FINRA News

FINRA Disciplinary Action against Buttonwood Partners, Inc. 

On August 20, 2018, FINRA issued a Letter of Acceptance, Waiver and Consent in which Buttonwood Partners, Inc. was censured and fined $50,000.  Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to establish, maintain and enforce a supervisory system and written procedures designed to review and monitor the transmittal of funds from customer accounts to third party accounts.

According to the investigation, in March 2015, a Buttonwood customer’s funds were fraudulently transferred out of her account after her email was hacked.  In 2015, the firm had approximately 100 customers who used a bill payment service that allowed them to transfer funds regularly from the customers’ security accounts to pay invoices from third parties.  Buttonwood’s clearing firm required the use of a letter of authorization (LOA), signed by the client, for transfers larger than $100,000.  The firm did not have a written supervisory procedure to address wire transfers of customers’ funds to third-party accounts. Nonetheless, it was a well-known routine practice to ask customers who used the bill payment service to sign a blank letter of authorization form.  This was done so that they would not have to sign a new LOA for each third-party fund transfer.

Per the Letter of Acceptance, Waiver and Consent, in or about February 2015, a Buttonwood customer advised her registered agent that she would be requesting fund transfers from her trust account.  On February 27, 2015, the customer called to request a wire transfer for $569,700.53.  The firm used a pre-signed, blank letter of authorization from the customer’s file to process the request.  Within the next couple of days, the customer’s email account had been hacked and the firm received 6 emails with wire transfer requests to different payees.  Buttonwood did not contact the customer to confirm each request.  Instead, it used the pre-signed LOA form and disbursed $207,300 out of the customer’s account as directed in the fraudulent emails.  The fraud was discovered once the firm became suspicious of the activity and called the client to confirm.  Buttonwood and its clearing firm were able to retrieve most of the money and reimburse the reminder amount to make the client whole.   It is worth noting that Buttonwood self-reported the violations to FINRA.

If you believe that you have suffered losses as a result of misconduct, you may contact David A. Weintraub, P.A. 7805 SW 6th Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422.

FINRA Disciplinary Action against Thrivent Investment Management, Inc. 

On August 9, 2018, FINRA issued a Letter of Acceptance, Waiver and Consent in which Thrivent Investment Management, Inc. (Thrivent) was censured.  Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to establish, maintain and enforce a supervisory system and written procedures designed to supervise mutual funds sales to ensure that eligible customers received the benefit of applicable sales charge waivers and breakpoint discounts.

According FINRA, during the investigation period (January 2011 – April 2016), Thrivent failed to reasonably supervise the application of sales charge waivers and available breakpoint discounts to eligible mutual fund sales.  The firm relied on its financial advisors to determine the applicability of sales charge waivers and breakpoint discounts to eligible customers but failed to maintain written policies and procedures to make correct determinations.  The different sales charges, breakpoint discounts, waivers and fees associated with different share classes impact mutual fund investors’ returns.

Per the Letter of Acceptance, Waiver and Consent, Thrivent launched an internal investigation and as a result it returned a total of $855,465.04 (inclusive of interest) in restitution to customers, which represents the amount eligible customers were overcharged because of its deficiencies.  An additional $16,157.75 (inclusive of interest) was returned to customers in restitution, which represents the overcharges for missed sales charge waivers.

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations.  If you believe that you have suffered losses as a result of misconduct, you may contact David A. Weintraub, P.A. 7805 SW 6th Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422.

FINRA Disciplinary Action Against Royal Alliance Associates, Inc; FSC Securities Corporation; SagePoint Financial, Inc.; and Woodbury Financial Services, Inc.

On July 24, 2018, FINRA announced that the firms submitted Letters of Acceptance, Waiver and Consent in which Royal Alliance Associates, Inc. was censured and fined $350,000; FSC Securities Corporation was censured and fined $200,000; SagePoint Financial, Inc was censured and fined $200,000.; and Woodbury Financial Services, Inc. was censured and fined $250,000.  Without admitting or denying the allegations, the firms consented to the sanctions and to the entry of findings that during the investigation period the firms failed to establish, maintain and enforce a supervisory system and written procedures designed to reasonably supervise representatives’ sale of multi-share class variable annuities and failed to provide training to their representatives and principals on the sale and supervision of these annuities.   Additionally, Royal Alliance failed to reasonably supervise variable annuity exchanges in that it failed to implement a reasonable supervisory system and procedures to regulate its registered representatives.

