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Regulatory Sanctions

Broker-Dealer Overpaid Customers' Third-Party Advisors

January 15, 2019

by Howard Haykin


Once the brokerage firm accepted its customers' written authorizations granting 3rd-party advisors the authority to execute securities trades and charge their accounts for management fees (subject to fee schedules in Management Agreements), it was up to the brokerage firm to make sure that the “discretionary” transactions were carried out in a proper and accurate manner.



From 2008 through April 2017 (the "Relevant Period"), MBSC Securities Corporation (“MBSC”) serviced approximately 17,000 retail customer accounts, of which more than 100 had established relationships with two 3rd party investment advisors (the “RIAs”).


While MBSC generally prohibited wire transfers from customer accounts to 3rd parties, the firm made an exception with these 100 customer accounts, who had: (i) opened an MBSC account in his or her own name; (ii) executed trading authorizations granting authority to the respective RIAs to trade securities in the account; and, (iii) provided MBSC copies of their management agreements with the RIAs, which authorized management fee charges from the customers' accounts in accordance with a fee schedule agreed to by each customer.


WHAT WENT WRONG.    The 2 RIAs routinely submitted requests for the payment of management fees that exceeded the amounts to which they were entitled under the Management Agreements and fee schedules - which MBSC processed without any review or verification.


In addition, MBSC continued to accept and process the submitted disbursement requests from one of the RIAs even though, in September 2016, that RIA became subject to a consent order issued by its state regulator prohibiting the RIA from engaging in registered advisory activities. By April, MBSC learned of the prohibition and stopped making payments in April 2017. 


In April 2017, MBSC took these further actions: (i) immediately suspended all trading activity in the accounts managed by that RIA; (ii) reviewed all the advisory fees paid to that RIA and discovered the over-payments; (iii) self-reported its findings to FINRA; and, (iv) conducted a further review and determined overpayments to the other RIA, as well.


All told, MBSC disbursed $971,000 in excessive fees from accounts of approximately 75 customers to the two 3rd-party RIAs .


CONSEQUENCES OF MBSC’S ERRORS.    FINRA determined that MBSC had violated its rules governing … (i) Supervision  [NASD Rule 3010 and FINRA Rule 3110]; and and, (ii) Supervisory Control System - Internal Inspections [NASD Rule 3012 and FINRA Rule 3110(c)(2)]


FINRA opted not to fine MBSC for its violative conduct because it had self-reported its violations. However, MBSC did agree to pay over $1.2 million in restitution and pre-judgment interest to the affected customers.



This case was reported in FINRA Disciplinary Actions for December 2018.

For details the case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2017054119401.