolve the matter.

Financial Crimes

1. Cyber Intrusion Compliance

According to an SEC Order, an exchange, along with certain of its subsidiaries (collectively, the "Exchange"), failed to notify the SEC in a timely manner of a "systems intrusion" as required by Regulation SCI, which obligates entities to immediately, i.e., within 24 hours, notify the SEC when there is a reasonable basis to conclude that an "SCI event has occurred." According to the Order, a third party informed the Exchange that it was one of several entities potentially impacted by a "zero-day" vulnerability in one of the Exchange's virtual private network concentrators. The Exchange took steps to analyze and respond to the vulnerability, and, four days later, concluded that the Intrusion was a de minimis event to be reported in the Exchange's next quarterly report. The Order stated, however, that the Exchange did not timely notify SEC Staff of the Intrusion in violation of Reg. SCI. According to the Order, the Exchange also failed to timely inform their compliance personnel of the Intrusion in violation of internal cyber incident reporting procedures. The Order stated that Exchange's conduct caused violations of Rules 1002(b)(1) and 1002(b)(2) of Regulation SCI. The Exchange agreed to a pay a civil money penalty of $10 million.

According to a FINRA AWC, two affiliated broker-dealers failed to establish and maintain a supervisory system, including necessary WSPs, reasonably designed to safeguard records and information relating to customers in violation of Rule 30(a) of Regulation S-P of the Exchange Act, among others. These violations allegedly stemmed from cybersecurity incidents at certain branch offices of the firms. Notably, both entities self-reported the issues described in the AWC. According to the AWC, the firms allowed branch offices to develop their own data loss prevention and security controls, which resulted in many of these offices lacking data loss prevention controls such as 1) multi-factor authentication for email accounts, 2) the maintenance of email access logs, and 3) encryption for outbound emails including customers' nonpublic personal information. Both firms had received notice from FINRA examinations that they lacked the necessary cybersecurity controls at their branch offices. The firms agreed to pay a total fine of $300,000.

2. Anti-Money Laundering and Customer Identification Program Issues

According to a FINRA AWC, a broker-dealer failed to establish and implement reasonable escalation and tracking procedures for its AML program. In particular, the AWC alleged that the firm's system was not reasonably designed to supervise how analysts at the firm reviewed and resolved potentially suspicious trading activity. According to the AWC, the firm's WSPs also were not reasonably designed regarding the acceptance and resale of low-priced securities, which potentially could implicate violations of Section 5 of the Securities Act. The AWC stated that the foregoing violated FINRA Rule 3110. The firm agreed to pay a $700,000 fine and to an undertaking to remediate the issues identified in the AWC.

According to another FINRA AWC, a broker-dealer allegedly implemented a Customer Identification Program (CIP) that was not reasonably designed to verify customer identity in violation of FINRA Rule 3310(b). The AWC stated that the firm used a third-party vendor which provided to the firm a number score for the customer applicant. According to the AWC, the firm automatically approved the applicant if, among other things, the score satisfied the firm's threshold. The AWC alleged that the firm approved applicants when there were red flags in the vendor's report, such as inconsistent telephone number or residential addresses; invalid social security numbers; and instances when the applicant used an Internet Protocol address more than 100 miles from the applicant's stated residential address. In addition, the AWC alleged that the firm violated Rule 201 of Regulation S-ID of the Exchange Act because the firm's Identity Theft Prevention Program was not reasonably designed to detect, prevent, and mitigate identity fraud. Allegedly, among other things, the firm did not review certain reports from the vendor containing potential red flags and the firm did not timely review fraud alerts associated with certain accounts. The AWC noted that relevant parties had been reimbursed and the firm agreed to pay a $1.1 million fine.

