Category Archives: FINRA News

On May 9, 2013, FINRA and the SEC issued an investor alert entitled, “Pension or Settlement Income Streams – What You Need to Know Before Buying or Selling Them.”

The alert informs investors about the risks involved when selling their rights to an income stream or investing in someone else’s income stream. The alert urges investors considering an investment in pension or settlement income streams to proceed with caution.

Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future. Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump-sum amount, which will almost always be significantly lower than the present value of that future income stream.

The alert contains a checklist of questions before selling away an income stream:

• Is the transaction legal?
• Is the transaction worth the cost?
• What is the reputation of the company offering the lump sum?
• Will the factoring company require life insurance?
• What are the tax consequences?
• Does the sale fit your longer-term financial goals?

The investor alert also warns investors who might be attracted to the yield offered by buying the rights to someone else’s pension or structured settlement to be aware that:

• Investors may encounter commissions of seven percent or higher.
• Pension and structured settlement income-stream products may or may not be securities and likely are not registered with the SEC.
• These products are illiquid, which means they can be difficult to sell. In the event you need money and want to sell the product you may not be able to do so or you may only be able to do so at a loss.
• Your “rights” to the income steam you purchased could face legal challenges.

A direct link to the alert can be found here.

Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.

On April 25, 2013, FINRA announced that it had had fined Global Financial Services LLC $42,500.00, and that they were required to pay $16,931.30, plus interest, in restitution to customers.

In 16 transactions from October 20, 2008, through December 19, 2008, Global Financial Services failed to sell corporate bonds to customers at prices that were fair, taking into consideration all the relevant circumstances, including market conditions with respect to each bond at the time of the transaction, the expense involved, and the firm’s entitlement to a profit.  As a result, the Firm violated NASD Rule 2110, 2440, IM-2440-1 and IM-2440-2, and FINRA Rule 2010.

According to FINRA’s findings the Firm also failed to provide adequate supervision reasonably designed to achieve compliance with respect to applicable FINRA rules concerning corporate bond pricing in that the firm failed to detect the transactions referenced above.

In settling this matter, Global Financial Services LLC neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On April 25, 2013, FINRA announced that it had fined and suspended New York Registered Representative Bryan R. Mackey.  The suspension effective dates were from May 20, 2013 until June 10, 2013.

During his association with Merrill Lynch, Pierce, Fenner & Smith, on September 28, 2012 Mr. Mackey exercised discretion in connection with 17 transactions he effected in the account of one customer.  He did not have written authorization from the customer to place discretionary trades.  Moreover, he failed to obtain written acceptance of the account as a discretionary account from Merrill Lynch, Pierce, Fenner & Smith.  This conduct is in direction violation of NASD Rule 2510(b).

In settling this matter Bryan R. Mackey neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.  It was unclear whether the customer initiated a FINRA arbitration, or any other type of securities arbitration.

On April 25, 2013, FINRA announced that it had fined Knight Capital Americas, L.P. $20,000.00, and that they were required to pay $890.14, plus interest, in restitution to customers.

FINRA’s findings state that during the period of January 1, 2009 through March 31, 2009 there were 21 instances when the Firm failed to contemporaneously or partially execute a customer limit order in seven NASDAQ securities after it traded each subject security for its own market-making account at a price that would have satisfied each customer’s limit order. The conduct described in this paragraph violates FINRA Rule 2010 and NASD IM-2110-2.

During the same time period outlined above there were also 31 instances where Knight Capital Americas, L.P. accepted customer market orders, traded for their own account at prices that would have satisfied the customer market orders, and failed to immediately thereafter execute the customer market orders up to the size and at the same price at which it traded for its own account or a at better price.  This is a distinct violation of FINRA Rule 2010 and NASD Rule 2111(b)

In settling this matter, Knight Capital Americas, L.P. neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On April 24, 2013, FINRA announced that it had censured and fined RBC Capital Markets, LLC $97,500.00.

FINRA’s findings state that during a review period of July 1, 2009 through September 30, 2009, RBC failed to use due diligence with transactions in corporate bonds for or with customers to ascertain the best inter-dealer market, and failed to buy or sell in such market so that the resultant price to its customers was as favorable as possible under prevailing market conditions.   The conduct described in this paragraph constitutes distinct violations of FINRA Rule 2010 and NASD Rule 2320.

The Firm also purchased municipal securities for its own account from a customer and/or sold municipal securities for its own account to a customer at an aggregate price (including any markdown or markup) that was not fair and reasonable, taking into consideration all relevant factors, including the best judgment of the broker, dealer or municipal securities dealer as to the fair market value of the securities at the time of the transactions; the expense involved in effecting the transactions; the fact that the broker, dealer or municipal securities dealer is entitled to a profit; and the total dollar amount of the transactions.  This violates MSRB Rules G-17 and G-30(a).

In addition, FINRA found that RBC failed to provide written notification disclosing to its customers its correct capacity in transactions; failed to disclose details available upon request for compensation, which is stated in a  single amount of customer confirmations; and disclosed on customer confirmations that a commission was charged for order filled in a principal capacity.  As a result, the Firm was not in compliance with SEC Rule 10b-10.

In settling this matter RBC Capital Markets, LLC neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On April 19, 2013, FINRA announced that it had censured and fined Caprock Securities, Inc. $15,000.00.  The Firm consented to the entry of findings that it failed to establish, maintain, and enforce a supervisory system reasonably designed to review and retain its associated persons’ email communications with the public.

Between March 5, 2007 and December 23, 2011, Caprock failed to retain all of its business-related electronic communication in a non-rewritable, non-erasable format. By failing to establish a reasonable supervisory system for email review and retention, Caprock violated NASD Rules 3010(d) and 2110, FINRA Rule 2010, and SEC Rule 17-a-4(b)(4).  SEC Rule 17-a-4(b)(4) requires members to preserve, for a period of not less than three years, the first two years in an easily accessible place, electronic and other communications relating to their business as broker-dealers.

