Enforcement Developments Wednesday, May 17 11:15 … Hopper . Senior Vice President and Counsel . FINRA Enforcement . ... Julie Glynn joined JP Morgan Chase in 2011 and is currently

© 2017 Financial Industry Regulatory Authority, Inc. All rights reserved. 1

Enforcement Developments Wednesday, May 17 11:15 a.m. – 12:15 p.m.

This session provides an overview of new developments and trends in enforcement, including enforcement priorities. Panelists highlight noteworthy decisions and settlements that illustrate FINRA priorities, and provide guidance on regulatory and compliance practices. Moderator: Susan Schroeder Senior Vice President and Counsel FINRA Enforcement Panelists: Julie Glynn General Counsel JPMorgan Chase & Co. Jessica Hopper Senior Vice President and Counsel FINRA Enforcement Christopher Kelly Regional Chief Counsel FINRA Enforcement Jeffrey Levine Managing Director – Legal/Compliance and General Counsel Mesirow Financial

© 2017 Financial Industry Regulatory Authority, Inc. All rights reserved. 2

Enforcement Developments Panelist Bios: Moderator: Susan Schroeder is the Deputy Chief of FINRA’s Department of Enforcement, responsible for Enforcement’s home office in New York. Prior to joining FINRA, she was a partner in WilmerHale’s Securities Litigation and Enforcement practice, where she specialized in SEC, FINRA, and state enforcement actions. She began her legal career as a litigation associate at Kirkland & Ellis. She received her J.D. from NYU School of Law, her M.A. from the University of California at Davis, and her B.A. from Georgetown University. She is a member of the New York bar. Panelists: Julie Glynn joined JP Morgan Chase in 2011 and is currently the General Counsel of Chase Wealth Management. She previously worked in the Government Investigation and Regulatory Enforcement Group and as Deputy Chief Legal Officer for JP Morgan Securities, LLC and JP Morgan Clearing Corporation. Prior to working at JP Morgan Chase she worked for FINRA Enforcement, Morgan Stanley and Morrison & Foerster. Jessica Hopper is FINRA’s Senior Vice President of Regional Enforcement, responsible for the Department of Enforcement’s attorneys and professionals in 15 District Offices throughout the country. She oversees the nationwide disciplinary proceedings that regional Enforcement brings against broker-dealers and registered representatives for violations of FINRA’s rules. She joined FINRA Enforcement in 2004 and served as a Director in FINRA’s Washington D.C. home office until 2011. Prior to joining FINRA, from 2000 to 2004 she was a member of the Legal & Compliance Department of Legg Mason Wood Walker, Inc.’s, where her responsibilities focused on retail sales compliance issues. Earlier in her career, she was an associate at a law firm and an editor in legal publishing. Christopher Kelly serves as the Regional Chief Counsel for the North Region of FINRA’s Enforcement Department. As Regional Chief Counsel, Mr. Kelly oversees the work of the Enforcement Staff in the Boston, New Jersey, and Philadelphia District Offices. Prior to joining FINRA, Mr. Kelly served as Deputy Chief of the Criminal Division at the U.S. Attorney’s Office for the District of New Jersey. In that role, Mr. Kelly supervised more than 35 Assistant U.S. Attorneys in the Office’s white collar units: Economic Crimes, National Security, Healthcare and Government Fraud, and Cybercrime. Prior to his promotion to the position of Deputy Chief, Mr. Kelly served as the Chief of the Economic Crimes Unit at the U.S. Attorney’s Office, where he oversaw the Office’s prosecution of complex economic crimes, including crimes involving insider trading, securities fraud, tax evasion, bank fraud, corporate fraud and embezzlement. Mr. Kelly also served as the lead prosecutor on several complex matters, including U.S. v. Tiger Asia, one of the first ever criminal prosecutions of a hedge fund. Mr. Kelly graduated from Duke University and Harvard Law School. Prior to joining the U.S. Attorney’s Office, he was an associate at the law firm Dechert LLP. Mr. Kelly also clerked for the Honorable Joseph E. Irenas, U.S. District Court Judge for the District of New Jersey. Jeff Levine is Managing Director – Legal/Compliance and General Counsel of Mesirow Financial. Mesirow Financial is a diversified financial company with a myriad of investment management, broker-dealer and insurance business lines. In this position, Mr. Levine is responsible for Mesirow Financial’s global legal activities and policies including its overall compliance with applicable regulatory organizations such as the Financial Industry Regulatory Authority, U.S. Securities and Exchange Commission (SEC), Commodities Futures Trading Commission, National Futures Association and various other foreign and state agencies. Prior to joining Mesirow Financial, he was an attorney advisor in the regulation division of the SEC, where he was responsible for the compliance of registered entities with federal securities regulations and self-regulatory agency rules. He also was assigned to the Enforcement Division of the SEC. Prior to his tenure at the SEC, Mr. Levine was an Assistant Cook County State’s Attorney. Mr. Levine holds a juris doctor degree from DePaul University College of Law and a Bachelor of Arts degree from Northwestern University. He holds multiple securities licenses, passed the U.K.’s Principal of Financial Regulations and has earned the designation of Chartered Alternative Investment Analyst program. Mr. Levine also serves on FINRA’s District Committee and its series 14 test writing committee.

FINRA Annual ConferenceMay 16-18, 2017 • Washington, DC

Enforcement Developments

FINRA Annual Conference © 2017 FINRA. All rights reserved.

ModeratorSusan Schroeder, Senior Vice President and Counsel, FINRA

EnforcementPanelists Julie Glynn, General Counsel, JPMorgan Chase & Co. Jessica Hopper, Senior Vice President and Counsel, FINRA

Enforcement Christopher Kelly, Regional Chief Counsel, FINRA Enforcement Jeffrey Levine, Managing Director – Legal/Compliance and

General Counsel, Mesirow Financial

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Panelists


Under the “Schedule” icon on the home screen,Select the day,Choose the Enforcement Developments session, Click on the polling icon:

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To Access Polling


1. How well do you understand the internal process that Enforcement follows to make charging and sanctions decisions?

a. Extremely wellb. Pretty wellc. Not well at all

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Polling Question 1


2. What is the biggest challenge firms face when supervising sales of complex products?

a. Ensuring that surveillance and exception reports are catching the right issues

b. Ensuring that designated supervisors are conducting appropriate follow-up

c. Staying current on potential issues identified in regulatory guidance

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Polling Question 2


3. Does your firm have a process in place to identify registered representatives who require heightened supervision?

a. Yesb. No

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Polling Question 3

FINRA Department of Enforcement Enforcement Priorities

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© 2017 Financial Industry Regulatory Authority, Inc. All rights reserved.

A. Fraud and Misrepresentations 1. Red River Securities, LLC and Brian Keith Hardwick (2013035344201) (February 2017)

A FINRA hearing panel expelled a Plano, TX-based broker-dealer Red River Securities, LLC, barred its CEO Brian Keith Hardwick, and ordered the firm and Hardwick to jointly and severally pay $24.6 million in restitution to customers for fraudulent sales in five oil and gas joint ventures. The hearing panel found that the respondents engaged in a pattern of misrepresentations and omissions that spanned nearly four years and involved sales in the risky joint ventures. The hearing panel dismissed FINRA Department of Enforcement’s allegations that the firm sold interests in two of the joint venture offerings in violation of the general solicitation prohibition for the private placement of securities under Regulation D, one alleged misrepresentation charge, several alleged suitability violations by the firm, and additional suitability allegations against Hardwick. The decision resolves charges brought by FINRA’s Department of Enforcement in July 2015. The panel found that Red River Securities and Hardwick intentionally and fraudulently misrepresented and omitted material facts in connection with the sales of interests in oil and gas joint ventures issued by Regal Energy, LLC, a close affiliate of Red River Securities. The oil and gas offerings, which the panel noted were already high-risk ventures, misrepresented the amount of income distributed to investors in other Regal Entity joint ventures, failed to disclose material conflicts of interest, and failed to disclose that one of the wells was a “wildcat,” which carried risk in addition to the usual risks of oil and gas joint ventures. In addition, Red River Securities and Hardwick omitted material information about the sizable management fees that would be paid to the affiliated entity and failed to disclose Hardwick’s participation in drafting an independent geologist’s report.

In addition, the hearing panel held that the joint venture purchase was not suitable for two customers. One customer was a 74-year-old, self-employed farmer and dog breeder with a net worth of $2 million, liquidity of $20,000, and $150,000 in annual income. Given her level of liquidity and her self-employed/seasonal employment situation, the hearing panel found that her investment of $94,754, representing well over half of her annual income, in three risky oil and gas ventures in a period of a year, was not suitable.

The panel decision also characterized Red River Securities and Hardwick’s misconduct as “egregious” and noted several aggravating factors, including the respondents’ “failure to develop and enforce a robust supervisory system” and “the extent of the respondents’ monetary gain,” including $3.6 million in due diligence fees and commissions from the five offerings, money earned as owners of Regal Entities, and management fees. Investors received total distributions of less than $500,000 from the more than $25 million they invested in the five offerings.

http://disciplinaryactions.finra.org/Search/ViewDocument/68062


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2. Lawson Financial and Robert Lawson (2014043854401) (January 2017)

FINRA expelled Phoenix-based Lawson Financial Corporation, Inc. (LFC) from FINRA membership, and has barred LFC’s CEO and President Robert Lawson from the securities industry for committing securities fraud when they sold millions of dollars of municipal revenue bonds to LFC customers.

