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Regulatory Sanctions

Long Island B/D Fails Supervision of Outside Brokerage Accounts

August 22, 2018

[Image: 'Written Supervisory Procedures' / Greico Compliance]


by Howard Haykin


Northeast Securities, a Long Island, NY-based broker-dealer, agreed to pay a $50K fine to settle FINRA charges that it failed adequately supervise its Registered Reps’ outside brokerage accounts and email correspondence.


The settlement further requires the firm to:

►     certify that it has corrected deficient pols, procedures and systems (WSPs) pertaining to the review of outside brokerage accounts (“OBAs”) held by Registered Reps (“RRs”).

►     certify that it has completed a retrospective review of all available or reasonably obtainable records related to OBAs disclosed, to detect potential violations of the industry laws and regulations, including those prohibiting insider trading and front running.

►     pay restitution, including interest, to each customer harmed by any misconduct detected by the retrospective review of OBAs.

►     certify that it has completed a risk-based retrospective review of emails sent or received by its associated personnel to detect potential violations of industry laws and regulations.


FINRA FINDINGS.    Northeast, a FINRA member firm since 1990, engages in a general securities business and employs approximately 60 RRs who operate out of 22 branch offices. Over a 7-year period (2010 through 2016), Northeast failed to maintain reasonable WSPs concerning the review of its RRs’ OBAs and failed to reasonably supervise its review of OBAs.


Heres' what the Firm's WSPs required:  (i) RRs must disclose any OBAs held in their own name, as well as accounts over which they had a financial interest and/or discretionary authority; (ii) duplicate account statements and trade confirms to be sent contemporaneously to the “designated principal" – i.e., the firm's entire Compliance Department; (iii) designated principals to review duplicate confirms and statements - verifying that outside firms were notified of associated persons' association with the Firm; (iv) reviews of internal account documentation and trade records for evidence of unacceptable trading practices; and, (v) reviews of annual attestations to see if an RR disclosed use of an outside account.


However, the Firm’s WSPS … (i) did not clearly specify the frequency with which accounts should be reviewed; (ii) did not provide guidance as to how reviewers should perform and document their review; and, (iii) did not assign any personnel the responsibility of verifying that the designated principals performed their required tasks.


Specifically, FINRA noted that the Firm …

  • failed to request and obtain duplicate account statements for certain of the OBAs that its associated persons had disclosed – e.g., in 2016, 20 of 81 (25%) OBAs – preventing it from conducting any required reviews of these missing OBAs;
  • failed to review certain duplicate OBAs that it did obtain – e.g., in 2016, 11 statements related to 10 OBAs.


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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2014040769402.