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Financial Services Law Insights and Observations


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  • FINRA fines broker dealer for AML failures

    Federal Issues

    On September 9, FINRA settled charges with a broker dealer (respondent) for alleged failures in its anti-money laundering (AML) compliance program. According to the letter of acceptance, waiver, and consent, the respondent allegedly failed to, among other things: (i) establish a reasonably designed AML program; (ii) implement a customer identification program; (iii) reasonably supervise for potentially manipulative trading; and (iv) preserve and maintain certain electronic communications. Additionally, FINRA found that the respondent unreasonably relied on manual reviews of the daily trade blotter to identify market manipulation. FINRA’s order includes alleged violations of FINRA Rule 2010, Rule 3110, Rule 3310(a)-(b) and Rule 4511. FINRA also determined that the respondent violated Securities Exchange Act of 1934 Section 17(a) and Rule 17a-4(b)(4). The respondent agreed to pay a $450,000 civil monetary penalty to FINRA and is prohibited from providing market access for two years.

    Federal Issues Financial Crimes FINRA Enforcement Anti-Money Laundering Compliance Securities Exchange Act

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  • FINRA reminds firms of their obligation to supervise digital signatures

    Agency Rule-Making & Guidance

    Recently, FINRA issued Regulatory Notice 22-18 reminding member firms of their obligation to supervise for digital signature forgery and falsification. FINRA reported it has received a rising number of reports claiming registered representatives and associated persons have been forging or falsifying customer signatures, as well as those of colleagues or supervisors in some instances. Issues have been flagged in “account opening documents and updates, account activity letters, discretionary trading authorizations, wire instructions and internal firm documents related to the review of customer transactions.” FINRA advised member firms to review outlined methods and scenarios for identifying digital signature forgery or falsification in order to mitigate risk and meet regulatory obligations.

    Agency Rule-Making & Guidance Federal Issues FINRA Compliance Risk Management

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  • FINRA announces electronic filing amendments

    Federal Issues

    On July 20, FINRA announced that it has amended its rules to permit, and in some cases to require, electronic service and filing of documents in disciplinary and other proceedings and appeals. FINRA also announced that it amended its rules to require parties in proceedings before the Office of Hearing Officers to file and serve the parties with their current email address and contact information at the time of their first appearance, and to file and serve any change in email address or contact information during the course of the proceeding. The amendments are effective August 22.

    Federal Issues FINRA Electronic Filing

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  • FINRA fines firm $2.8 million for faulty trade confirmations

    Federal Issues

    On June 29, the Financial Industry Regulatory Authority (FINRA) entered into a Letter of Acceptance, Waiver, and Consent (AWC), which ordered a New York-based member firm to pay $2.8 million to settle allegations that it sent customers inaccurate trade confirmations. According to FINRA, from November 2008 through the present, the firm allegedly sent customers roughly “270 million confirmations that inaccurately disclosed the firm’s execution capacity, the customer’s price, the market center of execution, or whether the trade was executed at an average price.” FINRA attributed the inaccuracies to 11 underlying issues, including technology issues, a drafting error, and a misunderstanding of regulatory guidance that allegedly went undetected for at least five years. Additionally, FINRA claimed that from at least November 2008 through March 2020, the firm failed to establish and maintain a supervisory system, including written procedures, to achieve compliance with the confirmation requirements, and claimed this alleged failure “persisted even though, by mid-2017, [the firm] was aware due to FINRA examinations of multiple systemic issues resulting in tens of millions of inaccurate confirmations.” Rather than implementing a “reasonable” supervisory system, FINRA contended that the firm took a year to set up a system and procedures that monitored only whether confirmations were delivered, not whether they were accurate. The firm neither admitted nor denied the findings set forth in the AWC agreement but accepted and consented to the entry of FINRA’s findings and censure and agreed to certify within 120 days that it corrected the identified issues.

    Federal Issues FINRA Enforcement Disclosures

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  • FINRA levies $15 million fine for software flaw that increased mutual-fund prices


    On June 2, the Financial Industry Regulatory Authority (FINRA) announced it had entered into a Letter of Acceptance, Waiver, and Consent (AWC), which ordered a New York-based member brokerage firm to pay more than $15.2 million in restitution and interest to customers who were steered by a software flaw in its automated system into purchasing higher-priced mutual fund shares when other shares were available at substantially lower costs. According to FINRA, the firm’s system, which is designed to restrict a customer’s purchase of Class C shares when lower cost Class A shares are available, allegedly “failed to correctly identify and implement applicable purchase limits on Class C shares,” thus causing thousands of customers to purchase Class C shares and incur fees and charges. The firm neither admitted nor denied the findings set forth in the AWC agreement but accepted and consented to the entry of FINRA’s findings and agreed to convert shares where applicable. FINRA stated that it “did not impose a fine due to the firm’s extraordinary cooperation and substantial assistance with the investigation.”

