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FINRA postpones in-person arbitrations and mediations until 2021
Recently, FINRA announced that all in-person arbitration and mediation proceedings will be postponed until January 1, 2021, except in certain specified circumstances. In particular, a proceeding may occur prior to that date: (1) if all parties to the arbitration or mediation agree to proceed in-person and the participants comply with state and local health orders; (2) if a panel orders that the arbitration or mediation take place telephonically or by Zoom; or (3) the parties stipulate that the proceeding may take place telephonically or by Zoom.
Broker dealer assessed $38 million in penalties for AML violations
On August 10, the Financial Industry Regulatory Authority (FINRA), SEC, and the CFTC announced separate settlements with a broker-dealer following investigations into its anti-money laundering (AML) programs. The broker-dealer did not admit or deny any of the charges, and the agencies all considered remedial actions undertaken by the broker-dealer. FINRA fined the broker-dealer $15 million for allegedly failing to establish and implement AML processes reasonably designed to detect and report suspicious transactions as required by the Bank Secrecy Act, including foreign currency wire transfers to and from countries known to be at high risk for money laundering. Additionally, the broker-dealer “lacked sufficient personnel and a reasonably designed case management system.” The broker-dealer consented to the terms of the Letter of Acceptance, Waiver and Consent and agreed to retain a third-party consultant to take steps to remediate its AML program.
In a separate investigation conducted by the SEC, the broker-dealer reached a settlement to resolve allegations that it repeatedly failed to file suspicious activity reports (SARs) as required by the Exchange Act for U.S. microcap securities trades executed on behalf of its customers. According to the SEC, because the broker-dealer’s “AML policies and procedures were not reasonably tailored to the risks of [its] U.S. microcap securities business,” over a one-year period, it failed to (i) recognize red flags; (ii) properly investigate suspicious activity; and (iii) file more than 150 SARs in a timely fashion even after compliance personnel flagged the suspicious transactions. Under the terms of the order, the broker-dealer has agreed to be censured, will cease and desist from committing future violations, and will pay an $11.5 million civil penalty.
The CFTC also announced a settlement to resolve allegations that the broker-dealer failed to (i) diligently supervise the handling of several commodity trading accounts; (ii) sufficiently oversee its employees’ handling of these accounts, leading to its “failure to maintain an adequate [AML] program and to conduct appropriate customer monitoring”; and (iii) identify or conduct adequate investigations necessary to detect and report suspicious transactions. Under the order, the broker-dealer is required to pay an $11.5 million civil penalty and disgorge $706,214 it earned as the futures commission merchant for certain accounts that were the subject of a 2018 CFTC enforcement action.
FINRA fines firm for alleged financial risk management failures
On July 30, the Financial Industry Regulatory Authority (FINRA) entered into a Letter of Acceptance, Waiver and Consent (AWC), fining a global securities firm $650,000 for allegedly failing to “establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial risks of its market access business activity.” As a result, because the firm’s controls allegedly failed to monitor and prevent (i) orders exceeding pre-set customer credit thresholds, or (ii) erroneous orders, the firm executed erroneous orders on “at least two trade dates.” Additionally, FINRA claimed that even though the firm knew internally of the potential issues in its financial risk management controls, in several instances it took years for the identified gaps to be fixed. The firm neither admitted nor denied the findings set forth in the AWC agreement but agreed to pay the fine and complete a review of its financial risk management controls and supervisory procedures to ensure compliance with SEC regulations.
FINRA fines firm for failing to follow its own AML policies
On July 27, the Financial Industry Regulatory Authority (FINRA) entered into a Letter of Acceptance, Waiver and Consent (AWC), fining a California-based securities firm $50,000 for allegedly failing to implement and follow its own anti-money laundering (AML) compliance procedures. As a result, the firm allegedly failed to detect red flags concerning potentially suspicious activity and failed to investigate or report the activity in a timely manner. According to FINRA, a sales practice examination detected instances between November 2012 and December 2016 in which the firm failed to detect red flags in four related accounts, including suspicious activity related to: (i) the “ownership of multiple accounts without an apparent business purpose for multiple accounts”; (ii) an account owner with a “significant disciplinary history related to securities fraud”; (iii) possible manipulative trading activity; (iv) unusual, unexpected transfer activity between related accounts without an apparent business purpose; and (v) unexplained third-party wire transfers, inconsistent with expected account activity. FINRA stated that although the “firm’s AML procedures indicated that when the firm detected any red flags of potentially suspicious activity, it would determine whether and how to investigate further,” the firm failed to implement these measures. The firm neither admitted nor denied the findings set forth in the AWC agreement but agreed to pay the fine and address identified deficiencies in its programs to ensure compliance with its AML obligations.
