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FINRA issues AWC for trade reporting failures
On September 16, FINRA accepted a Letter of Acceptance, Waiver, and Consent (AWC) from a member firm for violating trade reporting rules. According to the AWC, FINRA found the firm failed to include necessary indicators in approximately 23,000 municipal securities transactions and 155,000 transactions in TRACE-eligible securities between July 2016 and April 2021. Specifically, the firm’s electronic reporting system failed to account for transactions with affiliates where no transaction-based compensation was charged, resulting in a failure to report the Non-Transaction Based Compensation (NTBC) indicator for municipal securities transactions and the No Remuneration (NR) indicator for TRACE-eligible transactions.
The AWC noted FINRA determined the firm’s supervisory systems were not reasonably designed to ensure compliance with MSRB Rule G-14 and FINRA Rule 6730 (in violation of MSRB Rule G-27 and FINRA Rules 3110 and 2010, respectively), and lacked supervisory reviews and written procedures to check the accuracy of the NTBC and NR indicators. As a result of these findings, FINRA imposed a censure and a $150,000 fine on the firm. The firm agreed to pay the fine and waived its rights to contest the findings or the sanctions.
SEC charges and fines 12 municipal firms with record-keeping violations
On September 17, the SEC charged 12 municipal advisors for not maintaining and preserving certain electronic communications, leading to over $1.3 million in civil penalties. The firms admitted to violations under Sections 15B and 21C of the Securities Exchange Act and agreed to implement compliance improvements. The penalties ranged from $40,000 to $324,000. In the press release, the SEC emphasized the importance of record-keeping for facilitating inspections and ensuring compliance with securities laws.
Most orders were alike, involving off-channel communications at various levels of seniority, including municipal advisor representatives and principals. These firms failed to maintain communications and agreed to establish new policies and conduct training to ensure compliance. Nearly all the firms were examined between 2020 and 2023.
One firm faced a $250,000 penalty for similar violations as the others. It has since revised its policies, enhanced training and considered technological improvements to boost compliance. The rationale behind the varied charges imposed on different firms remained unclear. Another firm that was fined $184,000 failed to implement adequate supervisory systems and relied on employees’ written acknowledgments without having appropriate follow-up measures. The SEC’s charges underscored the importance of accurate disclosures and robust internal controls.
SEC charges 11 institutional investment managers with failing to file required reports
On September 17, the SEC announced charges against 11 institutional investment managers for failing to file the required Forms 13F, which were mandated for entities with discretion over more than $100 million in securities. Additionally, two entities were charged with failing to file Forms 13H, which was required for large traders of exchange-listed securities. The 11 firms agreed to settle the charges, with nine firms collectively paying over $3.4 million in civil money penalties. Two firms did not receive a financial penalty because they self-reported their violations and cooperated with the SEC, and a third firm was not penalized for its failure to file Forms 13H for the same reasons.
FINRA accepts placement agent’s AWC
On September 16, FINRA accepted a Letter of Acceptance, Waiver, and Consent (AWC) from a member firm, settling alleged rule violations made during its participation as a placement agent in a contingency offering.
The firm allegedly failed to promptly return customer funds when the minimum contingency for the offering was lowered — a material change in the offering’s terms that required prompt return of the funds — and therefore violated Section 10(b) of the Securities Exchange Act, Rule 10b-9 and FINRA Rule 2010. Additionally, FINRA alleged the firm’s supervisory system and written supervisory procedures “were not reasonably designed to achieve compliance” with the rules.
To resolve FINRA’s allegations, the firm consented to, among other things, a censure, a $20,000 fine, and remediating the identified issues within 60 days.
SEC alleges whistleblower protection violations in customer gag clauses
On September 4, the SEC announced it had settled charges against three affiliated registrants (the respondents) accused of violating the whistleblower protection rule. According to the SEC order, from May 2021 through February 2024, the respondents required collectively eleven retail clients to sign confidentiality agreements that hindered them from reporting potential securities law violations to the SEC. Specifically, some agreements included provisions that restricted clients from disclosing information unless an inquiry was initiated by a regulator and required clients to represent that they had not reported and would not report the underlying dispute to any securities regulator.
The SEC found that respondents willfully violated Rule 21F-17(a) under the Securities Exchange Act, which prohibits taking any action to impede an individual from communicating with the SEC about possible securities law violations. The respondents agreed to the settlement without admitting or denying the findings.
Respondents are ordered to cease and desist from future violations of the whistleblower protection rule and are required to pay civil monetary penalties: the Commission-registered investment adviser will pay $160,000, the Commission-registered broker-dealer will pay $70,000, and the state-registered investment adviser will pay $10,000. The SEC noted that it considered the respondents’ cooperation and remedial efforts in determining the penalties and that penalties were apportioned based on the relative size and financial condition of the entities involved.
SEC charges company for defrauding customers for $6M via false IPO
On August 26, the SEC filed a complaint and demand for a jury trial against a South Dakota corporation, its China-based investment adviser, and their CEO for allegedly defrauding investors out of millions of dollars in violation of several securities laws. The SEC alleges the defendants made false statements about guaranteed returns, the safety of client investments, the investment adviser’s business relationships, and the status of an IPO — which never occurred. According to the complaint, the defendants stopped communicating with investors and the website used to access funds was taken down.
