In February 2014, FINRA announced that BB&T Securities, LLC f/k/a Clearview Correspondent Services, LLC had submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $300,000. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that its affiliate and former member firm, Scott & Stringfellow LLC (S&S), with which it has since merged, effected sales of unregistered securities in contravention of Section 5 of the Securities Act of 1933.
The findings stated that the firm participated in the sale of approximately 242 million shares of unregistered stock of low-priced securities on behalf of issuers, which generated proceeds of approximately $537,000. The securities were not subject to a registration statement. The findings also stated that despite certain questionable circumstances surrounding the sales, such as the substantial deposits of the same low priced securities in related accounts at the firm followed shortly by liquidation of the shares, S&S failed to conduct a searching inquiry to ensure that the sales did not violate Section 5 of the Securities Act.
The findings also included that S&S failed to adequately enforce its Written Supervisory Procedures regarding the sales of unregistered securities. S&S did not have any documentation to show that it performed any reviews or asked the questions that the firm’s WSPs mandated concerning the subject securities before they were sold. In fact, the firm did not conduct, as its WSPs required, sufficient inquiries on any of the physical stock certificates that it received in the customer accounts, even though there were several “red flags,” some of which were identified in the WSPs. These red flags included customers opening new accounts and delivering physical certificates representing a large block of thinly traded or low-priced securities, and the customers having a pattern of depositing physical certificates, immediately selling the shares and then wiring the proceeds of the resale. The firm’s brokers who serviced the accounts in question did not conduct any searching inquiries and instead assumed that the firm’s clearing firm was supposed to ensure that all securities deposited were available to sell.
FINRA found that S&S failed to implement an adequate anti-money laundering (AML) program designed to detect and cause the reporting of suspicious activity. The firm’s AML program failed to adequately address potentially suspicious activity related to the deposits and liquidations of unregistered low-priced securities before or at the time the liquidations commenced. FINRA also found that S&S failed to adequately respond to red flags that were apparent at the time sales began, did not conduct appropriate due diligence on the underlying clients and the issuers before proceeding with further transactions, and failed to review whether the trades represented potentially manipulative activity on the market. The firm’s AML program eventually detected and stopped the questionable trading activity. Nevertheless, the activity was allowed to continue for approximately four months before the firm stopped it. In addition, FINRA determined that BB&T and S&S failed to consistently send letters to customers notifying them of a change in address made to their account records, due to a problem with the automated systems the firm utilized.
Moreover, FINRA found that S&S failed to maintain sufficient records of its research analysts’ public appearances made to ensure that they made disclosures NASD Rule 2711(h) required. As a result, the firm’s records did not show what disclosures were made with these public appearances and, most importantly, whether any disclosures complied with NASD Rule 2711(h).