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Archive for November, 2017


UBS follows Morgan Stanley in leaving broker protocol

UBS is withdrawing from the Protocol for Broker Recruiting Agreement, making it the second wirehouse and original member of the arrangement to do so after Morgan Stanley withdrew from it in October.

The brokerage sent a memo to its advisors Monday morning notifying them the firm would no longer be a member of the agreement as of Friday, Dec. 1.

Morgan Stanley is the nation’s largest wealth management firm with nearly 16,000 advisors and more than $2.2 trillion in assets. UBS is half that size, with approximately 6,900 advisors, though its brokerage force is the most productive based on revenue generated per advisor, according to earnings reports.

George Jeffrey Dahl – Laguna Woods, California

An AWC was issued in which Dahl was barred from association with any FINRA member in all capacities. Without admitting or denying the findings, Dahl consented to the sanction and to the entry of findings that he refused to provide testimony during a FINRA on-the-record interview. (FINRA Case #2017053631301)

First Allied Securities, Inc. – San Diego, California

An AWC was issued in which the firm was censured and required to provide FINRA with a remediation plan to remediate eligible customers who qualified for, but did not receive, an 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 approximately $876,915 (the amount eligible customers were overcharged, inclusive of interest). The firm will also ensure that retirement and charitable waivers are appropriately applied to all future transactions. 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 frontend sales charge or Class B or C shares with back-end sales charges and higher ongoing fees and expenses. Many mutual funds waive the up-front sales charges associated with Class A shares for certain retirement plans and/or charitable organizations. Some of the mutual funds available on the firm’s retail platform offered such waivers and disclosed those waivers in their prospectuses. Notwithstanding the availability of the waivers, the firm failed to apply the waivers to mutual fund purchases made by eligible customers and instead sold them 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 them to pay higher fees than they were actually required to pay.

The findings also stated that the firm failed to establish and maintain a supervisory system and procedures reasonably designed to ensure that eligible customers who purchased mutual fund shares received the benefit of applicable sales-charge waivers. 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 10 Disciplinary and Other FINRA Actions October 2017 sales-charge waivers, the firm estimates that eligible customers were overcharged by approximately $769,054 for mutual fund purchases made since July 1, 2009. (FINRA Case #2016050259301)

City National Securities, Inc. – Beverly Hills, California

An AWC was issued in which the firm was censured and fined $250,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to supervise certain of its registered representatives to ensure their compliance with FINRA rules relating to outside business activities, private securities transactions and outside accounts. The findings stated that that the firm’s WSPs failed to include any procedures about how and to whom employees’ outside business activity requests should be submitted for review and evaluation. Nor did the firm update its WSPs to reflect the requirements of the Supplemental Material of FINRA Rule 3270 that relates to the obligations of member firms receiving an outside business activity notice. In addition, at least one of the firm’s Office of Supervisory Jurisdiction managers did not know the procedure for evaluating or who evaluated outside business activities on the firm’s behalf. The findings also stated that the firm’s WSPs reminded associated persons that it is a serious violation of FINRA rules for a registered representative to sell a security other than through the firm with which they are registered. The WSPs, however, focused only on private securities transactions involving the firm’s customers. The firm’s WSPs did not address private securities transactions not involving the firm’s customers, even though dually registered firm representatives had investment advisory customers who were not also firm customers. The findings also included that the firm’s WSPs failed to address aspects of compliance with NASD Rule 3050, including that a representative must provide written disclosure to the firm prior to opening an outside brokerage account, placing an initial order or promptly after becoming associated with the firm, and must also disclose his or her association with the firm to the outside brokerage firm.

FINRA found that although the firm was aware that a registered representative—who was employed by its affiliated registered investment advisor—was engaging in outside business activities, held outside brokerage accounts through those outside entities, and was engaging in private securities transactions through at least one of those outside entities (an investment fund), the firm did not ensure that he properly disclosed those outside business activities, private securities transactions or outside brokerage accounts. The firm failed to adequately review or evaluate this representative’s outside business activities, failed to supervise the activity in some of the outside brokerage accounts and the private securities transactions, failed to record the private securities transactions on the firm’s books and records, and failed to identify and follow up on items that should have warranted further scrutiny of the representative’s activities. The representative engaged in extensive outside business activities through the investment fund, but he did not provide the firm adequate written notice of the investment fund. The representative also failed to list the investment fund as an outside business activity on his Uniform Application for Securities Industry Registration or Transfer (Form U4). (FINRA Case #2014043089901)