The SEC seeks several forms of relief in its complaint, including a permanent injunction preventing the defendants from continuing their alleged fraudulent activities, disgorgement of funds, and civil penalties. Additionally, the SEC requested that the CEO be barred from serving as an officer or director of a public company.
District Court dismisses FINRA challenge for lack of subject matter jurisdiction
On September 4, the U.S. District Court for the Eastern District of Pennsylvania dismissed a plaintiff’s attempt to enjoin FINRA from proceeding with a disciplinary hearing against the plaintiff. The plaintiff’s disciplinary issues stemmed from a complaint filed against him in December 2023, alleging violations of FINRA rules during his employment at a financial group. As previously covered by InfoBytes, the plaintiff had asked the court for a temporary restraining order and a preliminary injunction to enjoin FINRA from proceeding with the hearing. The plaintiff argued that FINRA’s proceedings violated his Seventh Amendment right to a jury trial, referencing the U.S. Supreme Court’s decision in SEC v. Jarkesy, which held that a respondent to an enforcement action requires a jury trial for civil penalties. However, the district court held that the plaintiff’s claims must appeal to FINRA’s Office of Hearing Officers (OHO) or to an appellate court.
FINRA argued that under the standard set forth in Thunder Basin Coal Co. v. Reich, a 1994 U.S. Supreme Court decision, the court lacked subject matter jurisdiction. The court agreed, holding that: (i) denial of the district court’s jurisdiction would not foreclose meaningful judicial review; (ii) the claim is not wholly collateral to the Securities Exchange Act’s review; and (iii) the claim is within the SEC’s expertise. The plaintiff’s case will now proceed through the administrative channels like the OHO, with the potential for further appeals.
Broker-Dealer fined for “No Remuneration” indicators in FINRA reports
On August 27, FINRA accepted a broker dealer firm’s Letter of Acceptance, Waiver, and Consent (AWC) regarding alleged trade reporting violations and supervisory failures. According to the AWC, the respondent failed to include a required “No Remuneration” indicator on about 50,000 reports to FINRA’s Trade Reporting and Compliance Engine (TRACE) from 2016-2023, which violated FINRA Rules 6730 and 2010. FINRA further alleged that the respondent did not establish an acceptable system to achieve compliance with Rule 6730 and did not conduct supervisory reviews of TRACE reports, thereby failing to detect errors with certain indicators.
Without admitting or denying the allegations, the respondent agreed to a censure, a $175,000 fine, and an undertaking to certify within 60 days that the firm remediated the alleged issues and implemented a supervisory system designed to comply with FINRA Rule 6730.
Crowdfunding portal member expelled from FINRA Membership
On August 26, FINRA accepted a Letter of Acceptance, Waiver, and Consent (AWC) from a former funding portal member (the respondent) that acted as an intermediary for crowdfunding offerings conducted under Section 4(a)(6) of the Securities Act. The AWC outlined the respondent’s alleged violation of FINRA Funding Portal Rules 800(a) and 200(a) and FINRA Rule 8210. It asserted that FINRA began investigating one of the respondent’s offerings in January 2023 and, while the respondent initially cooperated with the investigation, the respondent subsequently “fail[ed] to respond to requests for documents and information,” despite multiple requests.
To resolve FINRA’s allegations, the respondent consented to an expulsion from FINRA funding portal membership, effective upon approval of the AWC, and acknowledged that the AWC will become part of its permanent disciplinary record. Respondent did not admit nor deny FINRA’s claims.
Broker-dealer to pay $1.19M for suspicious activity reporting violations
On August 12, the SEC issued published a settled enforcement action order against a broker-dealer for failing to monitor, investigate, and file Suspicious Activity Reports (SARs) between March 2020 and May 2023, violating Sections 15(b) and 21C of the Securities Exchange Act. The SEC ordered the broker-dealer to cease and desist from future violations of Section 17(a) of the Exchange Act and Rule 17a-8. The firm was also censured and required to pay a civil money penalty of $1.19 million.
The broker-dealer admitted other registered broker-dealers as subscribers to its trading system platform, which traded over-the-counter securities like microcap or penny stocks. Despite being required to comply with the BSA and its regulations, the broker-dealer failed to adopt or implement adequate AML policies and procedures. The SEC alleged that the broker-dealer did not surveil, investigate, or file SARs on numerous transactions indicating possible fraudulent activity or lacking a lawful business purpose. The SEC highlighted several red flags the broker-dealer failed to address, such as large volume trading, one-sided trading with price increases, and trading activities involving pre-arranged or wash trades. Additionally, the broker-dealer did not investigate transactions involving subscribers known to be subjects of criminal, civil or regulatory actions.
The broker-dealer’s surveillance system alerted potentially suspicious trading activity, but the firm did not review these alerts. Between January 2020 and June 2021, the system generated 1,862 alerts (about 310 alerts per month). However, the compliance team devoted only about five hours per month to review these alerts, which the SEC found insufficient. Consequently, the broker-dealer failed to file any SARs during the relevant period despite suspicious trading activity. The broker-dealer neither admitted nor denied these findings.