    Securities FINRA Enforcement

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  • FINRA fines firm $2.3 million for misusing customer funds and charging unreasonable fees


    On March 22, a decision was entered in a disciplinary proceeding between FINRA’s Department of Enforcement and a securities firm over whether the firm engaged in unauthorized trading and misused customer funds in response to mounting financial challenges in 2018. FINRA’s extended hearing panel alleged that the firm, in light of declining profits, informed customers that it would stop carrying retail accounts and levied “unreasonable and unnecessary” fees in a discriminatory manner on retail customers who did not close their accounts—including a $5,000 monthly account fee—without providing proper notice. According to the panel, the monthly fee was applied in a discriminatory manner, wherein the fee was waived for profitable accounts and certain customers. Other customers were required to pay a portion or all of the monthly fee in order to regain possession of other holdings. Moreover, the panel claimed that in most instances, “customers were not even aware of the $5,000 monthly account fee, let alone that the firm was taking their cash and securities to cover it.”

    The firm argued that the monthly fee should be considered reasonable because it resulted from an “arm’s-length agreement” between the firm and its customers, but the panel rejected the firm’s defense, pointing out that customers did not agree to the fee “as part of a contract freely negotiated at arm’s length between sophisticated parties with equal bargaining power.” The panel further asserted that, among other things, the firm also allegedly charged customers unfair prices in securities transactions, moved securities from customer accounts to firm accounts without authorization, and executed an unauthorized capital withdrawal disguised as a payment.

    In issuing its decision, the panel found no mitigating factors but identified several aggravating factors, including that the firm “continued a disturbing pattern of misconduct” after a temporary cease and desist order was issued. The firm is ordered to pay more than $2.3 million in restitution and must permanently cease and desist from converting or misusing customer funds or securities, effecting unauthorized transactions in customer accounts, charging unreasonable or discriminatory fees, or causing harm to investors, among others. The panel cautioned that it was “highly likely” that the firm’s misconduct would recur if it remained a FINRA member firm and stressed that expulsion was “the only alternative for protecting the investing public.” The firm denied all allegations.

    Securities FINRA Enforcement Fees

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  • FINRA: Supervisory obligations rest with a firm’s business management, not the chief compliance officer

    Agency Rule-Making & Guidance

    On March 17, FINRA issued Regulatory Notice 22-10 reminding member firms that meeting their supervisory obligations under Rule 3110 “rests with a firm’s business management, not its compliance officials.” According to FINRA, a firm’s chief compliance officer’s (CCO) role generally is advisory and not supervisory, and as such, an action will not be brought against a CCO under Rule 3110 for failure to supervise unless a firm confers to the CCO supervisory responsibilities, and the CCO then fails “to discharge those responsibilities in a reasonable manner.” Specifically, FINRA stated that supervisory liability will not apply to a firm’s CCO unless the CCO is responsible for either establishing, maintaining, and updating the firm’s supervisory procedures, or has been “expressly or impliedly designated” to enforce the firm’s compliance with its supervisory procedures. With respect to determining a CCO’s liability when the CCO is exercising supervisory responsibilities, FINRA added that it would apply a reasonableness standard to a CCO’s actions. A CCO may be more likely to be held liable should it be discovered that (i) the CCO “was aware of multiple red flags or actual misconduct” and then failed to take steps to address the issues; (ii) the CCO “failed to establish, maintain, or enforce a firm’s written procedures”; (iii) “the CCO’s supervisory failure resulted in violative conduct”; or (iv) the “violative conduct caused or created a high likelihood of customer harm.”

    FINRA also listed factors that would weigh against charging the CCO, including: (i) the CCO was given insufficient resources to undertake his supervisory responsibilities; (ii) the CCO was overburdened with other responsibilities; (iii) the CCO’s supervisory responsibilities were poorly defined; (iv) the firm changed in such a way such that it would be appropriate to allow the CCO time to update procedures; and (v) the CCO attempted to fulfill his duties, including by escalating concerns to senior leadership. FINRA added that it will also consider whether to take action against a firm or the firm’s president (or another individual with more director supervisory responsibility) rather than the CCO and explained that in some instances a Cautionary Action Letter may be more appropriate than formal disciplinary action.

    Agency Rule-Making & Guidance FINRA Compliance Supervision

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  • OFAC targets Russian wealth, imposes sanctions on Putin and Lavrov

    Financial Crimes

    During February and March, as conflict continued to escalate in Ukraine, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) imposed significant new sanctions, including most recently designations targeting numerous Russian elites and their family members for continuing to provide direct and indirect support to the Russian government through their business empires, wealth, and other resources. (See also General License 15.) The sanctions also targeted six of the individuals companies, one of Russia’s largest privately-owned aircraft, and one of the world’s largest superyachts. The actions were taken in close coordination with the EU, UK, Canada, Japan, the ROK, and Australia as part of a “transatlantic effort to further deny Russian elites the benefits of their kleptocracy” and to ensure the effective implementation of recently announced financial sanctions. An additional 26 Russia- and Ukraine-based individuals and seven Russian entities connected with the Russian government’s efforts to promulgate disinformation and influence perceptions were also sanctioned by OFAC, while the Department of State imposed substantial costs on 22 Russian defense-related firms. OFAC also released three new Russian harmful foreign activities sanctions FAQs.