Firm Operations

1. Books and Records

According to an NYSE Arca AWC, NYSE Arca and several other Exchanges alleged that a broker-dealer failed to accurately record order transmission times on the brokerage memoranda for options orders and did not establish and maintain a supervisory system reasonably designed to achieve compliance with Exchange Act Rule 17a-3(a)(6), among others. For certain orders manually routed for execution, the AWC stated that the firm recorded the time that the broker to whom the order was routed acknowledged the order rather than the time the firm transmitted the order for execution. According to the AWC, the firm, among other things, did not have a system to capture accurate transmission times and did not implement WSPs reasonably designed to check the accuracy of order transmission times per NYSE Arca Rule 11.18. The firm agreed to pay a fine of $28,900, which was resolved simultaneously with similar matters for a total fine of $725,000.

According to an NYSE Arca AWC, a broker-dealer failed to accurately record over one thousand options orders manually handled and routed to either NYSE Arca or NYSE American LLC for execution in violation of Exchange Act Rule 17a-3, among others. In addition, the AWC alleged that the firm's WSPs were not reasonably designed to achieve compliance with the recordkeeping rules. According to the AWC, there was a lapse in the supervisory review of manual options order records in early 2022 and a lack of review for the accuracy of timestamps on order tickets before 2022 in violation of NYSE Arca Rules 11.18(b) and (c). The firm agreed to pay a fine of $52,500, which was resolved simultaneously with similar matters for a total fine of $105,000.

2. Customer Confirmations

Four respective firms resolved alleged customer confirmation and supervision allegations with FINRA during the first half of 2024. In one of the matters that originated from a FINRA Rule 4530 Report, and because of a coding error, FINRA alleged that a broker-dealer's institutional customers received customer confirmations that did not reflect that the price provided on the confirmation was an average price or that additional information about the transactions were available upon request in violation of Exchange Act Rule 10b-10, among others. The AWC noted that customers had access to online information about the individual transactions, which may have been a mitigating factor. Nonetheless, the AWC stated that once the firm became aware of the issues, it did not take timely steps to address the coding error that resulted in inaccurate confirmations. FINRA also alleged that the firm's WSPs were deficient because the monthly reviews did not include a specific review for average price disclosures in violation of FINRA Rule 3110. The firm agreed to pay a $425,000 fine.

In another customer confirmation matter that also originated from a FINRA Rule 4530 report, a broker-dealer issued customer confirmations to institutional customers in fixed income securities that contained an inaccurate capacity or were incorrectly marked as solicited/unsolicited because of coding issues. In other instances, retail customers who consented to electronic delivery of the confirmation did not receive a confirmation because of system input or system configuration issues. Finally, another set of retail customers allegedly received monthly confirmations, rather than trade-by-trade confirmations, for their dividend reinvestment plan (DRIP) transactions that allegedly did not conform to the relevant no-action letter in this area. According to the AWC, the firm could not avail itself of the monthly disclosure process because the customers had not received a detailed written description of the DRIP prior to enrollment. The AWC stated that the customer confirmation issues violated Exchange Act Rule 10b-10 and MSRB Rule G-15, among others. Finally, the AWC stated that the firm's WSPs were deficient because they did not describe how to review the firm's systems to determine whether they were working as intended and because there was no periodic testing of the systems used to generate customer confirmations in violation of FINRA Rule 3110 and MSRB Rule G-27. The firm agreed to pay a $375,000 fine and restitution of over $393,000, and to an undertaking to remediate the customer confirmation issues identified in the AWC.

In another matter, FINRA found that a broker-dealer allegedly prepared customer confirmations containing inaccurate or incomplete information in violation of Exchange Act Rule 10b-10, among others. For example, and according to the AWC, certain confirmations stated that the transactions were executed at a single price rather than at an average price. In other instances, confirmations allegedly stated that a markup/markdown had been charged when a commission was charged. The AWC also alleged that the firm violated FINRA Rule 3110 because it did not memorialize certain reviews of customer confirmation samples; did not investigate certain red flags; and stopped conducting a sample review due to a coding issue that was subsequently identified. The firm agreed to pay a $250,000 fine.