According to the findings, the firms’ procedures did not specifically address suitability issues related to the different surrender periods, fees and costs of the different variable annuity share classes; as well as, it did not specifically address the suitability concerns raised by the sale of an L-share contract when combined with a long-term income rider.  The investigation also found that the firms failed to provide adequate training to their registered representatives and reviewing principals to ensure that they understood the material features of variable annuities.   The firms’ training was not designed to ensure that their representatives and reviewing principals understood all suitability considerations.

The investigation revealed that between February 2014 and December 2015, Royal Alliance received over $61.9 million from the sale of variable annuities.  More than 28% of the annuities were L-share contracts.  Between January 2013 and December 2014, FSC received over $51.5 million from the sale of variable annuities; SagePoint received over $52.7 million from the sale of variable annuities; including $11.5 million from the sale of L-share contracts, and Woodbury received over $107.1 million from the sale of variable annuities, including approximately $18.8 million from the sale of L-share contracts.

Questions or comments may be addressed to David A. Weintraub, P.A. 7805 SW 6th Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422.

Newport Coast Securities, Inc. expelled as FINRA member.

On June 22, 2018 Newport Coast Securities appealed a National Adjudicatory Council decision to the Securities and Exchange Commission.  The firm was expelled from FINRA membership, fined $403,000 and ordered to pay $853,617.04, plus prejudgment interest, jointly and severally, in restitution to customers.   Representatives Andre Vincent La Barbera and Douglas Anthony Leone were barred from association with any FINRA member in all capacities and ordered to pay full restitution to their customers.  The sanctions were based on the findings that the firm, La Barbera and Leone excessively traded customers’ accounts.  Specifically, the investigation found that La Barbera and Leone exercised de facto control of customers’ accounts and the firm is liable for the excessive trading and churning of its representatives.  FINRA found that the firm ignored multiple red flags indicating that these representatives were excessively trading and churning certain customers’ accounts.  FINRA noted that these representatives’ clients appeared repeatedly on the firm’s exception reports reflecting the high volume of trading, commission charges, or both.   As a result of their conduct, the firm, La Barbera and Leone violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, NASD Rule 2120 and FINRA Rule 2020.  The firm’s expulsion is in effect pending review.  On June 25, 2018 the NAC decision became final with respect to La Barbera and Leone.

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations.  If you believe that you have suffered losses as a result of misconduct, you may contact David A. Weintraub, P.A. 7805 SW 6th Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422.

FINRA Announces Initiative to Transform CRD, Other Registration Systems

On June 14, 2018,FINRA announced details of a multi-phased effort to overhaul its registration and disclosure programs, including the Central Registration Depository (CRD)—the central licensing and registration system that FINRA operates for the U.S. securities industry and its regulators and that provides the backbone of BrokerCheck. The first phase of the transformation—a new WebCRD interface that highlights important information or activities requiring immediate attention of firms, branches and individuals—goes into effect June 30.

The transformation aims to increase the utility and efficiency of the registration and disclosure process for firms, investors and regulators, as well as to reduce compliance costs for firms. FINRA’s Board of Governors has approved moving forward with the project, which FINRA expects to complete in 2021.

FINRA developed and operates several systems that support registration and disclosure requirements for the securities industry, and works closely with the SEC and NASAA on policy and program requirements for the systems. Securities firms use these systems to register and maintain the records of associated persons who operate within the securities industry, and investors use them—through BrokerCheck—to research the professional backgrounds of brokers and brokerage firms. These registration systems are essential to the operation of the securities industry, and experience consistently high usage volume.

The redeveloped registration systems will facilitate more efficient interaction for users and leverage information from other FINRA regulatory programs, resulting in a more accurate and complete set of information about registered individuals, branches and firms—enhancing firm compliance programs and reducing compliance costs. The transformation also allows FINRA to leverage the information security benefits of cloud-based technology, and architect systems that address dangers associated with current and anticipated cyber threats and risks.

