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Category Archives: FINRA News

Wells Fargo Broker-Dealers Ordered to Pay $3.4 Million in Restitution and Reminds Firms of Sales Practice Obligations for Volatility-Linked Products

On October 16, 2017, FINRA announced that it had ordered Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC to pay more than $3.4 million in restitution to affected customers for unsuitable recommendations of volatility-linked exchange-traded products (ETPs) and related supervisory failures. FINRA found that between July 1, 2010, and May 1, 2012, certain Wells Fargo registered representatives recommended volatility-linked ETPs without fully understanding their risks and features.

Volatility-linked ETPs are complex products that could be misunderstood and improperly sold by registered representatives. Certain Wells Fargo representatives mistakenly believed that the products could be used as a long-term hedge on their customers’ equity positions in the event of a market downturn. In fact, volatility-linked ETPs are generally short-term trading products that degrade significantly over time and should not be used as part of a long-term buy-and-hold investment strategy.

FINRA found that Wells Fargo failed to implement a reasonable system to supervise solicited sales of these products during the relevant time period. However, FINRA found that Wells Fargo took remedial action to correct its supervisory deficiencies in May 2012, prior to detection by FINRA and around the time that the firm was fined for similar violations relating to sales of leveraged and inverse ETPs. In addition, Wells Fargo provided substantial assistance to FINRA’s investigation by, among other things, engaging a consulting firm to determine the appropriate restitution to be provided to affected customers. FINRA took Wells Fargo’s previous corrective actions and cooperation into account when assessing the sanctions in this matter, and encourages member firms to assess their own sales and supervision of volatility ETPs.

In settling with FINRA, Wells Fargo neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Morgan Stanley Sanctioned $13 Million in Fines and Restitution for Failing to Supervise Sales of Unit Investment Trusts

On September 25, 2017, FINRA announced that it had fined Morgan Stanley Smith Barney LLC $3.25 million and required the firm to pay approximately $9.78 million in restitution to more than 3,000 affected customers for failing to supervise its representatives’ short-term trades of unit investment trusts (UITs).

A UIT is an investment company that offers units in a portfolio of securities that terminates on a specific maturity date, often after 15 or 24 months. UITs impose a variety of charges, including a deferred sales charge and a creation and development fee, that can total approximately 3.95 percent for a typical 24-month UIT. A registered representative who repeatedly recommends that a customer sell his or her UIT position before the maturity date and then “rolls over” those funds into a new UIT causes the customer to incur increased sale charges over time, raising suitability concerns.

FINRA found that from January 2012 through June 2015, hundreds of Morgan Stanley representatives executed short-term UIT rollovers, including UITs rolled over more than 100 days before maturity, in thousands of customer accounts. FINRA further found that Morgan Stanley failed to adequately supervise representatives’ sales of UITs by providing insufficient guidance to supervisors regarding how they should review UIT transactions to detect unsuitable short-term trading, failing to implement an adequate system to detect short-term UIT rollovers, and failing to provide for supervisory review of rollovers prior to execution within the firm’s order entry system. Morgan Stanley also failed to conduct training for registered representatives specific to UITs.

In settling this matter, Morgan Stanley nether admitted or denied the charges, but consented to the entry of FINRA’s findings.

SunTrust Charged with Improperly Recommending Higher-Fee Mutual Funds

On September 14, 2017, the Securities and Exchange Commission announced that it had charged the investment services subsidiary of SunTrust Banks with collecting more than $1.1 million in avoidable fees from clients by improperly recommending more expensive share classes of various mutual funds when cheaper shares of the same funds were available.

SunTrust Investment Services agreed to pay a penalty of more than $1.1 million to settle the charges.  SunTrust separately began refunding the overcharged fees plus interest to affected clients after the SEC started its investigation.  SEC examiners cited the practice during a compliance review of the firm in mid-2015.  More than 4,500 accounts were affected.

According to the SEC’s order, the Atlanta-based firm breached its fiduciary duty to act in its clients’ best interests by recommending and purchasing costlier mutual fund share classes that charge a type of marketing and distribution fee known as 12b-1 fees.  Investors were not informed that they were eligible for less costly share class options that did not charge 12b-1 fees.  The avoidable fees flowed back to SunTrust in the form of higher commissions from the funds.

The SEC’s order found that SunTrust violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7.  Without admitting or denying the findings, SunTrust agreed to pay the penalty totaling $1,148,071.77 as well as disgorgement plus interest on any leftover amount of the avoidable 12b-1 fees that are being refunded to clients.  The firm also agreed to be censured.

