As summarized below, FINRA recently announced some recent enforcement actions against member firms that we wanted to share with you. We have selected these specific cases to share as we feel these are very important areas of compliance within a broker-dealer. More importantly, each of the examples summarized below were easily preventable. Firms must ensure that its personnel receive adequate training and have the requisite experience when assigned supervisory responsibilities, and also have an obligation to ensure its policies and procedures are being followed.
FINRA recently announced that it has expelled Texas E&P Partners, Inc. fka Chestnut Exploration Partners, Inc. from FINRA® Membership. The findings stated that the firm had insufficient written supervisory procedures (WSPs). 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. One of the firm’s representatives 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.
Citizens Securities, Inc. submitted an AWC in which the firm was censured and fined $300,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to timely disclose customer complaints and settlements on its associated persons’ Forms U4 and Forms U5. The findings stated that in addition, individuals associated with the firm reported disclosable events such as outside business activities or bankruptcies on their annual compliance questionnaires, yet the firm did not timely amend the individuals’ Forms U4. The findings also stated that the firm failed to implement an adequate supervisory system to ensure that the firm reported customer complaints and settlements on associated persons’ Forms U4 and U5. The individuals at the firm who were responsible for reviewing customer complaints lacked sufficient training about the criteria that required the firm to report customer complaints on associated persons’ Forms U4 and U5, and the deadlines for doing so. In addition, the firm failed to ensure that associated persons’ annual compliance questionnaire responses were timely reviewed.
Prager & Co., LLC submitted an AWC in which the firm was censured and fined $28,500. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that during three separate periods in 2014 and 2015, it failed to enforce its WSPs related to financial controls and books and records, including net capital computations. The findings stated that those failures had the effect of causing the firm to conduct a securities business while net capital deficient, as well as a failure to maintain books and records reflecting an accurate net capital computation. The net capital deficiencies arose from the firm’s failure to adequately monitor the capital implications arising from increases in non-allowable assets attributable to accounts receivable from financial advisory clients that were collected in the ordinary course of business. The firm’s Financial and Operations Principal (FINOP) did not discover the net capital deficiencies until the FINOP was preparing the prior month’s FOCUS filings. The firm’s WSPs provided that the firm would maintain 120 percent of its minimum net capital, and that at each week’s end, the FINOP or a designee would conduct a net capital computation and confirm its accuracy. The firm, however, did not uniformly enforce these procedures, and those computations were not routinely completed. Had the firm enforced its WSPs and done such computations, it would have discovered the net capital deficiencies before preparing the FOCUS filings for the month prior.