FINRA’s High-Risk Broker Initiative Is A Half-Step Measure

        In response to a Congressional inquiry, FINRA Chairman and CEO, Robert Ketchum, recently discussed a new initiative adopted by the regulator to identify and punish dishonest brokers on an expedited basis.  While FINRA should be lauded for its proactive effort to root out fraud, the regulator should use the information developed through the initiative’s data-mining metrics to promptly enjoin high-risk brokers and directly warn their customers of possible fraud until formal action is taken to permanently remove such brokers from the industry.

        On November 13, 2013, FINRA published Mr. Ketchum’s letter to U.S. Senator Edward Markey describing the regulator’s enhanced enforcement strategies that target “rogue brokers.”  The stated goal of FINRA’s recent enhancements, including improvements to its BrokerCheck database and tightening the expungement rules, is to protect investors from the increasing risks of unscrupulous brokers.

        Mr. Ketchum’s letter boasted about its oversight vigilance by noting that, between January 2011 and September 30, 2013, FINRA barred 1,342 individual brokers from the industry for a variety of violations of federal securities laws or FINRA rules.   The seriousness with which FINRA addresses the risk to investors posed by so many dishonest brokers led to its launch in early 2013 of FINRA’s High Risk Broker initiative that is intended to identify individual brokers for targeted, expedited investigation.  The initiative compiles and analyzes data including broker terminations, complaints, tips, arbitrations, and field reports from ongoing examinations to identify candidates for the high-risk designation.

        According to Mr. Ketchum’s letter, since February 2013, FINRA has designated 42 brokers as High Risk Brokers.  As of November 13^th, 16 enforcement actions have been brought, all of which resulted in bars from the industry.  Such preemptive efforts to address broker fraud are commendable, but stop short of fully protecting victimized investors who remain unsuspecting customers of identified rogue brokers.  By not immediately enjoining the activities of brokers identified as High Risk, and not warning the customers of such brokers of its designation, FINRA is foregoing a meaningful opportunity to prevent further investor losses.

        FINRA plans to expand the High Risk Broker initiative in 2014, and to create a dedicated Enforcement team to prosecute such cases.  That means FINRA will have greater knowledge of a significant number of brokers it believes should be out of the industry but nonetheless are allowed to continue their potentially fraudulent activities until formal action is taken.  FINRA should more aggressively use the information developed through its initiative to stop rogue brokers as soon as they are identified.

Oppenheimer & Co. Hit With FINRA Fine for Failing to Anti-Money Laundering Violations

            The Financial Industry Regulatory Authority (FINRA) continues a trend by securities regulators imposing affirmative duties on brokerage firms to detect certain illegal activities in their clients’ accounts.  FINRA’s latest action targets Oppenheimer & Co., Inc., for allowing nearly $1.5 million in unregistered penny stocks to be sold in customer accounts.  This is the second time Oppenheimer has been found to have violated its Anti-Money Laundering (AML) obligations.

            According to FINRA’s findings, between August 2008 and September 2010, several customers deposited large amounts of penny stocks shortly after opening Oppenheimer accounts, liquidated the holdings and then transferred the proceeds out of the accounts.  The penny stocks, which are low-priced, speculative securities, were not registered or otherwise exempt from registration.   During this time period, Oppenheimer sold more than one billion shares of the penny stocks.  FINRA determined that the sales occurred due to failures of the Oppenheimer AML program to focus on securities transactions and its failure to monitor patterns of suspicious activity associated with penny stock trades.  Among other problems, FINRA found that the firm’s procedures were inadequate and unable to determine whether stocks being sold were restricted or freely tradable. 

            AML requirements are necessary protections against a wide array of illicit securities transactions, many of which can directly harm unsuspecting investors.  The securities litigation attorneys at Block & Landsman investigate possible AML violations to determine whether an investor’s losses were caused by improper trading or a failure to supervise.  

U.S. Legislators Seek to End Mandatory Arbitration for Consumers

The securities industry has adopted mandatory arbitration as the de facto method of resolving disputes against broker-dealers and their registered representatives.   Brokerage firm account agreements universally require clients to waive their rights to file lawsuits in court and instead arbitrate their claims before the Dispute Resolution division of the Financial Industry Regulatory Authority (“FINRA”).   