The changes are being made in response to feedback FINRA has received through various channels during its ongoing organizational improvement initiative—FINRA360—including via recommendations from firms in response to FINRA’s 2017 Special Notice on Engagement. FINRA is working closely with member firms throughout the multi-year project, and will continue to solicit their input and feedback to ensure the enhanced systems are meeting the industry’s needs.

 

General Securities Representative Bradley Everett Gardner barred from FINRA

On June 4, 2018, Bradley E. Gardner accepted a Letter of Acceptance, Waiver and Consent in which he acknowledged that he was barred from association with any FINRA member in any capacity.   According to FINRA, on June 2, 2017, Gardner accepted a personal check in the amount of $7,400 from one of his elderly customers.  He allegedly told his client that she could pre-pay the fees associated with her advisory Firm accounts at a discount by writing a check payable to him, and that he would then “turn off” the fees associated with her accounts until March 2019.    He then deposited the check into his personal bank account and used the funds to pay for his personal expenses.  In the meantime, the firm continued to charge the client the fees associated with her advisory Firm accounts.  Mr. Gardner’s misconduct was discovered in September 2017, at which time Mr. Gardner reimbursed the whole amount to his client.

By converting customer funds, Garner violated FINRA rules.   Conversion is the intentional and unauthorized taking of an/or exercise of ownership over property by one who neither owns the property nor is entitled to possess it.

If you believe that you have suffered losses as a result of misconduct, you may contact David A. Weintraub, P.A. 7805 SW 6th Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422.

FINRA Sanctions Fifth Third Securities, Inc., $6 Million for Cost and Fee Disclosure Failures and Unsuitable Recommendations Related to Variable Annuity Exchanges

On May 8, 2018, FINRA announced that it had fined Fifth Third Securities, Inc., $4 million and required the firm to pay approximately $2 million in restitution to customers for failing to appropriately consider and accurately describe the costs and benefits of variable annuity (VA) exchanges, and for recommending exchanges without a reasonable basis to believe the exchanges were suitable. This is the second significant FINRA enforcement action against Fifth Third involving the firm’s sale of variable annuities.

Variable annuities are complex investments commonly marketed and sold to retirees or people saving for retirement. Exchanging one VA with another involves a comparison of the complex features of each security. Accordingly, VA exchanges are subject to regulatory requirements to ensure that brokers have a reasonable basis to recommend them, and their supervisors have a reasonable basis to approve the sales.

FINRA found that Fifth Third failed to ensure that its registered representatives obtained and assessed accurate information concerning the recommended VA exchanges. It also found that the firm’s registered representatives and principals were not adequately trained on how to conduct a comparative analysis of the material features of the VAs. As a result, the firm misstated the costs and benefits of exchanges, making the exchange appear more beneficial to the customer. By reviewing a sample of VA exchanges that the firm approved from 2013 through 2015, FINRA found that Fifth Third misstated or omitted at least one material fact relating to the costs or benefits of the VA exchange in approximately 77 percent of the samples.  For example:

  • Fifth Third overstated the total fees of the existing VA or misstated fees associated with various additional optional benefits, known as riders.
  • Fifth Third failed to disclose that the existing VA had an accrued living benefit value, or understated the living benefit value, which the customer would forfeit upon executing the proposed exchange.
  • Fifth Third represented that a proposed VA had a living benefit rider even though the proposed VA did not, in fact, include a living benefit rider.

FINRA found that the firm’s principals ultimately approved approximately 92 percent of VA exchange applications submitted to them for review. However, in light of the firm’s supervisory deficiencies, the firm did not have a reasonable basis to recommend and approve many of these transactions.

In addition, FINRA found that Fifth Third failed to comply with the terms of its 2009 settlement with FINRA. In the 2009 action, FINRA found that, from 2004 to 2006, Fifth Third effected 250 unsuitable VA exchanges and transactions and had inadequate systems and procedures governing its VA exchange business. For more than four years following the settlement, the firm failed to fully implement an independent consultant’s recommendation that it develop certain surveillance procedures to monitor VA exchanges by individual registered representatives.

