Biggest Recent FINRA Fines Point to Poor Supervision at Large Broker-Dealers

Apparently the opportunity for bad brokers to engage in wrongful conduct is enabled by big brokerage firms, as recent Financial Industry Regulatory Authority (FINRA) fines indicate that these businesses fail to properly supervise their foot soldiers. The FINRA Rules, including Rule 3010, make clear that broker-dealers are the securities gatekeepers, because they are ultimately responsible for supervision of their brokers. Not all brokers take advantage of their customers, but those who do will certainly feel emboldened to continue their schemes if they know they can print account statements listing fictitious investments, or make misrepresentations to clients over emails they know will never be supervised.

InvestmentNews recent reported regarding the largest recent fines handed out by FINRA. The fines, some mentioned in prior blog posts, point to continued poor supervision at large broker-dealers.

For instance, we recently commented regarding FINRA’s announcement on February 24, 2014 of a $775,000 fine for Berthel Fisher & Company Financial Services, Inc. and its subsidiary for failure to supervise brokers on recommendations and sales of alternative investments such as non-traded real estate investment trusts (REITs) and leveraged and inverse exchange-traded funds (ETFs).

Then, one month later on March 24, 2014, FINRA announced that it had fined LPL Financial LLC $950,000 for supervisory deficiencies related to brokers’ recommendations and sales to public investors of alternative investments, including non-traded REITs, oil and gas partnerships, business development companies (BDCs), hedge funds, managed futures and other illiquid pass-through investments.

Other broker-dealers on InvestmentNews’ notorious list include FINRA’s report of a fine and ordered restitution in the amount of $1.2 million against Triad Advisors and Securities America for those companies’ failure to supervise the use of consolidated reporting systems and inaccurate valuations being sent to customers, and for failure to retain the consolidated reports, in violation of applicable securities recordkeeping laws. These types of failures are particularly problematic, because they allowed brokers to sell potentially fraudulent investments with the appearance of legitimacy, since they were printed on firm account statements. Such investments, according to FINRA, included those held “away” from the broker-dealers, which sometimes included fictitious promissory note schemes or other fraudulent or Ponzi-like investments. FINRA reported that the supervisory failures extended to “hundreds of brokers.”

The FINRA fine that topped the list was that handed to, again, LPL Financial LLC in the amount of $9 million (including a fund set up to compensate customers) for “systemic email failures” and “misstatements to FINRA,” reported on May 21, 2013. FINRA found that from 2007 to 2013, LPL Financial, which had completed numerous mergers to become one of the country’s largest independent broker-dealers, experienced repeated failures in their policies and procedures for supervising the email system. FINRA reported that LPL was unable, on many occasions, to capture email, supervise its brokers or even to respond to regulatory requests. Included in the supervisory oversights were 28 million emails sent or received from brokers acting as independent contractors through a DBA entity.

The attorneys at Malecki Law have prosecuted several failure to supervise cases over the years. Cases involving independent contracts acting through DBAs, or brokers peddling unsuitable alternative investments or issuing false reports, are some of the issues we have seen repeatedly. If you believe you have lost money as a result of inappropriately marketed or unsuitable investments, please contact an attorney at Malecki Law to determine if you may be able to recover some or all of your losses.