The bonds at issue were underwritten by LFC and related to an Arizona charter school and two assisted living facilities in Alabama (which were the borrowers on the bonds). FINRA found that Robert Lawson and LFC were aware that each borrower faced financial difficulties, and Lawson transferred millions of dollars to the borrowers and associated parties from a deceased customer’s trust account, in order to hide the borrowers’ financial condition and to hide the risks associated with the bonds. FINRA determined that when LFC customers purchased the bonds, LFC and Lawson hid the material fact that Lawson was improperly transferring millions of dollars from the trust account to various parties when the borrowers were not able to pay their operating expenses or required interest payments on the bonds.

FINRA found that Lawson and his wife, Pamela Lawson (LFC’s Chief Operating Officer), who were co-trustees of the trust account, violated FINRA rules by breaching their fiduciary duties as trustees and engaging in self-dealing with the trust account. FINRA also determined that Robert Lawson misused customer funds. In addition to expelling LFC and barring Robert Lawson, FINRA suspended Pamela Lawson from associating with any FINRA member firm for two years and fined her $30,000 to be paid prior to her return to the securities industry. This disciplinary action settles a May 2016 complaint filed against LFC, Robert Lawson, and Pamela Lawson.

3. Halcyon Cabot Partners Limited (2012033877802) (October 2015)

FINRA expelled New York-based Halcyon Cabot Partners, Ltd., and barred Chief Executive Officer Michael Morris and Chief Compliance Officer Ronald Heineman from the securities industry, for fraud, sales practice abuses, and widespread supervisory and anti-money laundering failures. FINRA found that Halcyon, Morris and Heineman engaged in a scheme to conceal a kickback of private placement fees.

FINRA's investigation found that Halcyon, Morris and Heineman, along with a previously barred registered representative, Craig Josephberg, agreed to conceal the discount the issuer provided to a venture capital firm when it purchased a private placement in a cancer drug development company. The scheme was effected through a bogus placement fee agreement that was entered into after the venture capital firm had already agreed to purchase the entirety of the offerings. Halcyon did not perform any work, as there was already a buyer in place, but rather returned almost all of its $1.75 million placement fee to the investor through sham consulting



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agreements. This fraudulent scheme allowed the drug company to conceal that it was selling its shares at a discount.

In addition to the kickback scheme, FINRA also found that Halcyon and Morris enabled a now-expelled broker-dealer, Felix Investments, LLC, to collect undisclosed commissions. Pursuant to an agreement between Halcyon and Felix, Felix charged buyer commissions and Halcyon charged seller commissions on a transaction, despite the fact Halcyon did not provide any services to the sellers. Halcyon then secretly shared the sellers' commissions with Felix.

FINRA also found that Morris falsified Halcyon's books and records to conceal Josephberg's sales of securities in states where he was not registered, including Florida, Texas and Colorado. Halcyon also failed to supervise Josephberg, who churned retail customer accounts and effected unauthorized trades.

4. Brookville Capital Partners LLC and President Anthony Lodati (2012030968601) (March 2015)

FINRA ordered Brookville Capital Partners LLC, based in Uniondale, NY, to pay full restitution of more than $1 million to the victims and fined the firm $500,000 for fraud in connection with sales of a private placement offering. FINRA also barred Brookville President Anthony Lodati from the securities industry.

FINRA found in its settlement and alleged in a May 2014 complaint that Brookville and Lodati defrauded Brookville customers in connection with the sale of a private placement offering called Wilshire Capital Partners Group LLC, through which investors would purportedly have an indirect interest in pre-initial public offering shares of Fisker Automotive. The conduct took place from January 2011 to October 2011.

During the time Brookville solicited customers to invest in the offering, Lodati learned that John Mattera, an individual with a significant criminal and regulatory background, had effected transactions on behalf of Wilshire as Wilshire's CEO and Managing Director. Instead of disclosing that, among other things, Mattera had been sanctioned by the Securities and Exchange Commission (SEC) in 2010 for securities fraud and convicted of a felony in Florida in 2003, Lodati and Brookville purposely withheld this information and information about Mattera's involvement with Wilshire, and continued to solicit its customers to invest. In total, Brookville sold over $1 million worth of interests in Wilshire to 29 customers. Brookville received more than $104,000 in commissions for the sales.

In November 2011, the SEC sued Mattera and others in connection with a scheme that included Wilshire, through which they defrauded investors of $13 million.


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These individuals were also criminally prosecuted and convicted, and Mattera has been sentenced to prison. The SEC obtained a court order freezing all of Wilshire's assets, including the interests owned by Brookville's customers. The Brookville customers who invested in Wilshire lost their entire investment.

5. Timothy S. Dembski (2013036168701) and Walter F. Grenda (2013036168701) (February 2016)

FINRA barred two Buffalo-based brokers – Timothy S. Dembski and Walter F. Grenda – from the securities industry for fraud in connection with the sale of a hedge fund, the Prestige Wealth Management Fund, LP. Dembski and Grenda’s misconduct occurred while they were employed with Mid Atlantic Capital Corporation.

FINRA’s investigation found that Dembski and Grenda made material misrepresentations and omissions to lead investors to believe that the hedge fund was a “growth” fund that would be based on a computer algorithm that automatically included risk protections and stop-losses to limit losses in the fund. In fact, the fund was a highly speculative investment, the fund’s Chief Investment Officer had complete control over the investments made, and it was not obligated to follow the computer algorithm. In the last full month that the fund traded, it lost over 80 percent of its value.

FINRA found that when marketing the hedge fund, Dembski and Grenda distributed a Private Placement Memorandum (PPM) that they knew contained material misrepresentations about the Chief Investment Officer’s professional experience. The PPM stated that the Chief Investment Officer had “worked in the financial services industry for over 14 years,” “co-managed a portfolio of over $500 million” and was a “Vice President of Investments for a New York based investment company,” all of which were false.

6. George Johnson (2013035533701) (February 2016) FINRA barred broker George Johnson from the securities industry for engaging in a manipulative trading scheme to artificially inflate the market price and trading volume for the common stock of IceWEB, Inc. (OTCBB: IWEB). FINRA also sanctioned Christopher Wynne, Johnson’s supervisor, suspending him for two years in all capacities, barring him in a principal capacity, and fining him $25,000. Joseph Mahalick, another broker who worked with Johnson and Wynne, was suspended for six months and fined $20,000 for falsifying firm records and has been barred from the securities industry in a separate action. Johnson, Wynne and Mahalick all worked for Meyers Associates L.P. in that firm’s Chicago branch office during the time period of the misconduct.





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FINRA found that over an eight-day period, Johnson manipulated the market for IWEB by recommending that certain of his customers buy at increasingly higher and artificially inflated prices while also recommending his other customers sell their shares, frequently matching trades between the customers. FINRA found that among Johnson’s motives for manipulating the stock was the fact that he wanted to obtain business from the issuer for which he would anticipate receiving compensation in connection with a future private offering. Johnson coordinated a campaign with a stock promoter to attempt to increase the stock’s share price to a level that would allow for the exercise of certain warrants. FINRA also found that Johnson and Wynne sent customers IWEB sales materials that omitted information concerning material conflicts of interest and material risks concerning IWEB’s business, and contained misleading, exaggerated and unwarranted information. Moreover, Johnson disclosed confidential information to potential purchasers concerning another offering. In addition to the IWEB scheme, FINRA found that Johnson committed fraud by recommending that certain of his customers purchase shares of another penny stock without disclosing to them that he was liquidating his own personal positions of the security from his own brokerage accounts. In addition, FINRA’s investigation found that to cover up Johnson’s violations of state securities registration requirements, Johnson, Mahalick and Wynne agreed to the practice of entering false information on more than 100 order memoranda, indicating that Wynne or Mahalick was responsible for the account or transactions, instead of Johnson.

7. Craig David Dima (2015046440701) (February 2017) FINRA barred registered representative Craig David Dima for making unauthorized and unsuitable trades totaling approximately $15 million in a 73-year-old retiree’s account, and for fraudulently misrepresenting the reasons for the trades to the customer. FINRA found that on 11 occasions, Dima sold virtually all of the customer’s Colgate-Palmolive stock, accumulated over 28 years of employment at the company, without the customer’s permission. In fact, Dima sold the customer’s shares even after the customer told Dima not to sell the stock, which she considered a valuable long-term investment and reliable source of dividends. When confronted by the customer about the sales, Dima misrepresented to her that they were caused by a “computer glitch” or a technical error. In connection with Dima’s unauthorized sales and subsequent repurchases of Colgate stock, Dima charged the customer more than $375,000 in mark-ups, mark-downs and fees and deprived the customer



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of substantial dividends had she held the Colgate shares as intended. FINRA also found that Dima’s trading of the customer’s Colgate shares was unsuitable and violated FINRA rules prohibiting excessive mark-ups and mark-downs.

B. Conversion/Misuse of Customer Funds

1. Texas E&P Partners, Inc., f/k/a Chestnut Exploration Partners, Inc., f/k/a Chestnut Energy Partners Inc., and Mark A. Plummer (2014040501801) (December 2016)

A FINRA hearing panel expelled Texas E&P Partners Inc. and barred Plummer, the firm’s owner, from association with any FINRA member in any capacity. The panel also ordered Plummer to pay $ 513,961, plus interest, in restitution to customers. The sanctions were based on findings that Plummer misused customer funds by misusing the portion of a completion assessment (certain assessments that were levied on investors for prospective oil and gas well investments) attributable to a prospective well. The findings stated that Plummer collected funds for one purpose—well completion—following a vote by investors and did not use that portion of the funds pertaining to a prospective well for that purpose. Plummer never received permission to use that portion of the assessed funds for other purposes and to date has not repaid those funds to investors, except for settlement payments made to three investors. The findings also stated that the firm had insufficient written supervisory procedures. The firm’s business involved acting as a placement agent in connection with investment offerings involving its affiliates, and its supervisory system failed to address conflicts of interest in such offerings. The findings also included that the firm produced an altered document regarding prospective oil and gas investments to FINRA during its investigation. Plummer intentionally altered the document prior to providing it to FINRA. The firm’s chief compliance officer (CCO) had witnessed the alteration and nevertheless produced the document to FINRA without disclosing its falsity. Plummer acted unethically or in bad faith by falsifying, and thereby rendering misleading, the document that he knew the firm was going to provide to FINRA in connection with its investigation. Plummer also gave false and misleading testimony concerning the document at his FINRA on-the-record interview, and did so intentionally or, at a minimum, recklessly.



