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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.

On December 27, 2017, FINRA announced that it fined J.P. Morgan Securities $2.8 million for violating the Securities and Exchange Commission’s (SEC) Customer Protection Rule and for related supervisory failures. The SEC rule creates requirements to protect customers’ funds and securities.

To ensure that customers could recover their assets in the event of the broker-dealer’s insolvency, the Customer Protection Rule requires a broker-dealer, which maintains custody of customer securities, to obtain and maintain physical possession or control over certain of those securities. These securities must be segregated in a “control location” and be free of liens or any other encumbrance that could prevent customers from taking possession of their securities. A firm cannot use segregated securities for its own purposes.

FINRA found that from March 2008 to June 2016, J.P. Morgan Clearing Corp. did not have reasonable processes in place to ensure that its possession or control systems were operating properly. Shares that should have been segregated were available for the firm’s use, due to systemic coding and design flaws, recurring and unresolved deficits and unreasonable supervision. By failing to move and maintain securities in good control locations, the firm created deficits in foreign and domestic securities valued at hundreds of millions of dollars. For example, J.P. Morgan failed to move Italian securities to a good control location for nearly two years, and on one sample day, created a deficit in 81 Italian securities worth approximately $146 million.

In determining the appropriate monetary sanction, FINRA considered J.P. Morgan’s cooperation in undertaking a plan to address the violations and that it over-reserved cash deposits in an effort to protect customers from its failed segregation of securities. In settling this matter, J.P. Morgan neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On December 20, 2017, a Letter of Acceptance, Waiver and Consent was issued in which FSC Securities Coporation was censured, fined $100,000, and required to provide FINRA with a plan to remediate eligible customers who qualified for, but did not receive, the applicable mutual fund sales-charge waiver. As part of this settlement, the firm agreed to pay restitution to eligible customers, which is estimated to total $414,261 (the amount eligible customers were overcharged, inclusive of interest). Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it disadvantaged certain retirement plan and charitable organization customers that were eligible to purchase Class A shares in certain mutual funds without a front-end sales charge. The findings stated that these eligible customers were instead sold Class A shares with a front-end sales charge, or Class B or C shares with back-end sales charges and higher ongoing fees and expenses. These sales disadvantaged eligible customers by causing the customers to pay higher fees than they were actually required to pay.

The findings also stated that the firm failed to reasonably supervise the application of sales-charge waivers to eligible mutual fund sales. The firm relied on its financial advisors to determine the applicability of sales-charge waivers, but failed to maintain adequate written policies or procedures to assist financial advisors in making this determination. In addition, the firm failed to adequately notify and train its financial advisors regarding the availability of mutual fund sales-charge waivers for eligible customers. The firm also failed to adopt adequate controls to detect instances in which they did not provide sales-charge waivers to eligible customers in connection with their mutual fund purchases. As a result of the firm’s failure to apply available sales-charge waivers, the firm estimates that eligible customers were overcharged by approximately $380,520 for mutual fund purchases made since January 1, 2011. If you believe that you have suffered losses as a result of FSC Securities Corporation’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6^th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

On December 6, 2017, a Letter of Acceptance, Waiver and Consent was issued in which Next Financial Group, Inc. was censured, fined $750,000, and required to retain an independent consultant to conduct a comprehensive review of the adequacy of its policies, systems and procedures (written and otherwise) and training. 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 implement a supervisory system reasonably designed to detect and address excessively traded accounts. The findings stated that the supervisory failings resulted from an inadequate corrective action taken by the firm in response to prior FINRA disciplinary actions that included a failure to use exception reports or any other reasonably designed system to detect excessive trading. In addition, the firm failed to identify excessive trading due to lack of clarity regarding supervisory responsibilities. Due to flaws in its supervisory system, the firm did not reasonably supervise a registered representative’s excessive trading activity. If the firm had instituted reasonably designed procedures to ensure branch audits were completed and findings of excessive trading acted upon, it could have prevented this activity.