21st Century Changes Needed for FINRA Form U4 – Part I

The Form U4 is the basic application for any person seeking to become registered with a FINRA member firm. Although updated in 2009, the U4 is an antiquated document in need of overhaul. In order to consider revisions to the U4, it is important to understand its role in today’s financial services world. Historically, the U4 was an administrative document used by self-regulatory agencies and state agencies for determining whether to grant requests for securities licenses. While the U4 retains this original purpose, that purpose has evolved. All of the information contained within a U4 application is submitted to the Central Registration Depository system, operated by FINRA. According to FINRA, Web CRD® “contains the registration records of more than 4,015 registered broker-dealers, and the qualification, employment and disclosure histories of more than 642,980 active registered individuals.” All of the information contained on the U4 becomes public, but only some of that information is available through FINRA’s BrokerCheck® website (which obtains its information from Web CRD®). Prior to the advent of BrokerCheck®, it was very difficult for a consumer to review a broker’s background. BrokerCheck® changed that. BrokerCheck® serves as “a free tool which is part of FINRA’s ongoing efforts to help investors make informed choices about brokers and brokerage firms.”

Because the U4 serves as BrokerCheck’s template, the U4 must be evaluated in the context of one of its purposes, helping investors make informed choices about brokers. With this purpose in mind, the U4, as well as BrokerCheck®, are ripe for change.

So what information is missing from the U4 that investors would find helpful in making informed choices about brokers? The first glaring absence from the U4 is any question about the applicant’s education. The only context in which education is mentioned is in the instructions to question 12, in which an applicant is asked to provide his employment history for the past ten years. According to the instructions, if an applicant was engaged in “full time education” within the past 10 years, that information should be provided in the employment history section. The applicant is not asked whether he or she finished the sixth grade, graduated from high school or college, or has a graduate school degree. The reason this information is not requested is because the securities industry has no minimum education criteria for the various licenses that permit individuals to manage client assets. To the extent FINRA wants BrokerCheck® to help investors make informed choices, an Education History section needs to be added to the U4. How many people would knowingly trust the management of their life’s savings to a person who did not graduate from high school? Or only finished one year of college? The answer is few, if any. So why hide this information? In order for the U4, as the template for BrokerCheck®, to be relevant in the 21st century, it should be revised in order to require the disclosure of an applicant’s entire education history. Stay tuned for Part II!

FINRA Issues Guidance for Puerto Rico Bond Loss Claims

Over the past several months, FINRA has received an influx of arbitration case filings related to Puerto Rico bonds. Most cases are filed by Puerto Rico residents. FINRA held various conversations and meetings concerning administration of these cases. After careful consideration, FINRA determined to issue the following guidance:


FINRA will determine venue in the Puerto Rico bond cases in accordance with Rule 12213 of the Customer Code of Arbitration Procedure (the “Code”) which states in relevant part that “the Director will select the hearing location closest to the customer’s residence at the time of the events giving rise to the dispute . . . .” FINRA cases generally are venued where the customer resides, the transactions took place, and the witnesses are located. These criteria all point to Puerto Rico as the appropriate venue.
Accordingly, FINRA will not modify its existing venue rule and procedures absent the agreement of the parties.

FINRA will follow Rule 12213 in assigning venue for the following reasons:

• FINRA’s longstanding rule and policies, which were codified in 2007, were designed for the convenience and protection of customers;
• The solicitations and transactions in these cases took place in Puerto Rico;
• Many Claimants in these cases are elderly and travel to the continental United States would be difficult, burdensome and expensive;
• Many Claimants’ attorneys are located in Puerto Rico and requested venue in Puerto Rico;
• Many named individual associated person Respondents are located in Puerto Rico;
• Almost all potential witnesses are located in Puerto Rico, including non-party witnesses;
• Compelling non-party witnesses located in Puerto Rico to testify at arbitrations in the continental United States may be difficult;
• The total expenses, including Claimant and witness travel, of requiring individuals from Puerto Rico to travel to the United States would be substantial.

FINRA will continue to allow customers with more than one residence to choose venue based on the location of any of their residences. Further, if all parties in an arbitration case agree in writing to a hearing location other than one based on the customer’s residence, FINRA will select that hearing venue.

Arbitrator Pools:

FINRA will initially provide arbitrators for the cases venued in Puerto Rico from Puerto Rico and from other hearing locations within the Southeast Region and Texas. Counsel for Claimants and Respondents were in agreement that this was the area from which to seek arbitrators to expand the available roster in Puerto Rico.