Wedbush Securities Inc. – Los Angeles, California

An AWC was issued in which the firm was censured and fined $110,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it engaged in trading unit aggregation but failed to ensure that individual traders were assigned to only one aggregation unit (AGU) at any time. The findings stated that the firm failed to ensure that AGUs had operated autonomously and engaged in separate trading strategies without regard to other trading units, and that AGUs had not coordinated trading activities, interacted, or shared order or position information. The findings also stated that the firm employed four individuals who acted as both a trader in one AGU and as a trader or supervisor in another AGU, including two individuals who served in such dual capacities. Such an arrangement is improper because it could result in the coordination of trading strategies or trading based upon position or trading information of the other AGU. The firm failed to provide adequate supervision to monitor for compliance with Rule 200(f) of Regulation SHO requiring a firm to aggregate all of its positions in a security unless it qualifies for independent trading unit aggregation. Aggregation of a unit’s independent net position prior to each sale limits the potential for abuse associated with coordination among units. The firm’s written plan of organization reflected unclear strategies, strategies that overlapped for multiple AGUs, and traders that also acted as traders or supervisors in other AGUs. The firm also lacked adequate WSPs and supporting documentation reflecting its creation and approval of AGUs and its supervision of traders. The findings also included that the firm transmitted reports that contained inaccurate, incomplete, or improperly formatted data to the Order Audit Trail System (OATSTM), failed to report non-market making proprietary orders to OATS and erroneously submitted post-trade allocations as reportable order events to OATS. FINRA found that the firm failed to provide written notification disclosing to its customer that a transaction was executed by the firm at an average price, that transaction details were available upon request, and/or its capacity in the transaction. FINRA also found that the firm inaccurately marked short sell orders as long. In addition, FINRA determined that the firm accepted a short sale order in an equity security from another person, or effected 4 Disciplinary and Other FINRA Actions October 2017 a short sale in an equity security for its own account, without borrowing the security, or entering into a bona-fide arrangement to borrow the security or having reasonable grounds to believe that the security could be borrowed so that it could be delivered on the date delivery is due, and documenting compliance with Rule 203(b)(1) of Regulation SHO. (FINRA Case #2014039939801)

Girard Securities, Inc. – San Diego, California

An AWC was issued in which the firm was censured and required to provide FINRA with a remediation plan to remediate eligible customers who qualified for, but did not receive, an 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 approximately $102,765 (the amount eligible customers were overcharged, inclusive of interest). The firm will also ensure that retirement and charitable waivers are appropriately applied to all future transactions. 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 frontend sales charge or Class B or C shares with back-end sales charges and higher ongoing fees and expenses.

Many mutual funds waive the up-front sales charges associated with Class A shares for certain retirement plans and/or charitable organizations. Some of the mutual funds available on the firm’s retail platform offered such waivers and disclosed those waivers in their prospectuses. Notwithstanding the availability of the waivers, the firm failed to apply the waivers to mutual fund purchases made by eligible customers and instead sold them 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 them to pay higher fees than they were actually required to pay.

The findings also stated that the firm failed to establish and maintain a supervisory system and procedures reasonably designed to ensure that eligible customers who purchased mutual fund shares received the benefit of applicable sales-charge waivers. These sales disadvantaged eligible customers by causing them 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 $90,125 for mutual fund purchases made since July 1, 2009. (FINRA Case #2016050259401)

SEC Seeks Order Against 235 Entities Affiliated with Woodbridge Group of Companies, LLC to Produce Documents to SEC

The Securities and Exchange Commission has filed a subpoena enforcement action against 235 limited liability companies (the “LLCs”) based in Delaware and Colorado seeking an order requiring the production of documents.

According to the SEC’s application and supporting papers, filed in federal court in Miami:

  • The SEC is investigating whether Woodbridge or others have violated, or are violating, the antifraud, broker-dealer and securities registration provisions of the federal securities laws in connection with Woodbridge’s receipt of over $1 billion of investor funds from thousands of investors nationwide.
  • The LLCs appear to have engaged in financial transactions with the Woodbridge Group of Companies, LLC, of Sherman Oaks, California, and may be owned and/or controlled by Woodbridge’s President, Robert Shapiro.
  • As part of the SEC’s ongoing investigation, on August 16 and 17, 2017, agency staff in the Miami Regional Office served each of the LLCs, through their registered agents, with subpoenas seeking the production of documents which identify corporate membership and financial account information.
  • The SEC’s application alleges that, although the LLCs were required to produce these documents by August 30 and 31, to date, they have failed to produce any documents.

The SEC’s application seeks an order from the federal district court compelling respondents to comply with the SEC’s subpoenas. This is the SEC’s second subpoena enforcement action in its continuing fact-finding investigation which, to date, has not concluded that any individual or entity has violated the federal securities laws.

Morgan Stanley Exits Broker Protocol

Morgan Stanley which saw its total advisor headcount drop slightly in the third quarter, says it will leave the Protocol for Broker Recruiting as part of its drive to make new investments in its advisors.

The protocol, created in 2004, limits litigation among member firms that sign on and agree to a set of rules regarding their advisors leaving and joining another company. In a statement released Monday, Morgan Stanley claimed the protocol had become “replete with opportunities for gamesmanship and loopholes” that undermined the rules. By exiting the agreement, the brokerage said it will be able to invest more in its advisors and drive growth.

But Morgan Stanley’s withdrawal from the agreement could mark a period of uncertainty for an industry already undergoing significant changes.

In addition to Morgan Stanley brokers, there will likely be broad implications for the industry if other Wall Street firms decide to exit as well.

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