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Regulatory Sanctions

New Broker-Dealer Started Off on the Wrong 'Feet’

June 11, 2019

by Howard Haykin


As the result of a routine cycle exam, a small broker-dealer was charged with violative conduct that began with making misleading statements to FINRA in connection with its application for registration as a new FINRA member. The firm, which became a FINRA member in 2015, agreed to pay a $60K fine to settle the FINRA charges.





1.  Between December 2014 and May 2015 … the firm (or “B/D”) made misleading statements during the new member application process in violation of FINRA Rules 1122 and 2010.

Despite the firm's representation that it did not intend to conduct business activities with any of its affiliates, the firm knew it intended to rely upon, and had made arrangements for, an affiliate entity to solicit and refer prospective customers to the firm in exchange for compensation. Further, the firm relied upon that affiliate entity to solicit prospective customers between at least February and October 2015.


2.  Between May and October 2015 … the B/D permitted an unregistered person to engage in securities activities requiring registration in violation of NASD Rule 1031 and FINRA Rule 2010.

Based on the above-mentioned arrangement , the firm permitted an unregistered individual associated with the unregistered affiliate entity to engage in securities business to the firm's benefit by soliciting firm customers. This activity required registration. 


3.  During January and February 2016 … the B/D made 2 payments totaling approximately $4,460 to this unregistered entity in violation of FINRA Rules 2040 and 2010.

Based on the above-mentioned arrangement, the firm agreed to pay the unregistered affiliate entity 90% of the commissions it received from accounts opened through introductions made by the unregistered individual. In January and February 2016, the B/D made 2 payments to the unregistered affiliate entity totaling $4,460.


4.  Between October 2015 and February 2016 … the B/D failed to establish, maintain, and enforce supervision, including WSPs, that was reasonably designed to review the trading activity in customer accounts in violation of FINRA Rules 3110 and 2010.

While the firm's WSPs required a principal to conduct a quarterly review of transactions "for: suitability ... excessive size or frequency of trades (i.e. churning) ... substantial trading profits or losses," the firm did not conduct such reviews – and thus was unable to assess whether the approximately 1,100 transactions in its 9 customer accounts between October 2015 and February 2016 were unsuitable, excessive, or resulted in excessive commissions. As a result, the firm failed to detect that 5 of its 9 customers had annualized turnover ratios in excess of 6 – indications of possible excessive trading.


5.  Between May and November 2015 … the broker-dealer failed to establish, document, and maintain a reasonable Customer Identification Program (“CIP”) in violation of FINRA Rules 3310 and 2010.

The firm intended to rely on its clearing firm to maintain a CIP on its behalf. But, in order for it to do so, the firm was required by the Bank Secrecy Act (“BSA”) to receive an annual certification from the clearing firm that it would do so. The B/D did not receive such a certification and, as a result, it was required to establish, document, and maintain a CIP independently. Having failed to do so, the firm did not conduct reasonable verification for 6 of its customers.



This case was reported in FINRA Disciplinary Actions for May 2019.

For further details, click on...  FINRA AWC #2015045780901.