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FINRA member fined over outside business activities
On November 22, FINRA accepted a Letter of Acceptance, Waiver, and Consent (AWC) from a member firm regarding its alleged failure to establish, maintain and enforce a supervisory system and written supervisory procedures (WSPs) to ensure compliance with rules governing registered persons’ outside business activities. Specifically, from December 2020 to November 2021, the firm allegedly evaluated or recorded the outside business activities inadequately of one of its registered representatives, who was managing an investment fund providing loans to early-stage companies. FINRA determined these constituted violations of NASD Rule 3110(b) and FINRA Rules 3270 and 2010. The firm consented to a censure and a $60,000 fine without admitting or denying the allegations and agreed to update its Form BD (Uniform Application for Broker-Dealer Registration).
FINRA accepts member firm AWC
On November 22, FINRA accepted a Letter of Acceptance, Waiver, and Consent (AWC) from a member firm regarding its alleged failure to establish, maintain and enforce a supervisory system and written supervisory procedures (WSPs) to ensure compliance with rules governing registered persons’ outside business activities. Specifically, from December 2020 to November 2021, the firm allegedly evaluated or recorded the outside business activities inadequately of one of its registered representatives, who was managing an investment fund providing loans to early-stage companies. FINRA determined these constituted violations of NASD Rule 3110(b) and FINRA Rules 3270 and 2010. The firm consented to a censure and a $60,000 fine without admitting or denying the allegations and agreed to update its Form BD (Uniform Application for Broker-Dealer Registration).
CSBS reinforces continuing education requirements for loan officers
On November 13, the CSBS reported that 14 mortgage loan originators (MLOs) associated with one company failed to provide the required information for completing their continuing education courses online, resulting in the loss of credit for 175 courses. The SAFE Mortgage Licensing Act of 2008 mandates that state-licensed MLOs complete eight hours of continuing education annually. With over 171,000 MLOs expected to complete continuing education online this year, the CSBS emphasized the importance of identity verification when taking online courses and noted that failing to identify when taking courses was a serious violation. The CSBS stated that it will continue to monitor continuing education activity and enforce compliance with NMLS rules of conduct.
CFPB publishes Fall 2024 supervisory highlights
On October 7, the CFPB published a special edition of its Supervisory Highlights focused on the auto finance market, which describes findings from examinations generally conducted between November 1, 2023 and August 30. The report highlights examiner observations such as the following:
Origination Disclosures:
- Subprime auto loan originators allegedly engaged in deceptive marketing by advertising “as low as” specified APR rates that consumers “had no reasonable chance of qualifying for…”
- Auto-loan originators allegedly violated TILA and its implementing Regulation Z, by inaccurately disclosing the terms for prepayment penalties.
Repossession Activities:
- Servicers allegedly wrongfully repossessed vehicles despite consumers making timely payments or obtaining loan modifications or other payment relief and without valid liens.
- The CFPB found that servicers allegedly engaged in unfair acts or practices by repossessing vehicles when: (i) representatives or service providers failed to cancel orders to repossess vehicles, or act on those cancellations, when consumers had made payments or obtained extensions that should have prevented repossessions; and (ii) consumers had requested, or the servicer had approved, a COVID-19 related loan deferment or loan modification, consumers had otherwise made timely payments, or consumers made arrangements to pay an amount sufficient to cancel the repossession.
Servicing Practices:
- Servicers allegedly misapplied payments on post-maturity loans, leading to late fees and extended principal balances.
- There were allegedly excessive delays in providing vehicle titles after loan payoff.
Add-on Products:
- Subprime auto-finance companies allegedly collected and retained amounts for optional add-on products that consumers did not agree to purchase.
- GAP products were allegedly financed on salvage vehicles, although there is an exclusion for salvage vehicles.
- Servicers allegedly imposed “onerous requirements” for canceling add-on products and failed to honor contractual cancellation rights.
- Refunds of unearned premiums for add-on products were allegedly not ensured upon early termination, and when provided, were often inaccurately calculated or delayed.
Furnishing Deficiencies:
- Auto lenders and servicers allegedly furnished inaccurate information to credit reporting companies, violating the FCRA.
- Auto furnishers allegedly significantly delayed correcting and updating inaccurate information.
The report also highlights recent enforcement actions and recent supervisory program developments, such as the issuance of BNPL Product FAQs and an advisory opinion on consumer protections for home sales financed under contracts for deeds.
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.
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.