In concluding this settlement, Caprock neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On April 18, 2013, FINRA announced that it had fined HKC Securities, Inc., nka AGGM, Inc., and Harold K. Cohen collectively $60,000.00 in sanctions for materially failing to fairly present the risks and potential disadvantages of hedge fund investing.

Between January 2008 and June 2011, the Firm’s procedures for the review and approval of hedge fund institutional sales material were not reasonably designed or implemented to achieve compliance with FINRA’s contents standards for institutional sales material.  Cohen, as the Firm’s Chief Compliance Officer and the principal responsible for the review and approval of institutional sales material, did not engage in adequate supervision to achieve compliance with FINRA’s content standards for institutional sales material.  The Firm and Cohen violated NASD Rule 221(b)(1)(B), NASD Rule 3010, NASD Rule 2110, and FINRA Rule 2010.

The Firm failed to adequately supervise the use of institutional sales material by its registered representatives.  Cohen did not follow the Firm’s written procedures, which required post-hoc review of institutional sales material and a written notation of approval.  Cohen’s review was not focused on compliance with FINRA’s content standards.  Rather, he looked to see whether the Firm’s summary was consistent with his own understanding of the funds being marketed.  The failure to review documents prepared by the funds resulted in documents being sent to potential investors that were labeled “not to be distributed to clients,” among other things.

The findings also concluded that the Firm did not maintain a complete file of institutional sales material and did not notate the sales material with the name of the person who prepared the document and the date the document was first circulated.  Cohen was responsible for ensuring the Firm’s compliance with these recordkeeping requirements.

In settling this matter, HKC Securities, Inc., nka AGGM, Inc., and Harold K. Cohen neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On April 16, 2013, FINRA announced that it fined Merrill Lynch, Pierce, Fenner & Smith Inc. $1.05 million for failing to provide best execution in certain customer transactions involving non-convertible preferred securities executed on one of its proprietary order management systems (ML BondMarket), and for failing to have an adequate supervisory system and written supervisory procedures in place. Merrill Lynch was also ordered to pay more than $323,000 in restitution, plus interest, to customers who did not receive best execution for their trades in non-convertible preferred securities. Additionally, FINRA has required Merrill Lynch to revise its written supervisory procedures regarding ML BondMarket best execution obligations within 30 business days.

In any customer transaction, a firm or its registered persons must use reasonable diligence to ensure that the purchase or sale price to the customer is as favorable as possible under current market conditions. FINRA found that Merrill Lynch had programmed a faulty pricing logic into ML BondMarket that only incorporated quotations published on the primary listing exchange for that non-convertible preferred security. As a result, in instances when there was a better quote on a market other than the primary listing exchange, that quote was not reflected on ML BondMarket. The firm instead executed 12,259 transactions in non-convertible preferred securities with its customers on ML BondMarket at prices that were inferior to the National Best Bid and Offer (NBBO).

FINRA also found that Merrill Lynch’s supervisory system relating to ML BondMarket was deficient in a number of respects. Merrill Lynch failed to perform any post-execution review of non-convertible preferred transactions executed on ML BondMarket to ensure compliance with its best execution obligations. The firm also failed to enhance its supervisory review of non-convertible preferred securities transactions executed on ML BondMarket despite the fact that several thousand of such transactions were identified on FINRA’s best execution report cards and it had received several inquiry letters from the staff.

In concluding this settlement, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.

On April 8, 2013, FINRA announced that it had censured and fined Deutsche Bank Securities Inc. $275,000.00 for violating FINRA’s rules by failing to establish and enforce adequate supervisory procedures regarding dividend-related yield enhancement on total return swap transactions that involve U.S. equities.

An equity-based swap is a contractual arrangement between two parties who agree to exchange cash flows that replicate the economics of owning an underlying equity.  The buyer of a swap has the risks and benefits similar to those of owning the underlying equity, while the seller of the swap has countervailing risks and benefits.  From at least 2002 through 2011, Deutsche Bank did not maintain any written procedures for how to supervise or document decisions that impacted dividend uplift on swap trades referencing U.S. dividend-paying securities.

For the reviews that were conducted, the Firm developed a document so that overall client trading patterns could be monitored and potential red flags regarding the use of Total Return Swaps could be identified by desk personnel.  However, this document and the Firm’s review of it were insufficient in that the document was based on data that did not facilitate adequate monitoring.

Deutsche Bank was aware that it needed to improve its record keeping regarding swaps, so as to better manage risks associated with yield enhancement on Total Return Swaps.  However, the Firm did not put in place systems to retrieve sufficient data for managers’ review of executions made by the desk staff.  The records regarding market-on-close pricing or cross trades were not adequate under NASD Rule 3010.

In settling this matter, Deutsche Bank Inc. neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On April 4, 2013, FINRA announced that it had censured and fined E*Trade Securities LLC  $30,000.00.  The fine was based on the amount of  excess commissions as well as other excess commissions self-identified and self-reported by firms that are not the subject of the formal charges.

Between July 1, 2009 and September 30, 2009, E*Trade Securities charged a fixed charge of $1.00 per bond for online corporate bond purchases.  In 14 transactions in low priced bonds, this charge was in excess of a fair and reasonable amount, taking into consideration all relevant factors, including the availability of the securities involved in the transaction, the expense of executing or filling the customer’s order, the value of the securities rendered by the firm, and the amount of any other compensation received or to be received by the firm in connection with the transaction.  As a result, the Firm violated NASD Rule 2440.

In settling this matter, E*Trade Securities LLC neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.