The Financial Industry Regulatory Authority (FINRA) announced on March 30, 2015 that it fined H. Beck, Inc., LaSalle St. Securities, LLC, and J.P. Turner & Company, LLC for failing to supervise consolidated reports. These consolidated reports were provided to public customers, according to the announcement.
According to FINRA, “[a] consolidated report is a single document that combines information regarding most or all of a customer’s financial holdings, regardless of where those assets are held,” and does not replace monthly reports received from the firm.
In the announcement, FINRA cited to FINRA Regulatory Notice 10-19. A regulatory Notice is used by FINRA to remind its members of obligations required by FINRA Rules and securities laws. In Regulatory Notice 10-19, FINRA made clear that:
If not rigorously supervised, this activity can raise a number of regulatory concerns, including the potential for communicating inaccurate, confusing or misleading information to customers, lapses in supervisory controls, and the use of these reports for fraudulent or unethical purposes.
Regulatory Notice 10-19, and FINRA’s announcement, make these concerns clear, and also put FINRA member broker-dealer firms on notice of their obligations to perform adequate supervision over these consolidated reports. In Regulatory Notice 10-19, FINRA states that to the extent brokers are permitted to create consolidated reports, “firms are required to supervise this activity.”
In FINRA’s March 30 announcement, it fined the three firms for inadequate supervision over consolidated reports. H. Beck, Inc., for example, has approximately 465 offices around the country and approximately 800 brokers. For a period, H. Beck, Inc. had no system in place to supervise the creation and dissemination of consolidated reports, despite the fact that close to 50 brokers sent them to certain of their respective customers, according to AWC No. 2012031552601. According to the AWC, certain of these consolidated reports contained inaccuracies.
Likewise, J.P. Turner, a firm of approximately 185 branch offices and 420 brokers, also was fined by FINRA for permitting close to 50 brokers to create and distribute to their customers consolidated reports, while the firm had no supervisory procedures in place addressing the use of consolidated reports, according to AWC No. 2013036404301.
We at Malecki Law have seen how consolidated reports, combined with lax broker-dealer firm oversight, can be used to perpetuate frauds against public investors. Very often, brokers have the ability to create or modify the consolidated reports to include “investments” that may not be on the broker-dealer’s books and records. If the firm does not properly supervise the creation and dissemination of these consolidated reports, then brokers may be permitted to give the questionable “investments” an appearance of legitimacy because they appear on a firm document.
Malecki Law has previously investigated and successfully handled securities arbitrations concerning issues related to consolidated reports. If you believe you have suffered losses as a result of questionable actions taken in your securities account, please contact us immediately for a confidential consultation.