In a fourth matter, a broker-dealer allegedly failed to disclose markup/markdown information to retail customers in municipal, corporate, and agency debt securities. According to the AWC, there were instances where the customer confirmations did not include any information related to the markup/markdowns. In other instances, the confirmations allegedly included a dollar amount for the transaction but did not reflect the markup/markdown as a percentage of the prevailing market price. According to the AWC, the disclosure issues resulted from a coding error. The AWC stated that the customer confirmation issues violated MSRB Rule G-15 and FINRA Rule 2232. Finally, the AWC stated that the firm's WSPs were deficient because they did not include a review of disclosures for retail customer confirmations in violation of MSRB Rule G-27 and FINRA Rule 3110. The firm agreed to pay a $100,000 fine.

3. Confidential Release Agreements

According to an SEC Order, a dually registered broker-dealer and investment adviser asked certain advisory and brokerage clients to sign a confidential release agreement when the firm issued a credit or agreed to a settlement above a specified dollar threshold with the client in violation of Exchange Act Rule 21F-17(a). The Order stated that although the agreements allowed clients to respond to inquiries from the SEC, clients allegedly were not permitted to voluntarily provide information about potential securities law violations to the SEC. In some instances, the firm separately reported the underlying issues to FINRA pursuant to FINRA Rule 4530, which the Order explicitly stated was not mitigating in this instance. The Order did credit the firm for its prompt remedial action to address the allegations. The firm agreed to pay a civil money penalty of $18 million.

Communications and Sales

1. Off-Channel Communications

The SEC has taken enforcement actions against several firms for failing to comply with federal recordkeeping requirements. Employees, including senior management, at these firms engaged in "off-channel communications" using personal devices, which were not preserved as required by law. This practice allegedly violated Section 17(a) of the Securities Exchange Act and Rule 17a-4(b)(4), as well as Section 204 of the Investment Advisers Act. According to the Orders, the firms' inadequate supervision of employees allegedly contributed to these violations and potentially hindered SEC investigations. As part of the settlements, the firms agreed to remedial measures, including hiring independent compliance consultants to review and enhance their recordkeeping practices, implementing new technologies, and increasing training to ensure compliance with federal regulations. The SEC also imposed substantial civil money penalties on these firms with amounts ranging from $1.25 to $16.5 million.

FINRA has also taken enforcement actions against firms for failing to preserve and supervise off-channel communications, highlighting the importance of compliance with recordkeeping obligations. In one case, a broker-dealer was fined for failing to preserve over a million business-related emails between 2013 and 2021 due to inadequate supervisory systems, in violation of Section 17(a) of the Securities Exchange Act, among others. Similarly, another firm and an individual were penalized for not preserving over 10,000 business-related text messages between 2011 and 2021, resulting in a fine for the firm and a fine and suspension for the individual. Both firms agreed to enhance their supervisory systems and retain independent compliance consultants to ensure future compliance with recordkeeping requirements.

2. Suitability and Regulation Best Interest

According to a FINRA AWC, a broker-dealer did not have a reasonable supervisory system to determine whether registered representatives had a reasonable basis to believe that their recommendations were suitable or in their customer's best interest and thereby allegedly failed to comply with the Compliance Obligation of Regulation Best Interest, Exchange Act Rule 15l-1(a)(1). The AWC stated that certain new-issue products were eligible for a fee waiver if purchased in an advisory account. In certain instances, registered representatives recommended that customers purchase the products in a brokerage account, which was not eligible for an advisory fee waiver, and then transfer the products to an advisory account. According to the AWC, the firm did not have a supervisory system, including WSPs, to detect this scenario. The firm obtained credit for extraordinary cooperation and did not have to pay a fine as a result.