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2. Jeffrey C. McClure (2014043071301) (December 2014)

FINRA barred RR Jeffrey McClure from the securities industry for converting nearly $89,000 from an elderly customer's bank account while working for Wells Fargo Advisors, LLC and an affiliated bank in Chico, California. The affiliated bank has made the customer whole for her losses.

FINRA found that from December 2012 to August 2014, McClure wrote himself 36 checks totaling $88,850 drawn on the customer's affiliated bank account without her knowledge or consent. McClure had access to the checks because the elderly customer had authorized him to pay her rent and other expenses as agreed. Instead, McClure deposited the checks into his personal bank account and used the funds for his personal expenses.

C. Negligent Misrepresentations/Omissions

1. Merrill Lynch, Pierce, Fenner & Smith, Inc. (2012032967901) (June 2016)

FINRA fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $5 million for negligent disclosure failures in connection with the sale of five-year senior debt notes to retail customers. In particular, Merrill Lynch failed to adequately disclose certain costs, making it appear that the fixed costs were lower than they actually were. The notes, known as strategic return notes, were linked to Merrill Lynch’s proprietary volatility index. The firm structured the index to track volatility in the equities markets by rebalancing, or rolling, S&P 500 Index options contracts through a series of simulated trades. During the relevant period, the firm sold approximately $168 million worth of the notes to its retail customers, promoting them as a hedge against potential downturns in the equities markets. Included in the costs associated with the notes was the “execution factor,” a feature of the Index intended to replicate transaction costs incurred in the simulated buying and selling of S&P 500 Index options. These transaction costs accrued on a daily basis and totaled 1.5 percent per quarter. In buying the notes, a reasonable retail customer would have considered it important that the execution factor imposed these costs. FINRA found that Merrill Lynch did not adequately disclose the execution factor in the offering documents or sales material. Instead, the firm emphasized that customers would be subject to a 2 percent sales commission and a 0.75 percent annual fee in connection with the notes. Merrill Lynch’s disclosures therefore made it appear as if the notes had relatively low fixed costs. As a result, the firm’s disclosures in the offering documents pertaining to the fixed costs were materially misleading to customers.



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D. AML and Suspicious Trading

1. Credit Suisse Securities (USA) LLC (2013038726101) (December 2016) FINRA fined Credit Suisse Securities (USA) LLC $16.5 million for anti-money laundering (AML), supervision and other violations. FINRA found that Credit Suisse’s suspicious activity monitoring program was deficient in two respects. First, Credit Suisse primarily relied on its registered representatives to identify and escalate potentially suspicious trading, including in microcap stock transactions. In practice, however, high-risk activity was not always escalated and investigated, as required. Second, the firm’s automated surveillance system to monitor for potentially suspicious money movements was not properly implemented. A significant portion of the data feeds into the system were missing information or had other issues that compromised the system’s effectiveness. The firm also chose not to utilize certain available scenarios designed to identify common suspicious patterns and activities, and it failed to adequately investigate activity identified by the scenarios that the firm did utilize. FINRA found that from January 2011 through September 2013, Credit Suisse failed to effectively review trading for AML reporting purposes. The firm expected its registered representatives, who were the primary contact with the customers, to identify and report to its AML compliance department activity or transactions that were unusual or suspicious based on “red flags” described in Credit Suisse’s AML policies. Its AML compliance department was then required to investigate the potentially suspicious activity, document its findings and file Suspicious Activity Reports (SARs) where appropriate. However, the systems and procedures the firm used to monitor trading for other purposes were not designed to detect potentially suspicious activity in order to cause the filing of a SAR, where appropriate, and the other departments and branches of the firm did not effectively assume responsibility for reviewing trading for AML reporting purposes. For example, the trading of one of the firm’s customers, a New York-based hedge fund, followed patterns commonly associated with microcap fraud, such as depositing and then quickly selling, with the proceeds being wired out of the account shortly thereafter. However, no one at the firm reviewed the activity in the account for AML purposes. In addition, Credit Suisse’s reliance on representatives to escalate potentially suspicious trading failed to account for the fact that most orders it received from its foreign affiliates came in to the firm electronically and thus were not seen by the firm’s sales traders. FINRA also found that from January 2011 through December 2015, Credit Suisse failed to effectively review potentially suspicious money transfers. The firm used an



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automated surveillance system to identify red flags of potentially suspicious activity. FINRA found that the firm failed to implement the automated surveillance system properly, including by failing to ensure that the data that was being fed into the system was adequate and by failing to utilize available scenarios that were applicable to the money-laundering risks presented by its business. In addition, FINRA found that Credit Suisse did not have adequate staffing to review the tens of thousands of alerts the automated system generated in any given year. Additionally, FINRA found that Credit Suisse’s procedures were deficient as it relates to compliance with the prohibition of the sale of unregistered securities. Certain Credit Suisse customers deposited and sold microcap shares through the firm, which should have raised red flags indicating that the shares were potentially part of an illegal distribution. The firm’s procedures failed to instruct its representatives, prior to executing trades in microcap securities, how to determine whether those securities were registered or subject to an exemption from registration. These failures extended to potentially suspicious trades made in omnibus accounts of the firm’s foreign affiliates. As a result, FINRA found that from 2011 to 2013, the firm facilitated the illegal distribution of at least 55 million unregistered shares of securities. The firm subsequently implemented additional procedures limiting the trading of microcap securities.

2. Raymond James & Associates, Inc., Raymond James Financial Services, Inc., and Linda L. Busby (2014043592001) (May 2016) FINRA fined Raymond James & Associates, Inc. (RJA) and Raymond James Financial Services, Inc. (RJFS), a total of $17 million for widespread failures related to the firms’ anti-money laundering (AML) programs. RJA was fined $8 million and RJFS was fined $9 million for failing to establish and implement adequate AML procedures, which resulted in the firms’ failure to properly prevent or detect, investigate, and report suspicious activity for several years. RJA’s former AML Compliance Officer, Linda L. Busby, was also fined $25,000 and suspended for three months. RJA and RJFS’ significant growth between 2006 and 2014 was not matched by commensurate growth in their AML compliance systems and processes. This left RJA and Busby, as RJA’s AML Compliance Officer from 2002 to February 2013, and RJFS unable to establish AML programs tailored to each firm’s business, and forced them instead to rely upon a patchwork of written procedures and systems across different departments to detect suspicious activity. The end result was that certain “red flags” of potentially suspicious activity went undetected or inadequately investigated. These failures are particularly concerning given that RJFS was sanctioned in 2012 for inadequate AML procedures and, as part of that settlement, had agreed to review its program and procedures, and certify that they were



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reasonably designed to achieve compliance. During its investigation, FINRA found that the firms failed to conduct required due diligence and periodic risk reviews for foreign financial institutions, and that Busby failed to ensure that RJA’s reviews were conducted. RJFS also failed to establish and maintain an adequate Customer Identification Program.

3. Cantor Fitzgerald & Co. (2012034964301) (December 2015) FINRA fined Cantor Fitzgerald & Co. $6 million and ordered disgorgement of nearly $1.3 million in commissions, plus interest, for selling billions of unregistered microcap shares in violation of federal law. Cantor Fitzgerald & Co. was also sanctioned for failing to have adequate supervisory or anti-money laundering (AML) programs tailored to detect “red flags” or suspicious activity connected to its microcap activity. In addition, two of the firm’s business executives were suspended and fined: Jarred Kessler, Executive Managing Director of Equity Capital Markets during the relevant period, was suspended for three months in a principal capacity and fined $35,000 for supervisory failures; and equity trader Joseph Ludovico was suspended in all capacities for two months and fined $25,000. FINRA found that Cantor Fitzgerald & Co.’s supervisory system was not reasonably designed to satisfy the firm’s affirmative obligation to determine whether the microcap securities that it was liquidating for clients were registered with the Securities and Exchange Commission or subject to an exemption from registration. While Cantor Fitzgerald & Co. made a business decision to expand its microcap liquidation business in March 2011, it failed to ensure that its supervisory system included a reasonable and meaningful inquiry into whether these sales were lawful. Among Cantor Fitzgerald & Co.’s failings were insufficient guidance and inadequate training about when or how to inquire into whether a sale was exempt, and inadequate tools for supervisors to identify red flags associated with illegal, unregistered distributions. As a result of these failures, Cantor Fitzgerald & Co. and Ludovico, as the broker of record, sold billions of shares of thinly traded microcap securities between March 2011 and September 2012 without adequate review and due diligence, a significant portion of which were neither registered nor exempt from registration. These violations were accompanied by a failure to implement an adequate AML program tailored to detect red flags and patterns of potentially suspicious money laundering activity related to these sales. Kessler, a former senior supervisor of Cantor Fitzgerald & Co.’s equities business, failed to respond adequately to a number of red flags indicating the firm’s existing supervisory system was insufficient to support the expansion of Cantor & Co.’s microcap liquidation business. In particular, Kessler knew that the expanding microcap business posed unique challenges and was generating an increasing



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number of regulatory inquiries, but nonetheless delegated his supervisory responsibilities to a central review group without taking sufficient steps to investigate the adequacy of their efforts.