While recent improvements to FINRA procedures have made the arbitration process more even-handed than it historically had been, investors are still required to forego a variety of benefits of litigating in court that are unavailable in arbitration.   Although arbitration is appropriate for some investors’ disputes, its limitations on discovery and testimony of witnesses not subject to FINRA’s jurisdiction can significantly hinder an investor’s ability to prove a respondent’s liability.

Recently, Senator Al Franken (D-MN) and Representative Hank Johnson (D-GA) introduced bills in the U.S. Senate and the U.S. House of Representatives, respectively, seeking passage of the Arbitration Fairness Act.  The proposed law would eliminate mandatory arbitration in consumer contracts, and instead make the alternative dispute resolution forum available to investors and other consumers as an optional alternative to filing a lawsuit.   While the bills face a long and challenging process to becoming law, their introduction reflects recent efforts to expand the rights of investors to litigate disputes in a fair and efficient manner.  In fact, the more fair FINRA’s dispute resolution procedures become, the more likely that investors would opt for arbitration even if given the choice of going to court.

Investors who have disputes against their financial advisers should contact the securities litigation attorneys at Block & Landsman for a confidential and free consultation.

Wells Fargo and Banc of America Compelled to Pay More Than $5 Million for Selling Unsuitable Investments in Floating-Rate Bank Loan funds.

On June 4, 2013, the Financial Industry Regulatory Authority (FINRA) announced sanctions imposed against Wells Fargo Advisors and Banc of America (through its successor Merrill Lynch, Pierce, Fenner & Smith) to reimburse a total of $3.1 million to more than 450 customers for recommending unsuitable floating-rate bank loan funds.  In addition, FINRA also imposed fines against the firms of more than $2 million.

Floating-rate bank loan funds are mutual funds that typically invest in a portfolio of secured senior loans made to entities that carry below-investment-grade credit.  As a result, the funds are subject to significant credit risks and can be illiquid. 

According to FINRA, brokers at Wells Fargo and Bank of America recommended that their customers purchase concentrated amounts of the funds despite their clients having investment objectives and risk profiles that were inconsistent with the features of floating rate loan funds.  Many of the brokers’ customers sought investments designed to preserve their capital with conservative risk levels.  In contrast, the brokers recommended the funds without having reasonable grounds to believe that the securities were suitable for the clients.

The sale of investments that are wholly unsuitable for the investors carry potentially devastating financial consequences for unsuspecting clients of brokerage firms.  Any investor who believes he or she has been misled or mistreated by their investment advisor should contact Block & Landsman for a free, confidential consultation to determine if they have a claim to make for investment losses caused by undisclosed risks.

FINRA Orders LPL Financial to Pay $9 Million in Sanctions for Systemic Email Failures

In May 2013, the Financial Industry Regulatory Authority (FINRA) announced that it sanctioned LPL Financial $7.5 million for a large number of significant email system failures that prevented the firm from accessing hundreds of millions of emails.  FINRA also ordered LPL to reimburse $1.5 million to customers who may have been affected by the firm’s failure to produce emails.

Email communications are a necessary tool for brokerage firms to manage the complex relationships with their expanding client base and to ensure customer transactions are being handled in an appropriate manner.   LPL’s rapid growth demanded that the firm devote sufficient resources to update and maintain its email systems.  The firm, however, knowingly failed to do so, as reflected by its failure on at least 35 separate occasions to capture email, supervise its representatives and respond to regulatory requests.  LPL’s repeated failures resulted in the firm failing to produce requested emails to federal and state regulators as well as, likely, private litigants in arbitration proceedings. 

With regard to customer arbitrations, LPL was ordered to notify eligible claimants within 60 days of the create of a $1.5 million fund designed to pay customers for discovery abuses.  Claimants who brought arbitration proceedings against LPL by January 1, 2007, and which were closed by December 17, 2012, will also receive emails that the firm failed to provide in the course of their dispute.  Such customers will have the option of accepting a payment of $3,000 from LPL or have a fund administrator determine an appropriate amount of compensation based on the particular failures of LPL in their cases. 

Brokerage firms are required to maintain and manage email communications with their customers, and to produce all required documents in arbitration and litigation proceedings.  Failure to do so can prejudice customers’ right to ensure that brokers are properly managing their accounts and to seek just reimbursement for improperly caused investment losses.  Investors who have questions about their LPL brokerage accounts should contact Block & Landsman for a free, confidential consultation.