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Regulatory Sanctions

At Daiwa, One Problem Leads to Another, Then Another, …

July 6, 2017

by Howard Haykin


Problem solving is fraught with risks. First, one must address - i.e., correct - the initial, immediate problem at hand. Next, one must implement a system to ensure detection should the initial proble recur. Third, one must address new problems or risks that may arise from the solution(s) to the initial problem. A big thanks goes out to FINRA and Daiwa for offering up this valuable lesson. 


Daiwa Capital Markets America Inc. agreed to pay a $100K fine to settle FINRA charges that during 2 different periods of time, it failed to deliver quarterly account statements to some customers who requested electronic-only delivery of account statements.


BACKGROUND. Daiwa Capital Markets America is an executing broker-dealer for primarily institutional customers. The Firm employs about 175 registered reps (RRs) who operate out of 2 branch offices - its main branch office is in New York, NY.  The firm has no relevant disciplinary history.


The firm employed quarterly instead of monthly account statements and during all relevant times, customers had the option of receiving these quarterly account statements through exclusively electronic means. 


FINRA FINDINGS.   Between December 2013 and March 2015 (the "Initial Period") and between September 2015 and June 2016 (the "Secondary Period"), Daiwa failed to deliver quarterly account statement to some customers who requested electronic-only delivery of account statements.


  • During the Initial Period, the Firm failed to deliver quarterly account statements to 93 direct customer accounts and 1,406 sub-accounts.
  • During the Secondary Period, the Firm failed to deliver quarterly account statements to 57 direct customer accounts and 515 sub-accounts.


On June 8, 2015, Daiwa learned that on 11/1/13 it had inadvertently turned off its system that delivered, via email, customer account statements to those customers who chose electronic delivery only. The system had been turned off in the course of upgrading a separate electronic system, and when that upgrade was complete the Firm neglected to re-employ the electronic account statement delivery system. As a result, between December 2013 and March 2015. the Firm failed to deliver quarterly account statements to approximately 93 direct customer accounts and 1,406 sub-accounts - or approximately 8% of the Firm's total accounts and 100% of the customers who had chosen to receive account statements solely via email.


Upon discovery, Daiwa promptly fixed the issue that led to that problem by turning on the electronic account delivery system. However, it failed to implement a system to ensure that, going forward, all quarterly account statements would completely and accurately be delivered to customers. So, when the Firm decided it needed to manually re-enter all customer emails addresses into its electronic account statement delivery system, it had no viable means for addressing a new risk that was now introduced to its account statement delivery system – i.e., inaccurate or missing email addresses.


Yes, the firm conducted occasional random spot-checks of its manual entry of email addresses and delivery of account statements. But no, they failed to disclose problems, namely: (i) that employees had failed to accurately populate email addresses in its electronic account statement delivery system for certain accounts and sub-accounts; and (ii) that those failures led to non-delivery of quarterly account statements during the Second Period.


This led to the Second Period delivery failures, which the firm did not learn about until its outside auditor reported that one customer had not received quarterly account statements. The firm investigated and found that data-entry failures during the project led its electronic system to fail to deliver a new group of quarterly account statements. These findings also revealed to FINRA that Daiwa, after it had learned of the failure to deliver electronic account statements during the Initial Period, had failed to establish and maintain adequate supervisory systems to review whether it delivered quarterly account statements to customers who chose email-only delivery of account statements.


This case was reported in FINRA Disciplinary Actions for June 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015047420601.