4. Aegis Capital Corp. (2011026386001) (August 2015)

FINRA fined Aegis Capital Corp. $950,000 for improperly selling unregistered penny stocks and for related supervisory failures, and for failing to implement anti-money laundering (AML) policies and procedures. Aegis is also required to retain an independent consultant to review its supervisory and AML systems and procedures. In addition, Charles D. Smulevitz and Kevin C. McKenna, who served successively as Chief Compliance and AML Compliance Officers at the time of the violations, agreed to 30- and 60-day principal suspensions, and fines of $5,000 and $10,000, respectively, for their supervisory and AML failures. In a separate proceeding, Robert Eide, Aegis’s President and CEO, was suspended for 15 days and fined $15,000 for failing to disclose more than $640,000 in outstanding liens.

In general, securities must be registered with the SEC to ensure that potential investors are able to receive essential facts about the issuers. FINRA found that from April 2009 to June 2011, Aegis Capital Corp. liquidated nearly 3.9 billion shares of five penny stocks that were not registered with the SEC and not exempt from registration. There were many “red flags” associated with the transactions, including that the customers were referred to Aegis by a single former securities broker who was barred from the industry and who controlled the activity in several of the Aegis accounts. Without conducting a reasonable inquiry into the red flags, Aegis sold the unregistered shares in violation of the registration requirements of the securities laws.

FINRA’s investigation found that the violations resulted, in part, from the supervisory failures of Aegis and its two Chief Compliance Officers, Smulevitz and McKenna, during the period of the liquidations. Aegis did not have a supervisory system reasonably designed to prevent the distribution of unregistered securities, and further failed to conduct reasonable and meaningful inquiries of the circumstances surrounding the sales of a total of 10 penny stocks by more than a dozen customers.

Additionally, FINRA found that Aegis, as well as Smulevitz and McKenna, as the firm’s AML Compliance Officers, did not adequately implement the firm’s AML program, as they failed to reasonably detect and investigate red flags indicative of potentially suspicious transactions. Specifically, the firm, through Smulevitz and McKenna, did not investigate the deposits of unregistered securities, followed shortly thereafter by liquidations. These sometimes occurred at the same time periods of suspicious promotional activity were undertaken and amounted to large


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percentages of the daily trading volume, and transfers of the resulting proceeds out of the accounts shortly after the liquidations. These failures evidenced the firm’s inadequate system to detect, investigate and, where appropriate, report suspicious activity to the Financial Crimes Enforcement Network.

5. Arthur W. Wood Company, Inc. (2011025444501) (March 2017)

The NAC affirmed a hearing panel’s that Arthur W. Wood Company, Inc. (Wood) failed to implement and enforce its AML procedures and failed to conduct adequate independent tests of its AML procedures, in violation of NASD Rules 3011 and 2110 and FINRA Rules 3310 and 2010. The NAC imposed a $73,000 fine and prohibited Wood from liquidating penny stocks in new accounts for a period of two years. The panel found that the firm failed to detect and investigate certain red flags related to the penny stock trading of one of its representatives, including coordinated deposits and liquidations of penny stocks, and failed to adequately respond to red flags relating to clearing firm alerts.

The NAC also found that Wood charged excessive commissions ranging from more than 5% to more than 18% on 367 equity transactions over a two year period, and failed to implement its supervisory procedures in connection with monitoring commissions. The NAC imposed a $10,000 fine and ordered the firm to pay affected customers over $40,000.00 in restitution.

Wood also failed to maintain accurate books and records, failed to file a required net capital deficiency notice, and operated a securities business while net capital deficient.

E. Foreign Finders

Foreign finders and related foreign affiliates pose compliance risks and may elevate a firm’s AML risk level. Recent examinations and enforcement cases have uncovered problematic arrangements with foreign finders. NASD Rule 1060(b) permits member firms, in limited circumstances, to pay transaction-related compensation to non-registered foreign persons or foreign finders. Specifically, the sole involvement of the foreign finder in the member firm’s business must be the initial referral of non-U.S. customers to the firm. FINRA reminds firms that the scope of permissible business activities and the associated regulatory requirements differ between foreign finders and foreign associates. Examiners have found finders whose activities go beyond an initial referral of non-U.S. customers to the firm and who are involved in the servicing of non-U.S. customer accounts, including having trading authority over accounts, entering customer orders directly to the clearing firm’s online platform, and processing new account documents and funds transfers. As a result of such activities, the foreign finder provisions in



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NASD Rule 1060(b) are not applicable, and the finder is required to be registered as a Foreign Associate pursuant to NASD Rule 1100, or in another appropriate registration category and be supervised as an associated person of the firm. Firms that engage foreign finders should ensure their procedures appropriately address the limited scope of activities permissible under such arrangements and potential risks. See Notices to Members 01-81 and 95-37.

A firm’s AML risk may be elevated by foreign finders and related foreign affiliates depending on the geographical regions involved, types of customers introduced, and products and services offered. Some of the red flags observed include customer accounts exhibiting significant account activity with very low levels of securities transactions, significant credit or debit card activity/withdrawals with very low levels of securities transactions, wire transfers to/from financial secrecy havens or high-risk geographic locations without an apparent business reason, and payment by third-party check or money transfer without an apparent connection to the customer. Relationships with foreign finders and related foreign entities have also been used to hide securities activities and payment of transaction-based compensation to previously disciplined individuals, and to engage in cross-trading for the inappropriate benefit of the finder. Prior to entering into these relationships, firms must have reasonably designed procedures to, among other things, assess and address the potential AML risks associated with the business, and monitor any subsequent activity conducted with foreign finders and related foreign entities.

1. Monex Securities Inc. (2011025617702) (December 2014)

FINRA ordered Monex Securities Inc. to pay $1,100,000 in disgorgement of commissions, plus interest, obtained by unregistered foreign individuals who sold securities on the firm's behalf. FINRA also fined Monex $175,000 for failing to register the foreign representatives and for related supervisory deficiencies over a period of two and a half years. Additionally, Monex's President and Chief Compliance Officer, Jorge Martin Ramos Landero (Ramos), was suspended from acting in a principal capacity for 45 days and fined $15,000.

FINRA's rules require any associated individual engaged in the investment banking or securities business to be registered under the appropriate category of registration and the individual must pass the appropriate qualification examination. FINRA found that Ramos executed an agreement on behalf of Monex with its parent company in Mexico that permitted numerous employees to conduct securities business on Monex's behalf by, among other things, collecting client information needed to open accounts, making investment recommendations to clients and transmitting orders. Monex paid these individuals transaction-related compensation for these efforts. None of these individuals, however, was registered


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in any capacity with FINRA. Ramos and Monex also failed to establish, maintain and enforce supervisory systems and written procedures to ensure compliance with applicable securities laws and regulations.

F. Supervision: Mutual Fund Switches

1. Barclays Capital, Inc. (2015044544001) (December 2015)

FINRA ordered Barclays Capital, Inc. to pay more than $10 million in restitution, including interest, to affected customers for mutual fund-related suitability violations. These suitability violations relate to an array of mutual fund transactions including mutual fund switches. Additionally, the firm failed to provide applicable breakpoint discounts to certain customers. Barclays was also censured and fined $3.75 million. NASD Notices to Members 94-16 and 95-80 remind broker-dealers of their obligation to ensure that any recommendation to switch mutual funds be evaluated with regard to the net investment advantage to the investor. FINRA noted that “switching among certain fund types may be difficult to justify if the financial gain or investment objective to be achieved by the switch is undermined by the transaction fees associated with the switch.” A “mutual fund switch” involves one or more mutual fund redemption transactions coupled with one or more related mutual fund purchase transactions. FINRA found that from January 2010 through June 2015, Barclays’ supervisory systems were not sufficient to prevent unsuitable switching or to meet certain of the firm’s obligations regarding the sale of mutual funds to retail brokerage customers. In particular, the firm incorrectly defined a mutual fund switch in its supervisory procedures to require three separate transactions within a certain time frame. Based on this incorrect definition, Barclays failed to act on thousands of automated alerts for potentially unsuitable transactions, excluded transactions from review for suitability and failed to ensure that disclosure letters were sent to customers regarding the transaction costs. As a result, during the five-year period, there were more than 6,100 unsuitable mutual fund switches resulting in customer harm of approximately $8.63 million. Additionally, FINRA found that the firm failed to provide adequate guidance to supervisors to ensure that mutual fund transactions for its retail brokerage customers were suitable based upon customer investment objectives, risk tolerance and account holdings. During a six-month look back review, 1,723, or 39 percent of mutual fund transactions were found to be unsuitable, with 343 customers experiencing financial harm totaling more than $800,000, including realized losses. In addition, during the same five-year period, Barclays’ supervisory system failed to ensure that purchases were properly aggregated so that eligible customers could be



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provided with breakpoint discounts. A six-month look back review found that the firm failed to provide eligible customers discounts in 98 Class A share mutual fund transactions.

G. Supervision: Missed Discounts 1. Edward D. Jones & Co., L.P. (2015045354201); Stifel Nicolaus &

Company, Inc. (2015045163601); Janney Montgomery Scott, LLC (2015045368001); AXA Advisors, LLC (2015045369801); and Stephens Inc. (2015046029901) (October 2015)

FINRA ordered five firms to pay restitution estimated at more than $18 million, including interest, to affected customers for failing to waive mutual fund sales charges for eligible charitable organizations and retirement accounts. The following firms were sanctioned.