FINRA updates guidance on fingerprinting requirements
FINRA has updated its frequently asked questions guidance regarding relief from certain fingerprinting requirements (previously covered here). The guidance notes that, on June 27, the SEC extended its order providing temporary relief from fingerprinting requirements of the Securities Exchange Act Rule 17f-2 for FINRA members until a date to be specified in a public notice from SEC staff. Because FINRA already provided notification to the SEC in March on behalf of its members, their employees, and associated persons, such individuals may continue to rely on the commissioner’s order and FINRA’s notification. However, for an individual seeking registration pursuant to the submission of a Form U4, a FINRA member firm seeking to rely on temporary exemptive relief for registered persons must comply with FINRA’s guidance with respect to FINRA Rule 1010.
FINRA extends temporary changes to its procedural rules
On June 10, FINRA filed a proposed rule change with the SEC to extend the effective date of previous temporary changes to its procedure rules, previously covered here. The previous rule change modified certain timing, method of service, and other procedural requirements contained in FINRA rules. The amendments extend the rule changes through July 31, 2020.
FINRA updates guidance on fingerprinting requirements
On May 28, FINRA updated frequently asked questions guidance regarding relief from certain fingerprinting requirements. The guidance notes that, on May 27, the SEC extended its order providing a temporary relief from fingerprinting requirements of the Securities Exchange Act Rule 17f-2 for FINRA members until June 20, 2020. Because FINRA already provided notification to the SEC in March on behalf of its members, their employees, and associated persons, such individuals may continue to rely on the commissioner’s order and FINRA’s notification. However, for an individual seeking registration pursuant to the submission of a Form U4, a FINRA member firm seeking to rely on temporary exemptive relief for registered persons must comply with FINRA’s guidance with respect to FINRA Rule 1010.
FINRA provides guidance on whether member firms must disclose reliance on agency relief during Covid-19
On May 21, FINRA updated its frequently asked questions (previously discussed here, here, here, here, here, and here) to provide additional detail on how and when to document that it has relied on temporary relief from FINRA rules during the Covid-19 pandemic. Among other things, the updated FAQs also address Form U4 filings and temporary extensions of time to pass qualification examinations for operations professionals.
FINRA updates Covid-19 supervisory FAQs to extend regulatory deadlines
On May 19, FINRA updated its Covid-19 FAQs (previously discussed here, here, here, here, and here) to extend certain reporting, certification, and testing requirements until June 30, 2020. First, FINRA extended the deadline for registered persons temporarily functioning as principals under FINRA Rule 1210.04 to pass qualification examinations. Second, FINRA extended the deadline for reports related to a member’s supervisory control system that are required under FINRA Rule 3120. Finally, FINRA extended the deadline for members to execute certifications required under FINRA Rule 3130.
FINRA updates guidance on verification of Form U4 for individual registration
On May 15, FINRA updated its response to a frequently asked questions regarding verification on Form U4 for individual registration. Under FINRA Rule 3110(e), members are required to have written procedures to verify the accuracy and completeness of an applicant’s initial or transfer Form U4 within 30 calendar days after the Form U4 is filed with FINRA. In light of challenges posed by Covid-19, if a firm is unable to verify the information within 30 days following submission, the firm must document which information could not be verified and the reasons and maintain an appropriate record, including steps taken to verify the information. For an initial or transfer Form U4, firms should make reasonable efforts to verify the information contained therein by June 30, 2020, and, if necessary, file an amended Form U4 to correct any discrepancies.