The findings also stated that the firm failed to implement a supervisory system and procedures reasonably designed to ensure appropriate suitability determinations in its variable annuity sales, including L-share contracts. The firm failed to establish, maintain and enforce systematic surveillance procedures to identify possible inappropriate rates of variable annuity exchanges. The firm also failed to enforce its existing procedures relating to the suitability review of variable annuity transactions. In addition, the firm did not establish, maintain, and enforce a reasonably designed supervisory system and WSPs related to the sale of multi-share class variable annuities. The firm’s WSPs failed to provide representatives and principals with guidance or suitability considerations for sales of different variable annuity share classes. Moreover, the firm failed to establish, maintain, and enforce WSPs or provide sufficient guidance to its representatives and principals on the sale of long-term income riders, such as long-term income riders with L-share contracts. The findings also included that the firm lacked a supervisory system reasonably designed to ensure that information included on consolidated reports provided to customers was accurate. The firm’s supervisory system was inadequate and it failed to enforce its own procedures.

FINRA also found that the firm failed to have supervisory procedures reasonably designed to detect and monitor for misleading communications on its website. As a result, the firm omitted material facts from its website that caused its communications with the public to be misleading. FINRA also found that the firm failed to establish, maintain, and enforce a system and WSPs reasonably designed to achieve compliance with FINRA rule 2310(c) related to maintaining records of all non-cash compensation received by it or its associated persons. As a result, the firm failed to track and verify non-cash compensation received by its representatives that came in the form of direct sponsorship payments by product issuers to vendors/merchants. Emails of representatives reflected multiple occurrences of product issuers paying vendors/merchants for branch client events directly without the firm’s knowledge and approval of the non-cash compensation. If you believe that you have suffered losses as a result of Next Financial Group’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6^th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

On December 4, 2017, an Office of Hearing Officers decision became final in which Legend Securities, Inc.  was censured and fined $200,000.  The sanctions were based on findings that it failed to supervise one of his registered representatives who engaged in a manipulative, deceptive and fraudulent scheme in which he churned the accounts of an elderly and blind customer.

The investigation revealed that between October 1, 2012 and December 31, 2015, the firm’s agent, Hank Werner, churned and excessively traded each of the three of the elderly client’s accounts, charging more than $243,000 in commission and fees.  According to the complaint, the Firm identified the representative as an individual who should be subject to heightened supervision, however, it failed to act at any time during the investigation period.  Additionally, the firm failed to reasonably supervise the Mr. Werner, which allowed him to engage in unsuitable trading and churning in the customer’s accounts causing the client’s losses of nearly $184,000.  The firm 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 6^th Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422.

On November 9, 2017, FINRA announced an extended hearing panel barred broker Hank Mark Werner of Northport, New York, for fraudulently churning and excessively trading the accounts of his customer, a blind, elderly widow, and for making unsuitable recommendations. The hearing panel also ordered Werner to pay more than $155,000 in restitution to the widow, fined him $80,000 and ordered disgorgement of more than $10,000 representing commissions received for recommending the purchase of an unsuitable variable annuity.

Werner had been the elderly widow’s broker, and that of her blind husband until his 2012 death, since 1995. According to the hearing panel decision, Werner plundered his customer’s accounts by engaging in such an active trading strategy that, when the high commissions he charged were taken into account, it was impossible for the customer to make money. The panel found Werner frequently bought and sold a security within a week or two, and charged exorbitant commissions even though the blind widow’s financial circumstances required that Werner invest her assets with a minimum amount of risk. She was 77 and in ill health when Werner began churning her accounts. Werner engaged in more than 700 trades from October 2012 to December 2015, generating approximately $210,000 in commissions while the customer lost more than $175,000 as a result of his reckless trading. The decision also noted that it was apparent to the Hearing Panel that Werner took advantage of the customer’s vulnerability after her husband died in September 2012.

The hearing panel concluded that Werner engaged in egregious misconduct and is unfit to work in the securities industry.

Legend Securities, Inc., which was also named in an amended disciplinary complaint, failed to respond and accordingly was held in default. The complaint charged that Legend failed to reasonably supervise Werner, which allowed him to engage in churning his customer’s account, and failed to establish, maintain, and enforce an adequate supervisory system to ensure that Werner was subject to heightened supervision. The hearing officer issued a default decision censuring and fining the firm $200,000. Legend voluntarily paid $20,000 in partial restitution to the customer.

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.