FINRA has expanded the available pool of arbitrators to serve in Puerto Rico from these states and FINRA will pay their travel expenses. To date, approximately 700 currently eligible arbitrators on the FINRA roster have agreed to serve in Puerto Rico. FINRA continues to expand the available pool of Puerto Rico arbitrators willing to serve. Additionally, FINRA is actively recruiting and training arbitrators who reside in Puerto Rico. As a reminder, parties retain the option to agree to modify the provisions of Rule 12401 to have a sole public arbitrator decide their case, as opposed to a three arbitrator panel, even in cases in which the amount in controversy exceeds $100,000.00.

Interpreter Services:

FINRA arbitration hearings generally are conducted in English. However, FINRA recognizes that Spanish is the primary language in Puerto Rico and that many Claimants are not conversant in English. Therefore, at FINRA’s request, the following firms have agreed to bear the costs of consecutive translation services in the Puerto Rico bond fund cases venued in Puerto Rico in which these firms are a named Respondent and Claimant or Claimant’s witnesses are not fluent in English and translation is necessary: UBS, Merrill Lynch, Santander Securities and Popular Securities. In addition, Oriental Financial Services has agreed to consider bearing such costs on a case-by-case basis upon request. Customer-Claimants should make arrangements directly with counsel for these firms regarding translation services. Please note that the agreement is to bear costs of translation when it is necessary, and any disagreements between the parties regarding interpreter services shall be addressed by the arbitration panels.

The Customer Code of Arbitration, Code of Mediation, Uniform Forms Guide, Resources for Parties Representing Themselves and Filing a Claim–Frequently Asked Questions are available in Spanish on FINRA’s website.

FINRA is providing this information and the translation of the above-mentioned documents in Spanish as a service to the customers who use or would like to use its forum. If you have questions concerning the meaning or application of a particular rule or law, please consult with an attorney who specializes in securities law. The English versions of the FINRA Dispute Resolution Codes serve as the official versions of our rules.

Additional Information

Service of Arbitrators:

Counsel for Claimants and Respondents have agreed that FINRA should not limit the service of arbitrators who have previously served on a case involving Puerto Rico bonds through Award. Parties, of course, have available to them the FINRA rules on causal challenges and the Director’s authority to remove an arbitrator as set forth in Rule 12407.

Costs of Witnesses:
Witness costs will be minimized by setting venue in Puerto Rico, where almost all of the likely witnesses are located. Therefore, FINRA will follow its existing rules concerning witness costs.

The arbitrators will be asked to answer an agreed upon set of disclosure questions submitted by the parties as part of the list selection process in order to alert the parties to possible conflicts.
Please also note that any party may request additional information from an arbitrator whose name appears on the arbitrator ranking form. If a party requests additional information about an arbitrator, FINRA will request the additional information from the arbitrator, and will send any response to all of the parties at the same time.

Concentration Risk is Real

According to FINRA, the Financial Industry Regulatory Authority, “Concentration risk is real. The sooner you give your portfolio a concentration checkup the better.” We are presently seeing portfolios constructed or managed by Raymond James and UBS Financial Services, concentrated in the precious metals sector or commodities sectors. Examples of the securities seen in these concentrated accounts include European Goldfields, LTD, Gold Resource Corp., Goldcorp Inc., Golden Queen Mining, Ltd., New Gold Inc., Silver Wheaton Corp., Yamana Gold Inc., Market Vectors Gold Miners ETF, Franklin Gold and Precious Metals, Van Eck International Gold Fund and Eldorado Gold. Investors, certified public accountants and estate planning attorneys should be especially concerned when seeing clients with concentrated positions in the precious metals sector or commodities sector, especially when any of these securities are part of the portfolio. Not only should your clients consider having a Certified Financial Planner review the portfolio, they should also consider having an experienced securities arbitration attorney review the portfolio.

David A. Weintraub, P.A. is interested in speaking with Raymond James and UBS clients with concentrated positions in the precious metals sector.

Puerto Rico to Host North American Securities Administrators Conference, Regulation for the Ages

It is ironic that Puerto Rico will serve as host for NASAA’s 2015 Annual Conference. Puerto Rico is ground zero since 2013 for claims of investor losses. Since 2013 hundreds of arbitration claims have been filed by investors in Puerto Rico municipal debt. Most of the claims have been brought by clients of UBS Financial Services. As of this date there have been three FINRA arbitration awards rendered against UBS Financial Services, all in favor of the investor Claimants. Puerto Rico bond investors have filed claims against other firms as well, including Merrill Lynch, Santander Securities, Popular Securities and Oriental Financial Services Corp.
Likewise, investors in the “upper 48 states” have also suffered significant losses investing in Puerto Rico debt. Those investors who have not already retained counsel should have their portfolios evaluated by an experienced Securities Arbitration Attorney. David A. Weintraub, Esq. spent the first
13 years of his career representing Wall Street. He now represents investors asserting claims against Wall Street’s largest firms. He is available to consult with you at your convenience.

