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FINRA charges member firm with Regulation Best Interest violations
On August 5, FINRA accepted a Letter of Acceptance, Waiver, and Consent (AWC) against a member firm for three alleged violations related to the failure to maintain policies and procedures and supervisory systems in compliance with federal law. First, the firm allegedly failed to establish and maintain written policies and procedures in compliance with Regulation Best Interest (Reg BI) since June 2020. According to FINRA, this lapse led to violations of the Securities Exchange Act Rule 15l-1(a)(1) and breaches of FINRA Rules 3110 and 2010. The firm also allegedly neglected its obligations under Exchange Act Rule 17a-14, which mandates the preparation of a customer relationship summary (Form CRS). From June 2020 to July 2023, FINRA claims the firm did not have a proper supervisory system tailored to ensure compliance with its Form CRS obligations. This oversight resulted in additional violations of FINRA Rules 3110 and 2010.
Last, the firm allegedly failed to file necessary documents in a timely manner for three private placement offerings sold to retail investors between April 2020 and March 2022. These filings were allegedly made almost two years late, and only after specific requests from the regulatory authority. The firm’s supervisory system was also lacking according to FINRA, as it designated an individual no longer associated with the firm to oversee these filings, violating FINRA Rules 3110 and 2010. The firm consented to a censure and a $60,000 fine as part of the settlement. Additionally, a senior management member must certify within 60 days that the firm has remediated the identified issues and implemented compliant policies and procedures.
SEC’s Gensler discussed recent enforcement actions and artificial intelligence risks
On August 1, the Chair of the SEC, Gary Gensler, addressed the Strike Force on Unfair and Illegal Pricing emphasized the agency’s commitment to combating deceptive, fraudulent and anticompetitive practices. The Chair highlighted the SEC’s recent enforcement efforts and rulemaking projects to enhance competition. His remarks focused on the transformative potential of AI and its implications for the securities markets. Gensler acknowledged that while AI offers substantial benefits, it also presents new challenges for regulatory agencies, like how to address bad actors that could potentially use AI to deceive or defraud investors.
The Chair also raised concerns about the anticompetitive risks associated with AI, such as the fact that few tech platforms dominate the current AI market. The Chair warned that AI could be used to manipulate market systems or signal to competitors about pricing, thus undermining competition. In conclusion, Gensler expressed a commitment to collaborating with other agencies to address the challenges posed by AI in the financial sector. The remarks demonstrated the SEC’s proactive stance in adapting to technological advancements while maintaining its core mission of protecting investors and ensuring fair, orderly and efficient markets.
FINRA fines broker $165K for lack of supervisory controls and market access rule violations
Recently, FINRA accepted a Letter of Acceptance, Waiver, and Consent (AWC) against a broker providing self-directed, online brokerage services to institutional and retail customers. The broker previously received a $595,000 fine in April 2015 for allegedly failing to supervise potentially manipulative trading and failing to have reasonable market access controls and procedures. This month’s AWC was based on similar alleged conduct, finding from November 2017 to January 2020, the broker allegedly failed to establish a supervisory system prohibiting potentially manipulative trading in violation of FINAR Rules 3110 and 2010. FINRA supervision found the broker implemented a third-party surveillance system without tailoring it to the firm’s business model or order flow, assigned one trader ID number for each customer even when the account had more than one trader, and closed alerts without reasonable follow-up or investigation.
The broker also allegedly violated Section 15(c)3-5 of the Securities Exchange Act, Exchange Act Rule 15c3-5, and FINRA Rule 2010 during that same period by failing to maintain market access controls and procedures. FINRA alleged the broker did not implement a system of controls to set the appropriate credit thresholds for each customer and instead relied on clearing firms. FINRA also alleged the broker failed to provide documentation evidencing how customers’ credit controls were established or designed. Due to these violations, FINRA issued a censure, a $165,000 fine, and a certification in writing that the issues have been remedied within 90 days.
CFTC awards over $1M to whistleblower
On August 8, the CFTC announced a $1+ million award to a whistleblower whose original information and voluntary assistance led to a successful CFTC digital assets-related enforcement action. According to the redacted order, the information from the whistleblower, who was the first, prompted the investigation’s start and led to the charges. The first whistleblower’s information also led to the discovery of the misconduct at issue, although it was “somewhat limited.” Conversely, the commission recommended denying the award applications of two other whistleblowers because the information they provided did not lead to the charges. Additionally, the commission also recommended denying the first whistleblower’s application for a related action award with respect to another agency because the other action was not based on the whistleblower’s original information.