• Edward D. Jones & Co., L.P. – $13.5 million in restitution • Stifel Nicolaus & Company, Inc. – $2.9 million in restitution • Janney Montgomery Scott, LLC – $1.2 million in restitution • AXA Advisors, LLC – $600,000 in restitution • Stephens Inc. – $150,000 in restitution

In July 2015, FINRA had ordered Wells Fargo Advisors, LLC; Wells Fargo Advisors Financial Network, LLC; Raymond James & Associates, Inc.; Raymond James Financial Services, Inc.; and LPL Financial LLC to pay restitution for similarly failing to waive mutual fund sales charges for certain charitable and retirement accounts. Collectively, an estimated $55 million in restitution will be paid to more than 75,000 eligible retirement accounts and charitable organizations as a result of those cases and the cases announced today. FINRA awarded credit for extraordinary cooperation for proactively identifying and remediating instances where their customers did not receive applicable discounts. Mutual funds offer several classes of shares, each with different sales charges and fees. Typically, Class A shares have lower fees than Class B and C shares, but charge customers an initial sales charge. Many mutual funds waive their upfront sales charges on Class A shares for certain types of retirement accounts, and some waive these charges for charities. FINRA found that although the mutual funds available on the firms’ retail platforms offered these waivers to charitable and retirement plan accounts, at various times since at least July 2009, the firms did not waive the sales charges for affected customers when they offered Class A shares. As a result, more than 25,000 eligible retirement accounts and charitable organizations at these firms either paid sales charges when purchasing Class A shares, or purchased other share classes that







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unnecessarily subjected them to higher ongoing fees and expenses. FINRA also found that Edward Jones, Stifel Nicolaus, Janney Montgomery, AXA and Stephens failed to adequately supervise the sale of mutual funds that offered sales charge waivers. The firms unreasonably relied on financial advisors to waive charges for retirement and eligible charitable organization accounts, without providing them with critical information and training.

2. Purshe Kaplan Sterling Investments (2014042291901) (February 2017)

FINRA ordered Purshe Kaplan Sterling Investments (PKS) to pay nearly $3.4 million in restitution to a Native American tribe, after the tribe paid excessive sales charges on purchases of non-traded Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs). In addition to ordering restitution, FINRA fined PKS $750,000 for its failures to supervise the sales of these securities. This settlement resolves charges brought in a February 2016 FINRA complaint against PKS.

FINRA found that from July 2011 through at least January 15, 2015, the tribe’s PKS registered representative was also the tribe’s Treasury Investment Manager responsible for managing the tribe’s investment portfolio. PKS failed to adequately review the risks inherent in that relationship or establish procedures designed to mitigate the risks. FINRA found that as a result of these supervisory failures, the registered representative was able to misrepresent to the tribe that neither PKS nor he would receive commissions on its purchases, and he was therefore able to induce the tribe to invest more than $190 million in non-traded REITs and BDCs. In fact, the representative personally received at least $9 million in commissions from the tribe’s investments.

FINRA also found that PKS failed to identify that more than 200 of the tribe’s purchases were eligible for discounts based on the volume of the purchases. FINRA found that the commissions would have been reduced to approximately $6 million if the tribe received the volume discounts for which it was eligible; however, the representative misrepresented to PKS that the tribe did not want to receive the volume discounts. PKS failed to take reasonable steps to verify this statement even after it received inquiries about the missed discounts from a REIT issuer and FINRA staff.

In addition, FINRA found that, between April 2009 and October 31, 2014, PKS failed to maintain and enforce an adequate supervisory system and written supervisory procedures to ensure compliance with the securities laws and FINRA rules when it sold non-traded REITs and BDCs. PKS did not have procedures that were reasonably designed to identify accounts that were eligible for volume discounts, and did not provide any guidance to its representatives or supervisors regarding how to ensure that the sales volume discounts were applied appropriately.



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3. UIT Sales Charge Discount Cases (October 2015) FINRA ordered 12 firms to pay restitution totaling more than $4 million and fines totaling more than $2.6 million for failing to apply available sales charge discounts to customers' purchases of Unit Investment Trusts (UITs), and related supervisory failures.

FINRA imposed sanctions against the following firms:

• First Allied Securities, Inc. of San Diego, CA, was ordered to pay $689,647 in restitution and fined $325,000.

• Fifth Third Securities, Inc. of Cincinnati, OH, was ordered to pay $663,534 in restitution and fined $300,000.

• Securities America, Inc. of La Vista, NE, was ordered to pay $477,686 in restitution and fined $275,000.

• Cetera Advisors LLC of Denver, CO, was ordered to pay $452,622 in restitution and fined $250,000.

• Park Avenue Securities LLC of New York, NY, was ordered to pay $443,255 in restitution and fined $300,000.

• Commonwealth Financial Network of Waltham, MA, was ordered to pay $357,521 in restitution and fined $225,000.

• MetLife Securities, Inc. of New York, NY, was ordered to pay $349,748 in restitution and fined $300,000.

• Comerica Securities of Detroit, MI, was ordered to pay $197,757 in restitution and fined $150,000.

• Cetera Advisor Networks LLC of El Segundo, CA, was ordered to pay $151,108 in restitution and fined $150,000.

• Ameritas Investment Corp. of Lincoln, NE, was ordered to pay $128,544 in restitution and fined $150,000.

• Infinex Investments, Inc. of Meridian, CT, was ordered to pay $109,627 in restitution and fined $150,000.

• The Huntington Investment Company of Columbus, OH, was ordered to pay $60,973 in restitution and fined $75,000.

A UIT is a type of investment company that offers redeemable units of a generally fixed portfolio of securities that terminate on a specific date. UIT sponsors generally offer sales charge discounts to investors, known as "breakpoint discounts" and "rollover and exchange discounts." A breakpoint discount is a reduced sales charge based on the dollar amount of the purchase-the higher the amount the greater the discount. Breakpoints generally function as a sliding reduction in the sales charge percentage available for purchases, usually beginning at $25,000 or $50,000 (or the corresponding number of units). A rollover or exchange discount is a reduced sales charge that is offered to investors who use the termination or redemption proceeds from one UIT to purchase another UIT.


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H. Supervision – Variable Annuities

1. VOYA Financial Advisors Inc. (2014039172901); Cetera Advisor Networks LLC, Cetera Financial Specialists LLC, First Allied Securities, Inc., Summit Brokerage Services, Inc., and VSR Financial Services, Inc. (2015045234401); Kestra Investment Services, LLC (2014039418401); and FTB Advisors, Inc. (2015043292101) (November 2016)

FINRA fined eight firms a total of $6.2 million for failing to supervise sales of variable annuities (VAs). FINRA also ordered five of the firms to pay more than $6 million to customers who purchased L-share variable annuities with potentially incompatible, complex and expensive long-term minimum-income and withdrawal riders.

FINRA imposed sanctions against the following firms. • VOYA Financial Advisors Inc., of Des Moines, IA, was fined $2.75 million; • Cetera Advisor Networks LLC of El Segundo, CA, was fined $750,000; • Cetera Financial Specialists LLC of Schaumburg, IL, was fined $350,000; • First Allied Securities, Inc. of San Diego, CA, was fined $950,000; • Summit Brokerage Services, Inc. of Boca Raton, FL, was fined $500,000; • VSR Financial Services, Inc. of Overland Park, KS, was fined $400,000; • Kestra Investment Services, LLC of Austin, TX, was fined $475,000; and • FTB Advisors, Inc. of Memphis, TN, was fined $250,000.

FINRA ordered the firms to pay the following to investors.

• Voya was ordered to pay at least $1.8 million to customers in this category. • Cetera Advisors Networks, First Allied, Summit Brokerage Services and

VSR were collectively ordered to pay customers at least $4.5 million.

The L-share VAs at the heart of this action are complex investment products combining insurance and security features designed for short-term investors willing to pay higher fees in exchange for shorter surrender periods. L-shares also had the potential to pay greater compensation to the firms and registered representatives than more traditional share classes. Each of the firms in this action lacked an adequate system to supervise variable annuities with multiple share classes, and failed to provide its registered representatives and principals with reasonable guidance regarding the narrow class of customers for whom the costs and features of L-share variable annuities were suitable.

These failures were compounded by the fact that the short-surrender L-Shares were often sold with complex and expensive guaranteed income and withdrawal riders that provided benefits only over longer holding periods.

http://www.finra.org/sites/default/files/Voya_AWC_110216.pdf

http://www.finra.org/sites/default/files/Cetera_AWC_110216.pdf

http://www.finra.org/sites/default/files/Kestra_AWC_110216.pdf

http://www.finra.org/sites/default/files/FTB_AWC_110216.pdf


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FINRA found that VOYA and four of the Cetera Group firms failed to identify “red flags” of broad patterns of potentially unsuitable sales of this product combination.

These actions also included additional violations by Voya, Cetera Advisors Networks, Cetera Financial Specialists and VSR for failure to monitor rates of variable annuity exchanges at their respective firms.

First Allied was further found to have failed in its supervision of the sale of structured products and non-traditional exchange-traded funds. Lastly, First Allied and Kestra permitted the use of consolidated statements by their registered representatives without proper oversight.

2. VALIC Financial Advisors, Inc. (2014042360001) (November 2016)

FINRA fined Houston-based VALIC Financial Advisors, Inc. (VFA), a total of $1.75 million for failing to identify and reasonably address certain conflicts of interest in the firm’s compensation policy for instances when customers elected to move assets out of their VALIC variable annuities (VA), many of which were held in retirement plan accounts. The firm also failed to adequately supervise its VA business, including the sale of VAs with multiple share classes.

FINRA found that VFA failed to have a reasonable system to address and review the conflict of interest created by its compensation policy. From October 2011 through October 2014, VFA created a conflict of interest by providing registered representatives a financial incentive to recommend that customers move their funds from VALIC variable annuities to the firm’s fee-based platform or into a VALIC fixed index annuity. VFA further incentivized the conflict by prohibiting its registered representatives from receiving compensation when moving customer funds from a VALIC VA to non-VALIC VAs, mutual funds or other non-VALIC products. During 2012 and 2013, FINRA found there was significant volume of assets moving from VALIC VAs to the advisory platform. Also, in a seven-month period after the compensation policy was amended to include the proprietary fixed index annuity, sales of that product grew more than 610 percent.

