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Trump Securities Nabbed for Lax Supervision Over Non-Branch Locations
by Howard Haykin
Trump Securities agreed to a $45K fine to settle FINRA charges that, among other things, it failed to ensure that it reasonably complied with the requirements related to the inspection of non-branch offices and failed to adequately monitor employee trading at these locations.
BACKGROUND. Trump Securities (“TSL”), based in New York, NY, has been a FINRA member since 1999. The Firm's principal business is providing assistance with capital raising and corporate financial advice to small companies. TSL’s 84 registered reps operate out of 2 branch offices, including its principal place of business in NYC office. The firm has no relevant disciplinary history.
Failure to Inspect Non-Branch Office Locations. For nearly 4 years (September 2011 – May 2015), TSL had registered reps working from 20 to 23 non-branch locations throughout the United States. Yet, the Firm never conducted or scheduled any inspections of its non-branch locations.
FINRA Rule 3110(c)(1)(C) requires member firms to inspect each of their non-branch locations on a regular, periodic schedule. It also requires firms to include that schedule and an explanation of how the frequency of the schedule was determined in their WSPs.
Failure to Maintain a Reasonable Supervisory System and WSPs for Monitoring Brokers' Personal Trading. Over a 2-year period (September 2011 – August 2013), TSL's principal business involved assisting small companies with capital raises and providing corporate financial advice. During that period, the Firm allowed its registered reps to maintain outside personal brokerage accounts and the Firm collected and reviewed duplicate copies of those account statements. However, the Firm did not require brokers to request and receive prior approval for personal trades in securities related to the companies for which they conducted TSL work and did not maintain watch lists or restricted lists to assist supervisors in their evaluation of employee trading.
FINRA Rule 3110(a) requires member firms to establish and maintain a system to supervise the activities of each registered rep reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable NASD and FINRA Rules. FINRA Rule 3110(b)(1) requires member firms to establish, maintain, and enforce WSPs to supervise the types of business in which it engages and to supervise the activities of its registered reps.
Failure to Conduct CIP on Investors in a Private Placement. In September 2012, TSL failed to implement its CIP procedures with respect to 17 individuals and entities who invested in a private placement through the Firm. TSL solicited the investors, provided them with offering documents that prominently mentioned the Firm's name as placement agent, and facilitated the investors' payments to the issuer. As such, the investors had a formal relationship with the Firm to effect transactions in securities and, therefore, compliance with the CIP rule was required.
FINRA Rule 3310(b) requires members firms to establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act ("BSA") and the implementing regulations thereunder.
FINANCIALISH TAKE AWAY. FINRA requires its member firms to inspect every location in which firm business is conducted. FINRA Supervision Rule 3110(c) provides specific timeframes for internal inspections of offices of supervisory jurisdiction (OSJs) and branch offices. Firms have flexibility in scheduling inspections of, or visits to, non-branch offices.
(A) … at least annually (on a calendar-year basis) every OSJ and any branch office that supervises one or more non-branch locations.
(B) … at least every 3 years every branch office that does not supervise one or more non-branch locations.
(C) … on a regular periodic schedule every non-branch location – taking into consideration the nature and complexity of the securities activities for which the location is responsible and the nature and extent of contact with customers; an explanation must be given for how the firm determined the frequency of visits.
And, when registered reps are permitted to operate in ‘remote’ non-branch locations – without hands-on supervision - firms may need to devise policies and procedures for monitoring sensitive areas like personal trading by registered reps. Here, FINRA provides little or no “wiggle room.” Get it done or be subject to a fine.
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 #2013035264401.