According to an SEC Order, a dually registered broker-dealer and investment adviser allegedly violated Regulation BI under Exchange Act Rule 15l-1(a) as well as Sections 206(2) and 206(4) of the Advisers Act. According to the Order, registered representatives and investment adviser representatives recommended that certain retail customers and clients consider transferring securities from one account to an account at an affiliate. The representatives allegedly failed to disclose to customers that the representatives would receive compensation for any recommendations and securities transfers. The firm's procedures also were allegedly deficient because they did not provide guidance for supervisors to identify, review, or address potential conflicts of interest. The procedures also allegedly did not provide a mechanism for the firm to identify and disclose in its Form CRS, Best Interest Client Disclosure Guide, or any other document, compensation that the registered representatives would receive for the recommendation and securities transfers. According to the Order, the alleged failure to disclose the payments to the investment adviser clients also did not comply with Section 206(2) of the Advisers Act. Similarly, the firm's policies were allegedly deficient because they did not require the firm to disclose the compensation to advisory clients. The firm, however, was credited for addressing the firm's procedures related to the disclosure of conflicts of interest for registered representatives and investment advisers. The firm agreed to pay a civil money penalty of $223,228.

According to a FINRA AWC, a broker-dealer allegedly failed to establish and maintain a supervisory system to address excessive trading in violation of FINRA Rule 3110. The AWC stated that the firm's WSPs did not provide reasonable guidance addressing how to identify or investigate potentially excessive trading activity. FINRA also alleged that the firm did not reasonably use available exceptions reports to identify potentially excessive trading. Although the firm sent activity letters to customers to address potential excessive trading, there was a period when the WSPs did not address what account activity should warrant letters. The AWC also alleged that the firm violated FINRA telemarketing rules and failed to reasonably supervise for compliance with such rules in violation of FINRA Rules 3110 and 3220. The firm agreed to pay a $300,000 fine and restitution of over $594,000 (plus interest), and to an undertaking to update the firm's WSPs.

According to a FINRA AWC, two affiliated broker-dealers failed to establish and maintain supervisory systems reasonably designed to comply with suitability obligations concerning certain complex financial instruments in violation of FINRA Rule 3110, among others. The AWC stated that the WSPs did not require supervisors to determine whether recommendations for the complex products were consistent with the intended holding periods in the prospectuses. According to the AWC, the firms also deactivated for several months an automated alert for potentially unsuitable recommendations because of false positives that the alerts generated, among other possible alerts that were valid. The AWC also stated that supervisors were not trained on how to evaluate potential red flags associated with the alerts. The firms ultimately prohibited sales of the complex products years before the AWC was finalized. The firms agreed to pay a total fine of $1 million and total restitution of over $1.2 million (plus interest).

According to an SEC Order, a dually registered broker-dealer and investment adviser allegedly failed to comply with Regulation BI in connection with recommendations to retail customers. According to the Order, retail customers could invest in a pre-selected suite of affiliated investments, including affiliated mutual funds. Customers also could invest in a broader selection of securities, including a variety of mutual funds, ETFs, stocks, and bonds. The mutual fund expenses for share classes of the same funds were higher in the former than the later. The Order stated that the firm did not accurately disclose that lower-cost share classes of affiliated funds were available and that there was an associated conflict of interest as a result. The Order also alleged that the firm violated the Care Obligation, as it related to the firm's exercise of reasonable diligence, and the Compliance Obligation as it related to the firm's written policies and procedures. The firm agreed to pay disgorgement of over $936,000 (plus interest) and a civil money penalty of $1.25 million.

3. Finfluencers

According to a FINRA AWC, a broker-dealer used influencers that posted information about the firm that was not fair and balanced or that included exaggerated or promissory statements in violation of FINRA Rule 2210(d)(1). The AWC stated that certain influencers made inaccurate statements about the repayment period for margin loans; claimed that the firm's services were free when certain fees may have applied; and included language indicating how much money investors could anticipate earning through their investments. According to the AWC, the firm also did not maintain records or dates of the retail communications created by the influencers, in violation of Exchange Act Rule 17a-4, among others. Finally, the AWC alleged that the Firm did not have a supervisory system to review, among other things, the content of the retail communications that influencers used and to retain those communications, in violation of FINRA Rule 3110. The firm agreed to pay an $850,000 fine and to an undertaking to update its WSPs to address the issues discussed in the AWC.