In addition, FINRA found that VFA failed to maintain systems and procedures to adequately supervise certain aspects of sales of individual VAs. The firm failed to provide its principals reviewing VA transactions with sufficient information to consider the customer’s other assets, failed to enforce its procedures relating to the review of required VA disclosure forms, allowed principals to review and approve transactions without all required documentation in certain instances, and failed to enforce its procedures relating to the review of VA transactions that exceeded customer concentration levels. In addition, the firm failed to have adequate procedures relating to the supervision of multi-share class VAs, particularly L-shares.



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3. MetLife Securities, Inc. (2014040870001) (May 2016)

FINRA fined MetLife Securities, Inc. (MSI) $20 million and ordered it to pay $5 million to customers for making negligent material misrepresentations and omissions on variable annuity (VA) replacement applications for tens of thousands of customers. Each misrepresentation and omission made the replacement appear more beneficial to the customer, even though the recommended VAs were typically more expensive than customers’ existing VAs. MSI’s VA replacement business constituted a substantial portion of its business, generating at least $152 million in gross dealer commission for the firm over a six-year period. Replacing one VA with another involves a comparison of the complex features of each security. Accordingly, VA replacements are subject to regulatory requirements to ensure a firm and its registered representatives compare costs and guarantees that are complete and accurate. For investors in New York, a firm also must adhere to the disclosure requirements set forth in Regulation 60 (Reg. 60). FINRA found that from 2009 through 2014, MSI misrepresented or omitted at least one material fact relating to the costs and guarantees of customers’ existing VA contracts in 72 percent of the 35,500 VA replacement applications the firm approved, based on a sample of randomly selected transactions. For example, • MSI represented to customers that their existing VA was more expensive than

the recommended VA, when in fact, the existing VA was less expensive; • MSI failed to disclose to customers that the proposed VA replacement would

reduce or eliminate important features in their existing VA, such as accrued death benefits, guaranteed income benefits, and a guaranteed fixed interest account rider; and,

• MSI understated the value of customers’ existing death benefits in disclosures mandated by Reg. 60.

FINRA also found that MSI failed to ensure that its registered representatives obtained and assessed accurate information concerning the recommended VA replacements, and did not adequately train its registered representatives to compare the relative costs and guarantees involved in replacing one VA with another. MSI’s principals did not consider the relative costs and guarantees of the proposed transactions. The firm’s principals ultimately approved 99.79 percent of VA replacement applications submitted to them for review, even though nearly three quarters of those applications contained materially inaccurate information. FINRA further found that MSI failed to supervise sales of the GMIB rider, the firm’s bestselling feature for its VAs. The rider was marketed to customers (many of whom were already holding MetLife annuities) as a means of providing a guaranteed future income stream. The GMIB rider is complex and expensive—



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annual fees during the relevant period ranged from 1 percent to 1.5 percent of the VA’s notional income base value. A frequently cited reason for MSI’s recommendation of VA replacements was to allow a customer to purchase the GMIB rider on the new VA contract. Nevertheless, MSI failed to provide registered representatives and principals with reasonable guidance or training about the cost and features of the rider. In addition, FINRA found that since at least 2009, firm customers have received misleading quarterly account statements that understate the total charges and fees incurred on certain VA contracts. Typically, the quarterly account statements misrepresented that the total fees and charges were $0.00 when, in fact, the customer has paid a substantial amount in fees and charges.

I. Supervision – Leveraged and Inverse ETFs

1. Oppenheimer & Co. Inc. (2013038180801) (July 2016)

FINRA fined Oppenheimer & Co. Inc. $2.25 million and ordered the firm to pay restitution of more than $716,000 to affected customers for selling leveraged, inverse and inverse-leveraged exchange-traded funds (non-traditional ETFs) to retail customers without reasonable supervision, and for recommending non-traditional ETFs that were not suitable.

In August 2009, in response to FINRA Regulatory Notice 09-31, which advised broker-dealers of the risks and inherent complexities of certain non-traditional ETFs, Oppenheimer instituted policies prohibiting its representatives from soliciting retail customers to purchase non-traditional ETFs, and also prohibited them from executing unsolicited non-traditional ETF purchases for retail customers unless the customers met certain criteria, e.g., the customer had liquid assets in excess of $500,000. Oppenheimer, however, failed to reasonably enforce these policies; thus, representatives continued to solicit retail customers to purchase non-traditional ETFs and continued to execute unsolicited non-traditional ETF transactions even though the customers did not meet Oppenheimer’s stated criteria. From August 2009 through September 30, 2013, more than 760 Oppenheimer representatives executed more than 30,000 non-traditional ETF transactions totaling approximately $1.7 billion for customers.

In addition, FINRA found that Oppenheimer did not establish an adequate supervisory system to monitor the holding periods for non-traditional ETFs. The firm failed to employ any surveillance or exception reports to effectively monitor the holding periods for non-traditional ETFs, so certain retail customers held non-traditional ETFs in their accounts for weeks, months and sometimes years, resulting in substantial losses.



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FINRA also found that Oppenheimer failed to conduct adequate due diligence regarding the risks and features of non-traditional ETFs and, as a result, did not have a reasonable basis to recommend these ETFs to retail customers. Similarly, Oppenheimer representatives solicited and effected non-traditional ETF purchases that were unsuitable for specific customers. For example:

• An 89-year conservative customer with annual income of $50,000 held 96 solicited non-traditional ETF positions for an average of 32 days (and for up to 470 days), resulting in a net loss of $51,847;

• A 91-year conservative customer with an annual income of $30,000 held 56 solicited non-traditional ETF positions for an average of 48 days (and for up to 706 days), resulting in a net loss of $11,161; and

• A 67-year conservative customer with an annual income of $40,000 held two solicited non-traditional ETF positions in her account for 729 days, resulting in a net loss of $2,746.

J. Supervision – Complex Products

1. Merrill Lynch, Pierce, Fenner & Smith Inc. (2014042578001) (November 2016) FINRA fined Merrill Lynch, Pierce, Fenner & Smith Inc. $6.25 million and required Merrill to pay approximately $780,000 in restitution for inadequately supervising its customers’ use of leverage in their Merrill brokerage accounts.

Merrill “loan management accounts” (LMAs) are lines of credit that allow the firm’s customers to borrow money from an affiliated bank using the securities held in their brokerage accounts as collateral. FINRA found that from January 2010 through November 2014, Merrill lacked adequate supervisory systems and procedures regarding its customers’ use of proceeds from these LMAs. More specifically, FINRA found that although both Merrill policy and the terms of the non-purpose LMA agreements prohibited customers from using LMA proceeds to buy many types of securities, the firm’s supervisory systems and procedures were not reasonably designed to detect or prevent such use. FINRA further found that during the relevant period, on thousands of occasions, Merrill brokerage accounts collectively bought hundreds of millions of dollars of securities within 14 days after receiving incoming transfers of LMA proceeds.

FINRA separately found that from January 2010 through July 2013, Merrill lacked adequate supervisory systems and procedures to ensure the suitability of transactions in certain Puerto Rican securities, including municipal bonds and closed-end funds, where customers’ holdings were highly concentrated in such securities and highly leveraged through either LMAs or margin. FINRA further found that during the relevant period, 25 leveraged customers with modest net



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worths and conservative or moderate investment objectives, and with 75 percent or more of their account assets invested in Puerto Rican securities, suffered aggregate losses of nearly $1.2 million as a result of liquidating those securities to meet margin calls. Merrill has already reimbursed some customers and, as part of the settlement, will pay approximately $780,000 in restitution to the remaining 22 customers affected.

K. Excessive Trading and Churning

1. Caldwell International Securities Corp., Greg Caldwell, Paul Jacobs and Lennie Frieman (2014039091903) (August 2016)

FINRA ordered Caldwell International Securities Corp. (“CISC”) to pay over $1 million in restitution to the victims and fined the firm $1 million for excessive trading in customer accounts and related supervisory failures. Over a four year period, the firm’s primary business evolved from conservative equity trading to speculative and active trading. Even though the firm knew about the unsuitable excessive trading, the firm failed to reasonably supervise and as a result, fifteen customer accounts, some with turnover ratios over 29 and cost-to-equity greater than 100%, paid over $1 million in fees and commissions. The offer of settlement also found that firm owner Greg Caldwell, firm president Lennie Frieman, and CCO Paul Jacobs, all failed to supervise the firm’s business in their principal roles. Caldwell was barred in all principal capacities and fined $50,000; Freiman was barred in all principal capacities and fined $75,000; and Jacobs was suspended for six months from associating with a FINRA member firm in all principal capacities (no fine was imposed against Jacobs due to demonstrated inability to pay).

2. Former Global Arena Representative Matters (September 2015)

FINRA barred seven former registered representatives from the securities industry, barred an eighth person, and barred two former branch managers from serving in a principal capacity. FINRA found that the representatives violated securities through various misleading sales pitches, customer account churning and other business misconduct at Global Arena Capital Corp The actions are a result of FINRA's continued focus on tracking groups of brokers that move from one risky firm to another. Seven of the 10 individuals had moved from HFP Capital Markets LLC—a problem firm that FINRA later expelled—to Global Arena Capital Corp. Global Arena opened a branch office in October 2013 to register a number of brokers who had been discharged by HFP. Like HFP, the branch office's business model involved cold-calling customers, including seniors, to make solicited recommendations of securities.