FINRA orders broker-dealer to pay over $1.4M for supervision failures
On July 29, FINRA accepted a Letter of Acceptance, Waiver, and Consent (AWC) against a full-service broker-dealer for allegedly failing to establish a supervisory system connected to non-traded real estate investment trusts from 2013 to 2017 and for allegedly failing to report 45 written customer complaints from 2015 to 2022 in violation of FINRA Rules 3110 and 2010. The respondent was found to fail supervision repeatedly. Because of these failures, the respondent agreed to a censure, a $475,000 fine, restitution of $1.05 million plus interest, and the creation of a reasonable plan of heightened supervision and a remediation certification. The respondent neither admitted nor denied these findings.
SEC awards whistleblower more than $37M
On July 17, the SEC announced an award totaling more than $37 million to a whistleblower whose information and assistance significantly contributed to a successful SEC enforcement action. According to the redacted order detailing the whistleblower award claim, the whistleblower provided original information and continued to assist in the investigation, which allowed the SEC staff to investigate the covered action more efficiently. The claimant negotiated the more significant percentage of their award because the information was vital not only for opening the investigation but also for the SEC securing a considerable settlement, as it included evidence of scienter by high-level executives and because the preliminary determination overlooked certain factors. Per the Dodd-Frank Act, the SEC did not disclose any information about the covered action that could reveal the whistleblower’s identity.
SEC names Keith E. Cassidy as interim acting Director of Examinations
On July 22, the SEC announced that Richard Best, the Director of the Division of Examinations, will take a leave of absence for previously disclosed health reasons, and the deputy director, Keith E. Cassidy, will become the interim Acting Director. Cassidy will continue to serve as the National Associate Director of the Division’s Technology Controls Program for the SEC and oversees the SEC’s CyberWatch program and the Cybersecurity Program Office. Cassidy is also an infantry officer in the U.S. Marine Corps Reserve. Previously, Cassidy has served as the director of the SEC’s Office of Legislative and Intergovernmental Affairs and as Chief of Staff and Counsel at the DOJ’s Office of Legislative Affairs. He also previously served as a legislative assistant in the U.S. Senate.
SEC opens comments for new “green governance” exchange
On July 23, the Federal Register published a notice requesting comments about an application to establish a new sustainability-focused securities exchange. The applicant filed a Form 1 application with the SEC to seek registration as a national securities exchange under Section 6 of the Securities Exchange Act of 1934. The SEC will solicit comments from the public regarding whether to permit the company’s request to be registered. The company would be owned wholly by its parent company and operate a fully automated electronic trading platform to trade equities. To list as a company under this exchange, the exchange will require all companies to comply with its “Green Governance Standards,” designed to provide “transparency and accountability for all listed companies’ green and sustainability promises.” According to Form 1, a company listing on the new exchange will be able to maintain its listing on its primary exchange. More details on the proposal can be found in Exhibit E of the proposed exchange’s Form 1 application. Comments must be received by September 6.
SEC launches new council to coordinate securities enforcement
On July 19, the SEC announced the creation of a new council to combat securities fraud across federal, state, and local agencies. The new council, named the Interagency Securities Council, will hold quarterly meetings to discuss scams, trends, and mitigation strategies to improve collaboration among agencies, share information, and provide resources to officials who may not have experience with securities law.
The council will include representatives from over 100 departments and agencies, including the DOJ, state attorneys general offices, and local police departments. It will also serve as a platform for sharing information and best practices among law enforcement agencies. The SEC will lead the council’s efforts and stated that the council will enhance its ability to protect investors by fostering stronger partnerships with other law enforcement agencies and improving information sharing.
FINRA accepts AWC regarding Regulation Best Interest/Form CRS
On July 19, FINRA accepted a Letter of Acceptance, Waiver, and Consent (AWC) from a member firm to resolve alleged Regulation Best Interest (Reg BI) violations. According to the AWC, from June 2020 to March 2023, the member firm allegedly failed to implement written policies and procedures for compliance with Reg BI, which generally requires a broker-dealer to act in the best interest of a retail customer when recommending a securities transaction or an investment strategy involving securities without placing the financial or other interest of the broker, dealer, or associated person ahead of the interest of the retail customer. FINRA alleged that the firm’s written supervisory procedures lacked specific guidelines for Reg BI compliance, and it inadequately addressed Reg BI. As a result, the firm was alleged to have willfully breached Exchange Act Rule 15l-1(a)(1) and Municipal Securities Rulemaking Board (MSRB) Rule G-27, along with FINRA Rules 3110 and 2010. Additionally, the firm allegedly had inadequate written supervisory procedures, which failed to comply with Form CRS requirements issued by the SEC.
Respondent agreed to a censure and a $35,000 fine, $17,500 of which pertained to the violations of MSRB Rule G-27.