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FINRA Sanctions Former AIG Broker-Dealers and FinOp Principal Over Net Capital Violations
by Howard Haykin
FSC Securities, Royal Alliance Associates, SagePoint Financial, Woodbury Financial Services and Inger Wilson Fields agreed to settle FINRA charges that inaccurate accounting and net capital treatment of investment advisory fees were applied at each of the firms while Fields was serving as the firms’ Financial and Operations Principal (FinOp).
- Royal Alliance Associates, fined $260K. Based in New York, NY, Royal Alliance has been a FINRA member since 1989. The firm conducts a general securities business, with over 2,000 registered reps operating out of nearly 800 branch offices. Royal Alliance has no relevant financial or net capital disciplinary history.
- FSC Securities Corporation, fined $150K. Based in Atlanta, GA, FSC has been a FINRA member since 1977. The firm conducts a general securities business with around 1,4008 registered reps operating out of some 667 branch offices. FSC has no relevant financial or net capital disciplinary history.
- SagePoint Financial, fined $75K. Based in Phoenix, AZ, SagePoint has been a FINRA member since May 2005. The firm conducts a general securities business with around 1,850 registered reps operating out of nearly 900 branch offices. SagePoint has no relevant financial or net capital disciplinary history.
- Woodbury Financial Services, fined $65K. Based in Oakdale, MN, Woodbury has been a FINRA member since 1968. The firm conducts a general securities business through nearly 1,400 registered reps operating out of more than 700 branch offices. Woodbury has no relevant financial or net capital disciplinary history.
During the time period of the violations discussed herein, all 4 firms were direct subsidiaries of American International Group, operating within the AIG Advisor Group. AIG sold that Group in January 2016 to PE firm Lightyear Capital and Canadian pension manager PSP Investments. Prior to closing the deal, AIG remedied the net capital deficiencies by contributing qualifying subordinated debt.
- Inger Wilson Fields, fined $5K & suspended one month as a FinOp. A resident of Powder Springs, GA, Ms. Fields became registered in the securities industry in 1997 as a FinOp. In 2011, she also became registered with FINRA as an Operations Professional. Ms. Fields was associated with the 4 firms, as follows:
► Royal Alliance: became associated on 4/3/01 and, from 6/8/10 through 8/30/16 was its designated FinOp.
► FSC: became associated on 7/7/88 and, from 11/11/97 through 8/25/16 was its designated FinOp.
► SagePoint: became associated on 9/10/04 and, from 5/26/05 through 8/30/16 was its designated FinOp.
► Woodbury: from 7/9/13 through 8/30/16 was its designated FinOp.
FINRA FINDINGS. Between January 2010 and April 2016, Royal Alliance, FSC and SagePoint, and between January 2014 and March 2016, Woodbury applied an inaccurate accounting and net capital treatment of investment advisory fees. Subsequent adjustments to correct the net capital computations resulted in hindsight net capital deficiencies for Royal Alliance, FSC and SagePoint, and books and records violations and financial reporting inaccuracies for all 4 Firms. During the timeframe when the violations occurred, Fields served as FINOP for the Firms,
The Firms collected investment advisory fees quarterly, in advance, and paid their financial advisors their commissions, also in advance. When accounting for such fees and commissions each month, the firms booked the investment advisory fees on a net basis by offsetting the prepaid commissions to financial advisors against the related deferred revenue - in essence reflecting the results of these 2 sets of transactions in a single net balance.
That accounting treatment, however, violated generally accepted accounting principles (GAAP), which required the firms to book such advisory fees on a gross basis. As a result of the erroneous accounting entries, the firms filed inaccurate monthly FOCUS reports throughout their respective periods. Additionally, 3 of the firms had unreported net capital deficiencies: Royal Alliance had a net capital deficiency in 18 months between January 2010 and April 2016; FSC had net capital deficiencies in 10 months during that same period; SagePoint had a net capital deficiency in one month.
[For commentary on this case, click on law360.com.]
This case was reported in FINRA Disciplinary Actions for July 2017.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case # 2016049751001.