FINRA employed a risk-based approach to identify certain brokers who had moved



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from HFP to Global Arena and were then subject to heightened regulatory scrutiny during a 2014 exam. During the onsite audit and subsequent investigation, FINRA found that certain Global Arena representatives engaged in securities fraud by, among other things, using misleading sales pitches and high pressure sales tactics to make sales of junk bonds and other securities to customers. Brokers at the firm also churned existing customer accounts by recommending frequent trades and made unsuitable recommendations.

FINRA barred the former President of Global Arena Capital Corp., Barbara Desiderio, and five former representatives (David Awad, a.k.a. "David Bennett," James Torres, Peter Snetzko, Alex Wildermuth, and Michael Tannen) in all capacities; barred two former principals of the firm (Kevin Hagan and Richard Bohack) in a principal capacity for supervisory failures; and sanctioned two former representatives (Niaz Elmazi, a.k.a. "Nick Morrisey" and Andrew Marzec) for failing to cooperate with FINRA's investigation. One of these individuals was barred in August 2015 and the other in October 2015. FINRA cancelled Global Arena's membership in July 2015, and the firm's de facto owner and three other former Global Arena brokers had been barred for fraud in a separate FINRA action related to HFP in July 2015.

L. Supervision– Complaint Reporting

1. Oppenheimer & Co. Inc. (2015046355401) (November 2016) FINRA fined Oppenheimer & Co. Inc. $1.575 million and ordered the firm to pay $1.85 million to customers for failing to report required information to FINRA, failing to produce documents in discovery to customers who filed arbitrations, and for not applying applicable sales charge waivers to customers. FINRA found that over a span of several years, Oppenheimer failed to timely report to FINRA more than 350 required filings including securities-related regulatory findings, disciplinary actions taken by Oppenheimer against its employees, and settlements of securities-related arbitration and litigation claims. FINRA rules require firms to timely and accurately report required information, yet Oppenheimer’s procedures did not provide direction to its employees on making these disclosures. On average, Oppenheimer made these filings more than four years late. Oppenheimer also failed to timely disclose that its then Anti-Money-Laundering Compliance Officer and another employee had received Wells notices from the Securities and Exchange Commission. Oppenheimer had revised its supervisory procedures as a result of a prior FINRA investigation but failed to adopt adequate procedures that addressed a specific obligation to report regulatory events involving its employees. In addition, FINRA found that between 2010 and 2013, Oppenheimer failed to



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produce relevant documents during discovery to seven arbitration claimants who alleged Oppenheimer failed to supervise former registered representative Mark Hotton. Oppenheimer failed to provide spreadsheets showing that Mark Hotton had excessively traded multiple customer accounts. Oppenheimer has paid more than $6 million to resolve customer arbitration claims related to its supervision of Hotton. Additionally, FINRA had previously ordered Oppenheimer to pay $1.25 million in restitution to 22 additional customers who suffered losses but had not filed arbitration claims. In today’s action, FINRA is ordering Oppenheimer to provide the seven claimants with copies of the respective documents that were not produced, and payments totaling more than $700,000. FINRA also found that Oppenheimer failed to reasonably supervise the application of sales charge waivers to eligible mutual fund sales. The firm relied on its financial advisors to determine the applicability of sales charge waivers, but failed to maintain adequate written policies or procedures to assist financial advisors in making this determination. As a result of today’s action, Oppenheimer has paid eligible customers $1.14 million in remediation to customers who qualified for, but did not receive, applicable mutual fund sales charge waivers.

M. Supervision – Red Flags

1. Ameriprise Financial Services, Inc. (2014040269301) (September 2016)

FINRA fined Ameriprise Financial Services, Inc. $850,000 for failing to detect the conversion of more than $370,000 from five customer brokerage accounts by one of its registered representatives. Ameriprise failed to adequately investigate red flags associated with nine third-party wire requests, including that the funds were being transmitted to a business bank account associated with an Ameriprise representative. The conversion went undetected for two years because Ameriprise failed to establish and enforce a supervisory system reasonably designed to adequately monitor the transmittal of funds from customer accounts to third parties, including those controlled by registered representatives of the firm. After Ameriprise discovered the misconduct, it paid restitution, plus interest and related fees, to the customers. FINRA barred the representative in June 2014.

FINRA found that from October 2011 to September 2013, a registered representative of the firm who worked as a sales assistant and office manager took more than $370,000 from five Ameriprise customers. The customers were the office manager’s family members, including his mother, step-father and grandparents as well as his domestic partner. The office manager converted the funds through a two-step process. First, he submitted request forms to transfer funds from the customers’ Ameriprise brokerage accounts into the business bank account of the office in which he worked, allegedly for the intended purpose of making investments. He then took funds from that account in order to pay himself additional salary, commissions he had not earned and other money to which he was not entitled.

http://www.finra.org/newsroom/2015/finra-sanctions-oppenheimer-co-375-million-supervisory-failures



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FINRA found that Ameriprise failed to adequately follow up on red flags, including that the funds were being transferred to an account that the firm knew or should have known belonged to one of its registered representatives. The firm also failed to adequately investigate possible signature irregularities that it flagged on certain wire request forms. In addition, even though four of the nine wire requests were also flagged for further review for other reasons, Ameriprise failed to adequately follow up.

The conduct was discovered in September 2013 when another office employee found evidence in a trash can that the office manager had been practicing signing the signature of a family member from whom he was scheming to convert funds.

2. Prudential Annuities Distributors, Inc. (2012034423502) (July 2016)

FINRA fined Prudential Annuities Distributors, Inc. $950,000 for failing to detect and prevent a scheme that resulted in the theft of approximately $1.3 million from an 89-year-old customer’s variable annuity account. The firm repeatedly failed to adequately investigate “red flags” that Travis A. Wetzel, a former registered sales assistant at LPL Financial and since-convicted felon, was transferring money from the customer’s Prudential variable annuity account to a third-party bank account in his wife’s maiden name. FINRA previously barred Wetzel in May 2013. Prudential Annuities and LPL reimbursed the customer in 2013.

FINRA found that, from July 2010 until his misappropriation was discovered in September 2012, Wetzel submitted to Prudential Annuities 114 forged annuity withdrawal requests – four to five withdrawals per month for a total of nearly $50,000 – requesting that Prudential Annuities wire funds from the elderly customer’s account to a third-party account in the maiden name of Wetzel’s wife. Prudential Annuities repeatedly followed Wetzel’s instructions without adequately investigating a variety of red flags that should have alerted the firm to Wetzel’s scheme. For example, every transfer request Wetzel submitted triggered an alert, which the firm reviewed but determined erroneously that the withdrawals appeared legitimate, and the firm did not further investigate these alerts. Prudential Annuities personnel also reviewed certain of the withdrawals as part of six quarterly audits and noticed that the funds were being sent to a third party, but concluded that the activity appeared to be legitimate. Also, when alerted that repeated payments were being made from the customer’s variable annuity account to the same third-party payee, Prudential Annuities concluded that the withdrawals appeared legitimate, without sufficiently investigating or determining the relationship between the customer and the person receiving funds from the customer’s account.

FINRA also found that Prudential Annuities’ inadequate supervisory procedures and controls contributed to its failure to detect and prevent Wetzel’s fraud. In particular, Prudential Annuities did not have sufficient supervisory procedures or controls to



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identify repeated transmittals of funds from a customer’s account to the same third-party payee.

3. Fidelity Brokerage Services LLC (2014041374401) (December 2015)

FINRA fined Fidelity Brokerage Services LLC $500,000 and ordered the firm to pay nearly $530,000 in restitution for failing to detect or prevent the theft of more than $1 million from nine of its customers, eight of whom were senior citizens. Lisa Lewis posed as a Fidelity broker, obtained her victims' personal information, and systematically stole customer assets through numerous transfers and debit-card transactions.

FINRA found that from August 2006 until her fraud was discovered in May 2013, Lewis was running a conversion scheme by targeting former customers from another brokerage firm from which she had been fired. Lewis told the victims she was a Fidelity broker and urged them to establish accounts at the firm and also established joint accounts with her victims in which she was listed as an owner. She eventually established more than 50 accounts and converted assets from a number of these accounts for her own personal benefit. In June 2014, Lewis pleaded guilty to wire fraud, and was sentenced to 15 years in prison and was ordered to pay more than $2 million in restitution to her victims.

FINRA found that Fidelity failed to detect or adequately follow up on multiple "red flags" related to Lewis's scheme. For example, though Lewis' victims were unrelated to one another, their various accounts shared a number of common identifiers tying them all to Lewis, such as a common email address, physical address or phone number. Fidelity also failed to detect Lewis' consistent pattern of money movements and overlooked red flags in telephone calls handled by its customer-service call center in which there were indications that Lewis was impersonating or taking advantage of her senior investor victims.

FINRA also found that Fidelity's inadequate supervisory systems and procedures contributed to the failure to detect and prevent Lewis's fraudulent activities. Though Fidelity maintained a report designed to identify common email addresses shared across multiple accounts, it failed to implement procedures regarding the report's use and dedicate adequate resources to the review and investigation of the reports. As a result, there was a backlog in reviewing thousands of reports, including a report in March 2012 showing that Lewis' email address was associated with dozens of otherwise unrelated accounts. The report was not reviewed by anyone at Fidelity until April 2013, more than a year after it was generated.


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N. Supervision – Research

1. Deutsche Bank Securities Inc. (2012035003201) (August 2016) FINRA fined Deutsche Bank Securities Inc. $12.5 million for significant supervisory failures related to research and trading-related information it disseminated to its employees, called ‘hoots’ or ‘squawks,’ over internal speakers commonly known as ‘squawk boxes.’ Despite multiple red flags regarding the potential dissemination of confidential information, Deutsche Bank failed to establish adequate supervision over registered representatives’ access to hoots or their communications with customers regarding hoots. As part of the settlement, Deutsche Bank also agreed to provide a written certification that it has adopted and implemented supervisory systems and written procedures concerning hoots that are reasonably designed to achieve compliance with FINRA rules and federal securities laws.

