[ by Howard Haykin ] Cleveland-based KeyBanc Capital Markets, has been a registered broker-dealer and FINRA member since 1998, when its parent company KeyCorp bought McDonald & Company Investments Inc.  Following the transaction and name change, the retail brokerage business was sold off, leaving the firm's business model exclusively institutional.  KeyBanc Capital Markets currently provides investment banking, equity, and debt underwriting services to large corporations and middle-market companies, as well as fixed  income and equity trading capabilities to institutional investor customers. Nature of FINRA Charges. After closing its retail business, the firm began revising its various WSPs to conform to its new business model.  However, it did not do so in the area of employee personal trading - i.e., the Personal Investments Policy, or PIP.  The WSPs and firm policies and procedures weren't updated until a later date. That, prior to the changes being made, the firm did not have adequate WSPs to protect the firm from committing rule violations relating to employee trading and investments.  So, when FINRA examined the firm for this relevant period, it found alleged violations of NASD and FINRA rules that resulted in the AWC and agreed-upon sanctions.

[C-I Note & Take Aways: All too often firms will make changes to its business models.  Usually such changes don't involve dramatic or drastic changes, like dropping an entire retail brokerage business.  More often, firms will:  (i) add branch offices;  (ii) increase numbers of registered personnel;  (iii) begin selling new securities products or begin to arrange and sell private placements under Reg D.

Regardless what change is made, a firm's supervisory procedures and internal controls must be updated.  That includes deleting sections of the WSP that no longer are applicable - firms have been sanctioned for having policies and procedures in its WSPs even though they do not engage in those business areas.

Of course, it the changes are material in nature, and vary significantly from the activities that FINRA has approved for the firm, then additional steps must be taken and the firm must file with FINRA and complete a Continuing Membership Application so that it obtains the regulator's approval for all business areas and business structures that the firm plans to operate under.

Missing any of these steps along the way will invariably result in fines and other sanctions - with the worst case scenario being that FINRA responds by restricting or prohibiting the firm from, say adding registered reps or branch offices, or from engaging in the anticipated new business areas.]

FINRA Findings and Allegations. During a 23-month period (February 2007 to January 2009), followed by an 8-month period (March 2009 to November 2009), the Firm allegedly failed to implement an adequate supervisory system, including WSPs, to ensure compliance with applicable NASD and FINRA rules.  During those periods, all retail accounts formerly held at the firm, including employees’ accounts, were transferred to a non-affiliated retail broker-dealer. As a result:

• those for employee accounts held away from the firm were not supervised for trading in securities on the firm’s Restricted and Watch Lists.
  • although the firm continued to monitor employee trading through the Control Room Group to ensure that no employees traded in securities on the Restricted and Watch Lists.
• employee trading was not adequately supervised for potential conflicts of interest
  • although revised pols and procedures and supervision, were implemented for personal investments by employees identified as Covered Persons - they had to maintain their personal brokerage accounts at one of 3 approved broker-dealers;
  • Covered Persons also had to have all personal transactions pre-cleared by the firm’s Control Room Group.
  • Supervisory principals were not required to identify the issuer in the employee's personal trading prior to approving that employee’s request to execute a personal trade.
  • However, Information Sensitive Employees (ISEs), who routinely work in business units that generate or have access to material, non-public information, were required to obtain a supervisory principal’s approval prior to effecting any personal transactions – an additional step to obtaining pre-clearance from the Control Room Group;
  • ISEs were not prohibited from trading in securities maintained in the firm's inventory - although, in their requests to do a personal transaction, they had to identify the quantity, price and CUSIP number of the security being traded.
  • transactions on behalf of ISEs in the fixed income sales and trading group were approved by a supervisory principal but the review did not address the risk of a potential conflict of interest – despite the fact that CUSIPs were provided by employees.
    • FINRA attributed this deficiency to the fact that Supervisory Principals were not guided on steps they should take prior to approving an employee’s personal transaction request.

FINRA Sanctions. KeyBanc Capital Markets Inc. fka McDonald Investments Inc. CRD #566, Cleveland, Ohio) agreed to an $85K fine. For further details, go to:  [FINRA Disciplinary Actions for July 2012] and [FINRA AWC #2009018590601].