Ariel Luis Hernandez, Former Stockbroker Stole Hundreds of Thousands From Century Village Retirees

On January 22, 2015, Ariel Luis Hernandez appeared in Broward County Court to face two charges of grand theft from an elderly person and misuse of identification. The initial bond of $300,000 has since been increased to $1 million. Broward Judge John “Jay” Hurley ordered him not to set foot on Century Village property or advertise financial services seminars or informational luncheons.
According to FINRA, Mr. Ariel Hernandez, was barred from the financial securities industry in March 2014, based upon allegations that he wired money form a client’s brokerage account to a bank without the client’s permission or knowledge. Mr. Hernandez used his position as a financial advisor to gain the trust of his victims. According to FINRA records, Mr. Hernandez is not currently registered, his previous employment records include: a) Liberty Partners Financial Services, b) Summit Brokerage Services and c) J.B. Hanauer.
According to Pembroke Pines Police, Hernandez forged the signatures of unwitting victims to steal hundreds of thousands of dollars from elderly clients who trusted him with their investment accounts. Three Century Village residents lost over $200,000, Detective Thomas Moran said he expected more victims to come forward.
Pembroke Pines Police Captain, Al Xiques, said “Although this is an economic crime, a white-collar crime, it’s actually one of the most heinous types of crime you can commit…The money was literally what these people were going to live off of for the rest of their lives.”
Attorney David Weintraub is currently representing three of the victims in this case.

FINRA Bars Broker for Stealing $89,000 From an Elderly Customer

On December 22, 2014, FINRA announced that Jeffrey C. McClure has been permanently barred from the securities industry. Mr. McClure, allegedly, wrote himself 36 checks totaling $88,850 drawn from the customer’s bank account, without her knowledge. Through its investigation, FINRA found that from December 2012 to Agust 2014, McClure had access to the checks because the elderly customer had authorized him to pay her rent and other expenses; instead, he deposited the checks amounting to nearly $89,000 to his personal bank account and used the funds for his personal expenses. At the time, Mr. McClure worked for Wells Fargo Advisors, LLC. The affiliated bank that held the accounts, located in Chico, California, has made the customer whole for her losses.

In settling this matter, Mr. McClure neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. FINRA’s investigation was conducted by the Office of Fraud Detection and Market Intelligence and the Department of Enforcement. In a statement, FINRA’s Executive Vice President and Chief of Enforcement, said “FINRA has a zero tolerance policy for brokers who steal form their clients, especially those who are most vulnerable. Rooting out this type of misconduct and removing these kinds of bad actors from the industry is a top priority.”

FINRA Fines Merrill Lynch $1.9 Million Plus Orders it to Pay $540,000 as Restitution to Affected Customers

On December 16, 2014, FINRA fined Merrill Lynch, Pierce, Fenner & Smith Incorporated $1.9 million for fair pricing and supervisory violations in connection with more than 700 retail customer transactions in distressed Motors Liquidation Company Senior Notes (MLC Notes). In addition, Merrill Lynch was ordered to pay $540,000, plus interest, in restitution to affected customers.

Through its investigation, FINRA found that Merrill Lynch’s Global Credit Trading Desk purchased MLC Notes issued by General Motors Corporation, prior to its bankruptcy, from its retail customers at prices below the prevailing market price. The Credit Desk, after accumulating small lots of discounted MLC Notes, sold these Notes to other broker-dealers at a higher price, within the prevailing market price. Accordingly, in 716 instances, Merrill Lynch purchased MLC Notes at prices that were not fair to its customers. In fact, out of the 716 customer transactions 510 of them had markdowns in excess of 10 percent.

In addition, FINRA found that Merrill Lynch did not have in place an adequate supervisory system to detect whether the firm’s Credit Desk executed customer transactions at a fair price. Specifically, the firm lacked post-trade best execution or fair pricing reviews or failed to conduct fair pricing or best execution post-trade reviews. As part of the sanctions, Merrill Lynch is also ordered to submit three reports over the next 18 months regarding the effectiveness of the firm’s supervisory system with respect to the pricing of retail customer transactions executed by the Credit Desk.

In a statement, FINRA said “…We expect firms to adhere to their fair pricing obligations to customers when transacting in lower-price or distressed securities. Even after factoring in the nature of the market for these types of instruments, the markdowns charged were simply unacceptable, as was Merrill Lynch’s failure to conduct post-trade fair pricing or best execution reviews for customer transactions executed on the Credit Desk.” On the other hand, Merrill Lynch neither admitted nor denied the allegations, but consented to the entry of FINRA’s findings.