FINRA Blames Inadequate Supervisory System, Spotty WSPs.

[ by Howard Haykin ]

FINRA announced on Wednesday that Pruco Securities, LLC of Newark, NJ, agreed to settle FINRA charges that, over an extended period - 8-years - it continuously applied erroneous prices to customer mutual fund orders and failed to prevent or detect the errors on a timely basis due to its inadequate supervisory system and WSPs in this area.

"Pruco's inadequate supervision and pricing system resulted in thousands of customers receiving inferior prices for more than seven years. Broker-dealers must ensure that their systems provide customers with accurate pricing for all products that the firms offer."  ---  Brad Bennett, EVP and Chief of Enforcement.

FINRA Findings and Allegations.   One of Pruco's retail brokerage business units, COMMAND, instituted a practice for handling mutual fund paper orders that was inconsistent with the pricing requirements of the Investment Company Act of 1940. 

Here's how the scenario played out:

• From late 2003 to June 2011, COMMAND priced more than 850,000 paper orders, on average, one or two days after it received complete orders prior to 4 p.m.

• The employees were mistakenly operating under the presumption that they could use "best efforts" - i.e.,  up to 2 business days - to process mutual fund paper orders and that such orders could be priced on the date the order was processed.

• Erroneous pricing occurred even when Pruco received a complete order prior to that date.

• All told, about 37,000 accounts for 34,000 customers had their M/F orders mispriced to their disadvantage. 

• Pruco calculated their losses at $10.7 million, which Pruco will pay as restitution, plus interest.

• As many as 3,240 additional customers may be entitled to restitution.  The firm is currently in the process of calculating possible losses of these customers.   This grouping had been overlooked, and the issue was discovered after an inquiry to COMMAND personnel regarding a fax order submitted had not been executed until the day after it was received as a complete order.

•  FINRA found that Pruco failed to have an adequate supervisory system to detect and/or prevent the mispricing errors and to ensure that such errors are corrected. 

• Contributing to the problem was that Pruco failed to have WSPs for the pricing of mutual fund orders.

• Pruco further did not provide employees with any training or training materials, as to correct pricing requirements.

 
FINRA Sanctions.  In determining the amount of any sanctions, FINRA looked favorably upon actions taken by Pruco after it had discovered the errors:

• Pruco discovered the errors - not FINRA examiners and not resulting from customer complaints.
• Pruco self-reported the pricing issue.
• Pruco conducted an internal review, implemented changes to its policies and procedures and commenced restitution to the affected customers.

In agreeing to the settlement, Pruco, neither admitted nor denied the charges, but consented to the entry of FINRA's findings.  In addition to the $10.7 million in restitution plus interest, Pruco was fined only $550,000 for committing the errors and for failing to have adequate systems in place to readily detect or prevent the errors, and them to correct them promptly. 

[C-I Note:  All in all, FINRA's fine was rather lenient - after all, the errors were systemic and lasted for nearly 8 years.  The firm never structured the organization or personnel for critical control points, and they apparently allowed the staff and their immediate supervisors to operate contrary to federal securities rules.  In many ways, it's mind-boggling how so many people can operate without knowing the right rules for so long a time.  However, Pruco got a break and hopefully, they are not operating the rest of their company in such a lax manner.   

As the old expression goes, where there's smoke there's fire.  I wonder if FINRA conducted a review or at least interviewed senior management in other units to see if they might be making similar mistakes and misjudgments. 

That's what I'd do if I ran FINRA.  But I don't and perhaps I'll share these ideas with the regulators.  They might appreciate such "thinking out of the box."]

FINRA Staff Credits.    Investigation by: Gino Ercolino, Jennifer Mennella, supervised by Myles Orosco, Richard Best.
 

For further details, go to:   [FINRA News Release, 12/26/12] and [Pruco Securities, LLC AWC  NO. 2011029046101].