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NEWSLETTERS & ALERTS
FINRA Opens a Can of WORMs at 3 Large Broker-Dealer Groups
By Howard Haykin
CASE ONE - AWC #2016051317701. Allianz Life Financial Services and Questar Capital Corporation … agreed to pay a $150K fine, jointly and severally, to settle FINRA charges that they failed to maintain a significant number of electronic brokerage records, essential to their business, in the required WORM format.
BACKGROUND. Minneapolis, MN-based ALFS, a FINRA member since 1968, is a wholly-owned subsidiary of Allianz Life Insurance Company of North America. ALFS is a wholesale distributor of annuity products to 3rd-party broker-dealers for Allianz Life and Allianz Life Insurance Company of New York. ALFS has some 489 registered reps who operate out of 13 branch offices nationwide.
Minneapolis, MN-based Questar, a FINRA member since 1997, is a wholly-owned subsidiary of Yorktown Financial Companies. Yorktown Financial, in turn, is a wholly-owned subsidiary of Allianz Life. Questar distributes a full range of securities products, including nonproprietary mutual funds, variable life insurance and annuity contracts, and processes general equities transactions through a clearing arrangement with a 3rd party. Questar has around 823 registered reps who operate out of 523 branches nationwide.
Neither firm had prior relevant disciplinary history.
FINRA FINDINGS. From 1997 to 2016 for ALFS, and from 2006 to 2016 for Questar, the Firms failed to maintain a significant number of electronic brokerage records in the WORM format, as required by various SEC and FINRA rules. Second, the Firms experienced related audit deficiencies affecting their ability to adequately retain and preserve electronic records. Third, the Firms failed to enforce written supervisory procedures (“WSP’s”) reasonably designed to achieve compliance with applicable record retention requirements
CASE TWO - AWC #2017053137201. HSBC Securities (USA) … agreed to - (i) pay a $1,5 million fine; (ii) to conduct a comprehensive review of its relevant policies and procedures (written and otherwise); and, (iii) to provide a description of remedial measures leading to full compliance relating to the conduct addressed in the AWC - to settle FINRA charges that it failed to maintain electronic broker-dealer records in WORM format.
BACKGROUND. New York, NY-based HSBC, a FINRA member since 1987, is a full-service broker-dealer with some 1,720 registered reps who operate out of 252 branch offices nationwide. The firm had no relevant disciplinary history.
FINRA FINDINGS. From May 2003 to the present, the Firm failed to maintain electronic broker-dealer records in the WORM format, as required by various SEC and FINRA rules. During the Relevant Period, the Firm failed to maintain in WORM format electronic records related to approximately 12.36 million transactions in exchange traded funds, equities and fixed income products.
The Firm also failed to (i) provide 90-day notice to FINRA prior to using electronic storage media; (ii) implement the required audit system for inputting records in electronic storage media; and, (iii) obtain an attestation from its 3rd-party vendor that the vendor will provide to regulatory authorities records stored electronically in the event the Firm is unable to do so. Finally, the Firm failed to have adequate written supervisory procedures (WSP’s) relating to its compliance with record retention requirements.
CASE THREE – AWC #2016052647801. MML Distributors, MML Investors Services, MML Strategic Distributors, and OppenheimerFunds Distributor … agreed to - (i) pay a $750,000 fine, jointly and severally; (ii) to conduct a comprehensive review of the adequacy of the relevant policies and procedures (written and otherwise; and, (iii) to provide a description of remedial measures leading to full compliance relating to the conduct addressed in the AWC – to settle FINRA charges that they failed to maintain electronic brokerage records in WORM format.
BACKGROUNDS. Respondents MMLIS, MMLD and MMLSD are wholly-owned subsidiaries of Massachusetts Mutual Life Insurance Company ("MassMutual"). They are all headquartered in Springfield, MA. OppenheimerFunds, which is headquartered in New York, NY, is a wholly-owned subsidiary of OppenheimerFunds, Inc., which in turn, is wholly-owned by MassMutual.
MMLD, a FINRA member since 1995, is a limited purpose broker-dealer serving as the underwriter to certain MassMutual variable life insurance products. It does not maintain customer accounts. MMLD has around 736 registered reps who operate out of approximately 43 branch offices nationwide.
MMLIS, a FINRA member since 1982, offers a variety of investment products and services to retail clients through MassMutual agents, including mutual funds, fee-based investment advisory programs, variable annuities and limited partnerships. MMLIS has some 3,017 registered reps who operate out of approximately 1,088 branch offices.
MMLSD, a FINRA member since 2014, is a limited purpose broker-dealer serving as a principal underwriter and wholesaler of variable annuity and variable life insurance products issued by MassMutual. It does not maintain customer accounts. The firm has approximately 188 registered reps operating out of approximately 5 branch offices.
OppenheimerFunds, a FINRA member since 1979, is a limited purpose broker-dealer serving as the distributor to the OppenheimerFunds family of mutual funds and for certain 529 College Savings Plans. It does not maintain customer accounts. It has around 846 registered reps who operate out of 4 branch offices nationwide.
None of the firms had prior relevant disciplinary history.
FINRA FINDINGS. Beginning in January 2001 and continuing to the present, MML failed to maintain approximately 2,400,000 electronic brokerage records in WORM format, as required by various SEC and FINRA rules. During the Relevant Period, the Firms also experienced related notice, audit and attestation deficiencies affecting the ability to adequately retain and preserve electronic records. Finally, the Firms failed to enforce written supervisory procedures (WSP’s) relating to compliance with the WORM requirement.
These cases were reported in FINRA Disciplinary Actions for August 2017.
For details on any of these cases, go to ... FINRA Disciplinary Actions Online, and enter the respective AWC number.