According to a FINRA AWC, a broker-dealer paid 17 individual social media influencers to post content about the firm on social media platforms. The AWC alleged that the content was not fair and balanced or that the influencers made claims that were promissory in violation of FINRA Rule 2210(d)(1). According to the AWC, the firm failed to: (1) review the influencers' videos prior to their posting on social media, (2) retain the videos, and (3) establish, maintain, and enforce a system, including WSPs, reasonably designed to supervise communications disseminated on the firm's behalf, in violation of Exchange Act Rule 17a-4(b)(4) and FINRA Rules 2210(b), 4511, 3110, and 2010. The firm agreed to pay a $200,000 fine and to an undertaking to remediate the issues identified in the AWC.

According to a FINRA AWC, a broker-dealer paid influencers to promote the firm in social media communications. The firm, however, allegedly failed to review the influencers' videos prior to posting the videos on social media platforms and online interactive electronic forums and also failed to retain them, in violation of FINRA Rule 2210(d)(1). The firm also allegedly failed to establish, maintain, and enforce a system, including WSPs, reasonably designed to supervise retail communications disseminated on the firm's behalf by its influencers, in violation of Exchange Act Rule 17a-4(b)(4), among others. In addition, the firm allegedly provided customers with privacy notices that inaccurately stated the extent to which the firm would use their nonpublic personal information in violation of Regulation S-P of the Exchange Act. The firm agreed to pay a $250,000 fine.

4. Research Analysts

According to a FINRA AWC, a broker-dealer allegedly failed to establish and maintain a supervisory system reasonably designed to comply with FINRA rules relating to research analyst conflicts of interest. According to the AWC, the firm's supervisory system was not reasonably designed to restrict or limit trading in covered securities in externally managed accounts. The AWC alleged that the firm did not conduct a review of research analysts' externally managed accounts and the firm's WSPs did not require the analysts to instruct their external account managers about trading restrictions. As a result, the AWC alleged that certain external account managers traded the securities in a manner inconsistent with the analyst's recommendations. In certain instances, research reports also did not disclose that the analyst held securities in the covered company. Separate from the foregoing issues, and as a result of a data-feed issue, the AWC stated that certain research reports did not contain complete information about payments to the firm's affiliates for non-investment banking services. The issues identified in the AWC resulted in violations of FINRA Rules 2241 and 3110, among others. The firm took remedial steps to address the issues discussed in the AWC and agreed to pay a $700,000 fine.

5. Payments to Unregistered Broker-Dealer

According to a FINRA AWC, a broker-dealer paid millions to an unregistered entity pertaining to the sale of a variable universal life insurance (VUL) in violation of FINRA Rule 2040. As a result of the VUL sales, the firm allegedly was compensated approximately $8.7 million and retained approximately $545,000 of gross compensation. FINRA Rule 2040 specifically prohibits firms and associated persons from providing any "compensation, fees, concessions, discounts, commissions, or other allowances to any person that is not registered as a broker-dealer under the Exchange Act." The firm agreed to pay a $500,000 fine.

6. Offerings

According to a FINRA AWC, a broker-dealer failed to file or timely file documents and information regarding seven public takedown offerings of securities following an initial shelf offering in violation of FINRA Rule 5110(b). The firm also allegedly failed to ensure that all underwriting compensation it received was disclosed in the prospectus supplements for two public offerings in violation of FINRA Rules 5110(c). The AWC stated that the firm failed to establish and maintain a supervisory system and WSPs reasonably designed to meet the firm's obligations related to FINRA Rule 5110, in violation of FINRA Rule 3110. The firm agreed to pay a $100,000 fine and to an undertaking to remediate the issues identified in the AWC.