FINRA begins pilot program for remote inspections
On July 24, FINRA announced it launched a voluntary Remote Inspections Pilot Program on July 1. FINRA described the program as a significant step in modernizing regulatory oversight in the financial industry. The pilot program will allow eligible firms to fulfill their inspection obligations remotely, subject to specific requirements such as conducting and documenting an office or location-specific risk assessment, and producing written supervisory procedures for conducting remote inspections and reporting inspection data to FINRA. A total of 741 member firms opted into the program’s initial phase.
FINRA designed the pilot to address the growing trend of remote work and the increased use of technology in the financial industry. Participation was notably high among large firms, with 60 percent of those with 500 or more registered representatives opting in. By collecting data throughout the three-year program, FINRA will aim to evaluate the effectiveness of remote inspections and determine whether they can be integrated seamlessly into the existing supervisory framework. This could lead to a more efficient and adaptable regulatory system that better aligns with modern business practices.
The first data submission from participants is due mid-October. The deadline to opt in for the second year of the pilot is December 27. Year two of the pilot will run the entire 2025 calendar year.
FINRA alleges firm failed to enforce supervisory procedures related to outside business activities
On July 12, FINRA accepted a Letter of Acceptance, Waiver, and Consent from a broker-dealer alleging that it did not enforce its written supervisory procedures related to outside business activities of its registered representatives. FINRA alleged that from April 2021 to March 2023, the broker-dealer failed to enforce its supervisory procedures while on notice that three of its employees founded and operated an independent company with two distinct lines of business (e-commerce storefronts and lead generation websites) outside of the scope of their association with the broker-dealer. As a result, FINRA alleged the broker-dealer violated FINRA Rules 3110 and 3270, and issued a censure and assessed a $60,000 fine.
While the broker-dealer maintained supervisory procedures that required certain processes for the written notification and approval of outside business activities, FINRA alleged that the firm did not follow its procedures. FINRA Rule 3110 required each member firm to establish, maintain, and enforce written procedures, and FINRA alleged the broker-dealer failed to enforce them. The broker-dealer was alleged to have also violated FINRA Rule 3270 (which prohibited employees from engaging in an OBA unless they provide prior written notice to the member firm) because it did not require written disclosure of the OBA despite repeatedly receiving new information regarding the employees’ involvement. The three employees terminated their association with the broker-dealer by March 2023; however, during the relevant time period, hundreds of customers purchased $33 million in goods and services from the employees’ OBA.
SEC’s Division of Examinations provides guidance on broker-dealer examination process
On June 5, the SEC’s Division of Examinations issued a risk alert to help broker-dealers prepare for an examination by the Division. The alert highlighted: (1) information that may be considered when selecting firms to examine; (2) areas of focus for the examination; and (3) types of information and documents that may form part of an initial exam request. The alert noted various reasons why the Division staff may consider firms for examination, including:
- A firm’s examination history
- Supervisory and disciplinary concerns
- Tips or complaints on the firm
- The length of time since the firm’s last examination
- Customer base of the firm
- Products and services offered by the firm
- Any signals of financial stress the firm may experience
- New reports on the firm
- Filings by the firm with the SEC
- If the firm holds cash or securities
The alert also included a sample request list of information and documents that Division staff would request. Although the list was not necessarily meant to be exhaustive, the sample request list was grouped into the following categories:
- General Information: Organizational Information; Business and Operations: Financial Information; Legal and Disciplinary.
- Supervisory and Compliance Structure: Books and Records, and Compliance and Oversight Processes; Branch Office Oversight; Information Processing, Reporting, and Protection.
- Regulatory Requirements (Select Topics): Sales Practices, Regulation Best Interest, and Form CRS; Anti-Money Laundering; Net Capital and Customer Protection
OCC releases May CRA evaluations for 19 institutions
On June 3, the OCC released its Community Reinvestment Act (CRA) performance evaluations for May. The OCC evaluated 19 entities including national banks, federal savings associations, and insured federal branches of foreign banks. The assessment framework incorporated four possible ratings: Outstanding, Satisfactory, Needs to Improve, and Substantial Noncompliance. Of the 19 evaluations reported by the OCC, eleven entities were rated “Satisfactory,” and eight entities were rated “Outstanding.” There were no institutions that received a rating of “Needs to Improve.” A full list of the bank evaluations is available here. In the FAQ section regarding the implementation of the CRA, the OCC detailed how it evaluated and rated financial institutions both on an institutional level and a community level. This explanation included an examination of institutional factors such as capacity, constraints, business strategies, competitors, and peers, as well as an analysis of the characteristics of the communities served by these institutions, which covered demographic particulars, economic data, and the availability of lending, investment, and service opportunities.