In settling this matter, Fifth Third neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. If you believe that you have suffered losses as a result of Fifth Third Securities Inc.’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

FINRA Disciplinary Action against Cambridge Investment Research, Inc.

On April 11, 2018, FINRA issued a Letter of Acceptance, Waiver and Consent in which Cambridge Investment Research, Inc. (Cambridge) was censured and fined $150,000.  Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to establish, maintain and enforce a supervisory system and written supervisory procedures designed to supervise representatives’ sales of leveraged, inverse-leveraged exchange-traded funds (Non-Traditional ETF’s) and the redemption of variable annuities.

During the relevant period, January 2014 to March 2016, Cambridge’s customers, redeemed variable annuities and transferred the proceeds to an advisory account, on about 100 occasions.  It was found that the firm’s associated persons were involved with and recommended some of those transactions.    Additionally, from June 2012 to June 2015, eighty-four Cambridge registered representatives traded 4,773 transactions involving Non-Traditional ETFs in retail customers accounts, totaling about $127 million.  Cambridge failed to enforce its procedures and adequately monitor its representatives.

If you believe that you have suffered losses as a result of misconduct, you may contact David A. Weintraub, P.A. 7805 SW 6th Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422.

Massachusetts Leads the Path for Enforcement of Fiduciary Rule

In court papers filed February 23, 2018, the Office of the Secretary of the Commonwealth alleged Scottrade violated Massachusetts’ securities laws by failing to comply with the impartial conduct standards of the Labor Department’s fiduciary rule.

According to the complaint, the discount broker-dealer knowingly violated the fiduciary rule by running sales contests targeting retail investors’ assets in qualified retirement accounts. The contests also violated the internal compliance policies the company put in place after the impartial conduct standard went into affect in June of 2017, the complaint says.

Broker-dealer Scottrade has been charged with violating the impartial conduct standards of the DOL fiduciary rule. Under the fiduciary rule’s impartial conduct standards, any recommendation to buy a security with assets in IRAs or 401(k) plans must be made in investors’ best interests.

Scottrade ran two sales contests; one launched days before implementation of the impartial conduct standards, and one launched in September of 2017. Those contests, which were common in what the claim says was Scottrade’s “aggressive sales practices” prior to the implementation of the impartial conduct standards, incentivized brokers to bring in new assets from customers, including through rollovers from qualified retirement accounts.

In the first contest, Scottrade offered $285,000 in cash prizes to brokers that satisfied high cold-calling penetration benchmarks. In the second, brokers were awarded weekly cash prizes of $500 and $2,500 for recommending investors move to the firm’s advisory program.

Under the fiduciary standard established by the impartial conduct standards, any compensation arrangement that creates a potential conflict of interest must be disclosed to investors. Massachusetts’ complaint says Scottrade failed to inform clients of the conflicts arising from the incentives in the sales contests.

New FINRA Rules Take Effect to Protect Seniors and Vulnerable Adults from Financial Exploitation

On February 5, 2018, two FINRA rule rules took effect that purport to address the financial exploitation of seniors and vulnerable adults, putting in place a uniform, national standard to protect senior investors. Firms are now required to make reasonable efforts to obtain the name of, and contact information for, a trusted contact person for a customer’s account. In addition, the rule permits FINRA member firms to place a temporary hold on a disbursement of funds or securities when there is a reasonable belief of financial exploitation, and to notify the trusted contact of the temporary hold.

The trusted contact person is intended to be a resource for firms in handling customer accounts, protecting assets and responding to possible financial exploitation of vulnerable investors. The new rule allowing firms to place a temporary hold provides them and their associated persons with a safe harbor from certain FINRA rules. This provision will allow firms to investigate the matter and reach out to the customer, the trusted contact and, as appropriate, law enforcement or adult protective services, before disbursing funds when there is a reasonable belief of financial exploitation. It is a critical measure because of the difficulty investors face in trying to recover funds that they have inadvertently sent to fraudsters and scam artists.

The rule changes were approved by the SEC in February 2017. FINRA set February 5, 2018 as the effective date to provide member firms substantial time to prepare and develop policies and procedures.

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