Summary of FINRA Regulatory Actions in Q2 2020

September 17, 2020 by ACA Compliance Group

The Financial Industry Regulatory Authority’s (“FINRA”) Enforcement Division brought 19 enforcement actions against member firms in Q2 2020 and levied fines that totaled $2,107,000. These numbers mark a decrease in the enforcement actions and the total fine amount from the second quarter of 2019, as the tables below show.

The largest individual fines in Q2 2020 stemmed from disciplinary actions involving alleged failures related to transmission of customer funds, detecting suspicious activity, the Securities and Exchange Commission's (SEC) Regulation S-P, and testing of broker dealer's supervisory controls.

 Q1 2020Q2 2020
Fine Amounts$21,027,000$2,107,000
 # of Fines4319


 Q1 2019Q2 2019Q3 2019Q4 2019Total 2019
 Fine Amounts$24,484,000$3,645,000$5,985,000$23,867,000$57,981,625
 # of Fines24243228108


Transmittal of Customer Funds

On April 7, 2020, FINRA issued a Letter of Acceptance, Waiver, and Consent (“AWC”) against a member for alleged violations of FINRA Rules 2010 and 3110(a) and (c)(2).

The AWC alleged that the member firm had failed to establish policies and procedures to monitor its registered representatives’ activities and allegedly failed to review and monitor all funds or securities transmittals from customer accounts to the accounts of third parties, including banks. FINRA also alleged that the firm’s supervisory system did not use exception reports or “any other means to monitor and review patterns of multiple wire requests and checks by multiple customers to the same third party bank account or for requiring comparison of customer signatures on request forms to signatures on file.”

FINRA censured the Firm for the alleged violations, fined it $350,000, and ordered it to enhance its supervisory procedures in the areas mentioned above.

FINRA Rule 3110(c)(2) requires broker-dealers to test and verify their supervisory policies and procedures for all funds and securities transmittals to accounts where the customer on the original account is not a named account holder. FINRA also requires that such policies and procedures include a “means or method of customer confirmation, notification, or follow-up that can be documented.” According to FINRA’s Rule 3110(c) FAQ, such “means or method of customer contact would include: the date of the notification, the means or method of contact, identification of the account in question, whether there was a response from the customer.”

In addition to the Rule 3110 regulatory requirements, FINRA has urged broker-dealers to review whether their current policies and procedures adequately verify the validity of such transmittal requests. It has also set forth several factors member firms should consider when establishing their policies and procedures. These include using exception reports to monitor transmittal requests, establishing transmittal tracking and/or reconciliation processes, and establishing employee guidelines for letters of authorization and effective communication with customers.

Regulation S-P

On April 28, 2020, FINRA issued an AWC against a member for an alleged violation of FINRA Rule 2010 and Regulation S-P.

According to the AWC, the member firm allegedly caused certain recruited registered representatives to take nonpublic personal customer information from the firms where the representatives were still registered. The representatives then allegedly disclosed the information to a third-party vendor that assisted the representatives with their transition to the member firm. These actions were taken without the knowledge or consent of the other broker-dealers or the customers, which violated Regulation S-P.

FINRA censured the firm for the alleged violations and fined it $125,000.

Broker-dealer written supervisory procedures (“WSPs”) must include policies and procedures that address Regulation S-P. Specifically, the WSPs must include procedures that:

  • Prohibit the disclosure of a customer’s nonpublic personal information (as defined in the regulation);
  • Provide a clear, conspicuous notice to customers that accurately reflects the firm’s privacy policies and practices, generally no later than on establishing a customer relationship and annually thereafter; and
  • Deliver a clear, conspicuous notice to its customers that accurately explains their right to opt out of some disclosures of their nonpublic personal information to nonaffiliated third parties.

Anti-Money Laundering: Suspicious Activity

FINRA issued an AWC against a member firm for allegedly failing to reasonably supervise activities that appeared to be potentially suspicious trading in low-priced securities. Specifically, FINRA noted that the firm’s AML policies and procedures did not list the most common red flags associated with low-priced security sales. They also did not provide guidance on how to use the available reports and tools to monitor for suspicious trading. Consequently, FINRA found the firm to have deficient written AML procedures, to have failed to detect and investigate any red flags, and to have failed to have its AML program independently tested, as required by FINRA Rule 3310.

FINRA expects firms to establish and implement policies and procedures reasonably designed to ensure that suspicious transactions are detected and reported. Member firms must also conduct ongoing monitoring of customer accounts for suspicious activities and potential violations of AML rules and regulations. As part of this process, broker-dealers should use automated systems—e.g., exception reports and other tools tailored to their business activities and customer base—to monitor trading, wire transfers, and other account activity. In addition, these firms must ensure that their WSPs, which include their written AML program, include red flag examples that can help employees identify patterns and/or behaviors that might warrant additional due diligence.

Supervisory Controls Testing and CEO Certification

FINRA issued an AWC against a member firm that did not implement the supervisory testing, verification, and documentation processes required by FINRA Rules 3120 and 3130.

FINRA Rule 3120 requires member firms to prepare an annual report of their supervisory controls testing and then have a designated principal submit the report to senior management. The report should detail the firm’s supervisory controls system, summarize the test results, including any significant identified exceptions, and list any supervisory procedure amendments adopted in response to the test results. Rule 3130 requires the member firms’ CEOs to certify annually that their firms have policies and procedures in place to maintain, review, test, and modify, as needed, their WSPs.

How ACA Can Help

ACA helps broker-dealers comply with regulatory requirements. Our services include compliance program development, trading reviews, conflict management analyses, corrective action assessments, supervisory control and AML testing, assistance with written supervisory procedures, help with initial and ongoing membership applications, and customized regulatory and compliance consulting. Learn more.

For More Information

For more information about FINRA's regulatory actions, or to find out more about ACA's services, please contact your ACA consultant or Dee Stafford.

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