FINRA found that Deutsche Bank was aware that hoots involving research and trading might contain confidential, price-sensitive information, and that there was a risk that material non-public information could be communicated over them. However, for several years, the firm repeatedly ignored red flags indicating that its supervision was inadequate, including internal audit findings and recommendations, multiple internal warnings from members of the firm’s compliance department, and internal risk assessments. Despite these red flags, the firm still failed to implement reasonable written policies, procedures and systems governing who should have access to the hoot information, how the employees should handle hoot information, and how supervisors should supervise employees to ensure compliance, and protection of confidential and material nonpublic information potentially communicated over the hoots.

2. Citigroup Global Markets, Inc. (2013036054901) (November 2014) FINRA fined Citigroup Global Markets, Inc. $15 million for failing to adequately supervise communications between its equity research analysts and its clients and Citigroup sales and trading staff, and for permitting one of its analysts to participate indirectly in two road shows promoting IPOs to investors.

FINRA found that from January 2005 to February 2014, Citigroup failed to meet its supervisory obligations regarding the potential selective dissemination of non-public research to clients and sales and trading staff. During this period, Citigroup issued approximately 100 internal warnings concerning communications by equity research analysts. However, when Citigroup detected violations involving selective dissemination and client communications, there were lengthy delays before the firm disciplined the research analysts and the disciplinary measures lacked the severity necessary to deter repeat violations of Citigroup policies.



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One example of Citigroup's failure to supervise certain communications by its equity research analysts involved "idea dinners" hosted by Citigroup equity research analysts that were also attended by some of Citigroup's institutional clients and sales and trading personnel. At these dinners, Citigroup research analysts discussed stock picks, which, in some instances, were inconsistent with the analysts' published research. Despite the risk of improper communications at these events, Citigroup did not adequately monitor analyst communications or provide analysts with adequate guidance concerning the boundaries of permissible communications. In another example, FINRA found that an analyst employed by a Citigroup affiliate in Taiwan selectively disseminated research information concerning Apple Inc. to certain clients, which was then selectively disseminated to additional clients by a Citigroup equity sales employee.

Moreover, FINRA found that, in 2011, a Citigroup senior equity research analyst assisted two companies in preparing presentations for investment banking road shows. Between 2011 and 2013, Citigroup did not expressly prohibit equity research analysts from assisting issuers in the preparation of road show presentation materials.

O. Books and Records: Record Retention

1. Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC (2016049784101); RBC Capital Markets LLC and RBC Capital Markets Arbitrage S.A. (2016049821601); RBS Securities, Inc. (2016048685301); Wells Fargo Advisors, LLC, Wells Fargo Advisors Financial Network, LLC and First Clearing, LLC (2016050274801); SunTrust Robinson Humphrey, Inc. (2016050194501); LPL Financial LLC (2014043539001); Georgeson Securities Corporation (2016050194001); and PNC Capital Markets LLC (2016050445901) (December 2016)

FINRA fined 12 firms a total of $14.4 million for significant deficiencies relating to the preservation of broker-dealer and customer records in a format that prevents alteration. FINRA found that at various times, and in most cases for prolonged periods, the firms failed to maintain electronic records in “write once, read many,” or WORM, format, which prevents the alteration or destruction of records stored electronically. Federal securities laws and FINRA rules require that business-related electronic records be kept in WORM format to prevent alteration. The SEC has stated that these requirements are an essential part of the investor protection function because a firm’s books and records are the “primary means of monitoring compliance with

http://www.finra.org/sites/default/files/WellsFargo_AWC_122116.pdf

http://www.finra.org/sites/default/files/RBC_AWC_122116.pdf

http://www.finra.org/sites/default/files/RBS_AWC_122116.pdf

http://www.finra.org/sites/default/files/WF_FC_AWC_122116.pdf

http://www.finra.org/sites/default/files/SunTrust_AWC_122116.pdf

http://www.finra.org/sites/default/files/LPL_AWC_122116.pdf

http://www.finra.org/sites/default/files/Georgeson_AWC_122116.pdf

http://www.finra.org/sites/default/files/PNC_AWC_122116.pdf





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applicable securities laws, including antifraud provisions and financial responsibility standards.” Over the past decade, the volume of sensitive financial data stored electronically has risen exponentially and there have been increasingly aggressive attempts to hack into electronic data repositories, posing a threat to inadequately protected records, further emphasizing the need to maintain records in WORM format. FINRA found that each of these 12 firms had WORM deficiencies that affected millions, and in some cases, hundreds of millions, of records pivotal to the firms’ brokerage businesses, spanning multiple systems and categories of records. FINRA also found that each of the firms had related procedural and supervisory deficiencies affecting their ability to adequately retain and preserve broker-dealer records stored electronically. In addition, FINRA found that three of the firms failed to retain certain broker-dealer records the firms were required to keep under applicable record retention rules.

2. Scottrade, Inc. (2014039991001) (November 2015) FINRA fined Scottrade, Inc. $2.6 million for failing to retain a large number of securities-related electronic records in the required format, and for failing to retain certain categories of outgoing emails. Scottrade also did not have a reasonable supervisory system in place to achieve compliance with certain Securities and Exchange Commission (SEC) and FINRA books and records rules, which contributed to its record-retention failures. Federal securities laws and FINRA rules require that business-related electronic records be kept in non-rewritable, non-erasable format (also referred to as “Write-Once, Read-Many” or “WORM” format) to prevent alteration. The SEC has stated that these requirements are an essential part of the investor protection function because a firm’s books and records are the “primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards.” FINRA found that from January 2011 to January 2014, Scottrade did not have centralized document-retention processes or procedures for all firm departments to follow. Further, no one at the firm was charged with responsibility for ensuring a consistent document-retention process, fully compliant with the record-retention rules, including the requirement that all records be retained in WORM format. Personnel in different departments of the firm saved certain documents to a restricted shared drive, which was not WORM-compliant. As a result, Scottrade failed to preserve a large number of key securities business electronic records in the required format.



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Over a related time frame, FINRA found that Scottrade also failed to copy more than 168 million outgoing emails to the firm’s WORM storage device, resulting in the deletion of those emails. These emails were generated automatically by the firm’s internal systems or by third-party vendors acting on Scottrade’s behalf, and included items such as margin call notices, address change notifications and failed password attempt notifications.

P. Trade Reporting: Blue Sheets

1. Deutsche Bank Securities Inc. (2015044296601) (June 2016) FINRA fined Deutsche Bank Securities Inc. $6 million for failing to provide complete and accurate trade data in an automated format in a timely manner when requested by FINRA and the Securities and Exchange Commission (SEC). As part of the settlement, Deutsche Bank has agreed to retain an independent consultant to improve its policies, systems and procedures related to blue sheet submissions. FINRA and the SEC regularly request certain trade data, also known as “blue sheets,” to assist in the investigation of market manipulation and insider trading. Federal securities laws and FINRA rules require firms to provide this information to FINRA and other regulators electronically upon request. Blue sheets provide regulators with critical detailed information about securities transactions, including the security, trade date, price, share quantity, customer name, and whether it was a buy, sale or short sale. This information is essential to regulators’ ability to discharge their enforcement and regulatory mandates. FINRA found that from at least 2008 through at least 2015, Deutsche Bank experienced significant failures with its blue sheet systems used to compile and produce blue sheet data, including programming errors in system logic and the firm’s failure to implement enhancements to meet regulatory reporting requirements. These failures caused the firm to submit thousands of blue sheets to regulators that misreported or omitted critical information on over 1 million trades. Additionally, FINRA found a significant number of Deutsche Bank’s blue sheet submissions did not meet regulatory deadlines. Firms typically have 10 business days to respond to a blue sheet request. Between January 2014 and August 2015, approximately 40 percent of Deutsche Bank’s blue sheets were filed past the regulatory deadline; and likewise, from July to August 2015, more than 90 percent of Deutsche Bank’s blue sheets were not submitted to FINRA on a timely basis. 2. Macquarie Capital (USA) Inc. (2014041862801) (December 2015) FINRA censured and fined Macquarie Capital (USA) Inc. $2.95 million for failing to provide complete and accurate trade data in an automated format when requested




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by the Securities and Exchange Commission (SEC) and FINRA. Also, Macquarie must conduct a comprehensive review of its policies, systems and procedures related to blue sheet submissions, and to subsequently certify that they have established procedures reasonably designed to address and correct the violations. The SEC and FINRA request trade data, or “blue sheets,” to assist them in investigations focused on equity trading, including market manipulation and insider trading. Federal securities laws and FINRA rules require firms to provide this information to FINRA and other regulators electronically upon request. Blue sheets provide regulators with critical information about securities transactions, including the security, trade date, price, share quantity, customer name, and whether it was a buy, sale, or short sale. This information is essential to regulators’ ability to discharge their enforcement and regulatory mandates. FINRA found that from January 2012 to September 2015, Macquarie experienced multiple problems with its electronic systems used to compile and produce blue sheet data. This caused the firm to submit some blue sheets that misreported buys as sells and vice versa on allocations of certain customer trades, miscalculate the net amount of transactions, fail to report post-trade cancels and corrections, and fail to provide accurate customer information. FINRA also found that Macquarie failed to have adequate audit systems in place.

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Enforcement Developments Wednesday, May 17 11:15 … Hopper . Senior Vice President and Counsel . FINRA Enforcement . ... Julie Glynn joined JP Morgan Chase in 2011 and is currently