    OFAC also imposed significant sanctions against the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation, as well as three entities that manage one of Russia’s key sovereign wealth funds: the Russian Direct Investment Fund, its management company, and one of the managing company’s subsidiaries. Sanctions were also imposed against Russian President Vladimir Putin and Minister of Foreign Affairs Sergei Lavrov, along with directors of the Foreign Intelligence Service, the Federal Security Service and the Federal Service of National Guard Troops, the interior minister, and other top government officials (see announcements here and here). As a result of the sanctions, all property and interests in property belonging to the sanctioned individuals and entities, and “any entities that are owned, directly or indirectly, 50 percent or more” by the blocked persons that are subject to U.S. jurisdiction are blocked and must be reported to OFAC. U.S. persons are prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons, unless exempt or authorized by a general or specific OFAC license. The Financial Industry Regulatory Authority also sent a regulatory notice alerting members of recent sanctions-related developments and advising members to continue to monitor OFAC’s website for relevant information.

    OFAC also issued Directive 4 under Executive Order (E.O.) 14024, which prohibits related transactions involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation, unless otherwise authorized by OFAC. Entities subject to Directive 4 can be found in OFAC’s updated list of Specially Designated Nationals or on OFAC's Non-SDN Menu-Based Sanctions List. Additionally, OFAC issued Russia-related General License 8A to authorize certain energy transactions with specified entities through 12:01 a.m. eastern daylight time, June 24, 2022.

    OFAC further announced that it is adding regulations to implement E.O. 14024 related to specified harmful foreign activities of the Russian government (covered by InfoBytes here). OFAC stated it plans to supplement these regulations with a more comprehensive set of regulations that may include additional interpretive guidance and definitions, general licenses, and other regulatory provisions.

    Additionally, President Biden, along with leaders of the European Commission, France, Germany, Italy, the UK, and Canada, issued a joint statement imposing further restrictive economic measures to further isolate Russia from the international financial system. The leaders agreed to block certain Russian banks from accessing the SWIFT global messaging system in order to harm the banks’ ability to operate globally and announced their commitment to “restrictive measures” against the Russian Central Bank to prevent the deployment of its international reserves in a manner that undermines the impact of these sanctions. The announcement further noted that the leaders plan to launch a transatlantic task force to ensure financial sanctions are effectively implemented through the identification and freezing of assets belonging to sanctioned individuals and companies that exist within their countries’ jurisdictions. Actions will include “employing sanctions and other financial and enforcement measures on additional Russian officials and elites close to the Russian government, as well as their families, and their enablers.”

    Find continuing InfoBytes coverage on the U.S. sanctions response to Russia’s invasion of Ukraine here.

    Financial Crimes Of Interest to Non-US Persons Department of Treasury OFAC OFAC Sanctions OFAC Designations Russia Ukraine FINRA Ukraine Invasion

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  • FINRA fines securities firm $20,000 for AML violations


    On January 20, the Financial Industry Regulatory Authority (FINRA) entered into a Letter of Acceptance, Waiver, and Consent (AWC), which requires a securities firm to pay a $20,000 fine for allegedly failing to: (i) establish and implement anti-money laundering (AML) policies and procedures reasonably expected to detect and cause the reporting of suspicious activity; (ii) conduct an independent AML test; and (iii) obtain the signature of a principal at the firm evidencing supervisory review and approval of the opening of customer accounts. According to the AWC, in 2018, “following a change in majority ownership, the firm’s business model shifted, and it began to service high-net worth international customers, many of whom were citizens or residents of jurisdictions that posed a heightened risk of money laundering or were considered bank secrecy havens.” The firm allegedly “failed to tailor its AML program to the firm’s new, higher-risk business model,” FINRA stated. The firm did not admit nor deny the findings as part of the AWC but agreed to a censure, among other things.

    Securities FINRA Anti-Money Laundering Enforcement Financial Crimes

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  • FINRA fines securities firm $9 million over customer protection violations


    On January 20, the Financial Industry Regulatory Authority (FINRA) announced it had entered into a Letter of Acceptance, Waiver, and Consent (AWC), which requires a securities firm to pay a $9 million fine for allegedly failing to (i) maintain proper control of excess margin securities it carried on behalf of customers; (ii) store electronic brokerage records in the required non-erasable, “write once, read many” format (known as “WORM”); (iii) disclose potential conflicts of interest when publishing research reports; and (iv) implement and enforce a supervisory system to ensure compliance with federal securities law and FINRA rules. FINRA claimed that among the alleged violations, the firm failed to preserve approximately 18.6 billion records in the required WORM format, which affected applications, “including those related to accounts payable and receivable, fingerprint records, customer account records, general ledger/trial balances, order and trade tickets, trade confirmations, and wire instructions.” According to FINRA, although the firm understood the requirement to store records in WORM format, it allegedly had no supervisory procedures in place to ensure compliance. The firm did not admit nor deny the findings as part of the AWC but has agreed to a censure and will pay the fine. Additionally, the firm is required to certify that it has implemented reasonably designed supervisory systems and procedures to comply with federal securities laws and FINRA rules and requirements.

    Securities FINRA Enforcement Privacy/Cyber Risk & Data Security Securities Exchange Act

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