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Regulatory Sanctions

Supervision: Wearing Too Many Hats Proves Fatal

November 12, 2018

by Howard Haykin


The 50% owner of Liberty Partners Financial Services, who also served as the firm’s CEO, CFO, FINOP, and its designated principal for reviewing activity in customer accounts, settled FINRA charges that he failed to reasonably supervise the equity trading of registered reps at his member firm for potentially excessive trading.

He agreed to: (i) pay a $20K fine; (ii) serve a 6-month suspension in all capacities; and, (iii) immediately thereafter, serve a 12-month suspension in any principal capacity.


FINRA FINDINGS:   Between January 2014 and September 2015 ("the relevant period"), the individual failed to reasonably supervise the equity trading of registered reps (“RRs”) for potentially excessive trading, and, even where his reviews identified potentially excessive trading, he failed to reasonably address that activity.


I.   Liberty’s written supervisory policies (“WSPs”) pertaining to excessive trading, as developed by the individual:


  • Failed to adequately describe how potentially excessive trading would be identified or handled.
  • Failed to accurately reflect the practices that Liberty actually employed to supervise potentially excessive trading by its RRs.
  • Failed to adequately identify procedures for processing and monitoring ‘active trading paperwork’ sent to customers whose accounts displayed potentially excessive trading.
  • Failed to adequately identify how ‘closing transactions only’ restrictions on such accounts  (referred to as "buy-blocks") would be processed and monitored.
  • Failed to adequately identify how 'commission restrictions' on such accounts would be processed and monitored.



II.   This individual failed to adequately supervise potentially excessive trading:


  • Supervisory reviews of customer account activity were not performed with any regularity.
    • Accounts with potentially excessive trading were at times not reviewed until months after the activity took place, if at all.
  • Even where such reviews identified potentially excessive trading activity, follow-ups were ineffective. For example, after determining that a customer needed to receive active trading paperwork to confirm that the customer desired the level of activity in the account, the individual …
    • failed to confirm that firm personnel actually sent active trading paperwork;
    • failed to confirm that Liberty received signed paperwork back.
    • never spoke with customers whose accounts appeared to be engaged in active trading with annualized turnover ratios ranging up to 104.
  • Buy-block restrictions were sporadically and inconsistently imposed on some accounts as result of account reviews – and, in at least one instance, the individual removed a buy-block based solely on the RR's request.
  • Commission restrictions were implemented by simply informing an RR to restrict his or her commissions, and then did nothing to ensure that the RR followed those directives.



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

For details on either case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015043246401.