Supervision

1. Surveillance Report Deficiencies

According to a FINRA AWC, FINRA and several Exchanges found that a broker-dealer did not include warrants, rights, units, and certain OTC equity securities in its anti-manipulation surveillance reports, including reports for potential wash sales and reports designed to identify marking the open and close. The AWC alleged that these deficiencies violated FINRA Rule 3110, among others. In particular, the firm's WSPs allegedly did not require the firm to review the completeness of the firm's automated surveillance report. As noted in the AWC, the firm subsequently implemented reviews to identify whether any securities were inadvertently omitted from the surveillance reports. The firm agreed to pay a total fine of $512,000.

In another FINRA AWC, a broker-dealer firm allegedly failed to reasonably supervise transactions that the firm's registered representatives placed directly with product sponsors on behalf of the firm's customers in violation of FINRA Rule 3110, among others. According to the AWC, the firm did not have a reasonable system to ensure that such direct business transactions were included in the firm's daily trade blotter, which the firm used to generate exception reports. Because of the missing transactional information, the firm allegedly was unable to reasonably supervise the suitability of the direct business transactions. The AWC also alleged that the firm did not take steps to ensure that representatives collected and maintained information about the customer profiles associated with certain direct business transactions. According to the AWC, the firm was therefore unable to determine whether certain of those transactions were suitable, in violation of Exchange Act Rule 17a-3, among others. The firm was credited for taking remedial steps to address the issues identified in the AWC and agreed to pay a $500,000 fine.[1]

2. Options

According to a FINRA AWC, a broker-dealer relied on automated, electronic approval systems to approve or disapprove of customers seeking to trade options. The AWC stated that the firm's systems were not reasonably designed because, among other things, they did not compare a customer's new options application to any prior applications that the firm had rejected for that customer. The AWC also alleged that the firm approved customers for certain levels of options trading despite red flags that the requested levels were not appropriate for the customers. For example, certain customers claimed they had multiple years of options trading experience despite recent applications stating that the same customers had less than one year of experience. As a result, the AWC stated that the firm violated FINRA Rules 2360 and 3110. The firm, however, was credited for making enhancements to its systems to address the allegations contained in the AWC. The firm also agreed to pay a $600,000 fine.

3. Forgery or Falsification

According to a FINRA AWC, a broker-dealer failed to implement a reasonable system to detect and prevent electronic signature forgery or falsification by its representatives in violation of FINRA Rules 3110, among others. According to the AWC, the firm's inadequate procedures and lack of guidance for supervisors resulted in at least 15 representatives falsifying or forging 120 customer signatures on over 260 firm documents, including account records and securities purchase instructions. The firm also allegedly failed to investigate red flags such as representatives using personal email addresses or their own devices to complete customer signatures. The AWC stated that the firm's WSPs mandated that representatives obtain authentic customer signatures on firm documents, but the WSPs allegedly lacked any procedures for supervising the use of electronic signatures and did not provide reasonable guidance to supervisors on how to assess the authenticity of electronic signatures. Notably, however, the AWC did not identify any customer harm. The firm agreed to pay a $325,000 fine and to an undertaking to remediate the issues identified in the AWC.

4. Theft of Customer Funds

According to a FINRA AWC, a broker-dealer failed to reasonably supervise the transmittal of customer funds initiated by third parties in violation of FINRA Rule 3110. The AWC stated that the firm used a proprietary tool to identify suspicious Automated Clearing House (ACH) transfers, but the tool only flagged internally initiated ACH transfers and not externally initiated transfers. Per the AWC, the firm also failed to investigate potential red flags associated with increased ACH activity and that the account had more ACH transfers than any other account at the firm, among other things. The AWC credited the firm with making enhancements to its supervisory systems and for conducting a look-back review of other customer accounts. The firm also agreed to pay a $225,000 fine.

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DWT's financial services team regularly handles enforcement matters involving the SEC, FINRA, and the state regulators, in addition to providing regulatory counseling to fintechs, broker-dealers, and investment advisers on a wide range of issues. Please contact us if you are interested in more information about the above-referenced matters or any of the issues discussed herein.