Problems at Broker Dealers

Merrill Lynch Fined For Fair Pricing and Supervisory Violations

December 16, 2014 | Malecki Law Team

The Financial Industry Regulatory Authority (FINRA) has announced that Merrill Lynch has been fined $1.9 million and ordered to pay restitution in the amount of $540,000 for fair pricing violations as well as supervisory violations related to the purchase of certain distressed securities.

According to FINRA, more than 700 transactions in Motors Liquidation Company (MLC) Senior Notes with retail customers were affected over a two year period. FINRA found that “Merrill Lynch purchased MLC Notes at prices that were not fair to its retail customers.” Specifically, Merrill Lynch was found to have purchased the notes from retail customers for anywhere between 5.3% and 61.5% below market price, leaving customers significantly disadvantaged. Merrill Lynch would later selling those shared purchased from retail customers to other broker-dealers at the prevailing market price.

Another problem FINRA found was that Merrill Lynch failed to have an adequate supervisory system in place to detect whether the prices paid to retail customers on the MLC Notes were fair and consistent with prevailing market prices.

Citigroup Fined for ETF Prospectus Failures

December 15, 2014 | Malecki Law Team

Citigroup, Inc. has reportedly agreed to pay a $3 million fine for failing to properly deliver prospectuses to some customers. Specifically, according to the Financial Industry Regulatory Authority (FINRA), Citigroup failed to deliver prospectuses to customers who bought shares in one or more of 160 exchange traded funds (ETFs) in late 2010. It has also been said that Citi may have not delivered prospectuses related to more than 1.5 million ETF purchases between 2009 and early 2011. Citigroup was also fined by the New York Stock Exchange in 2007 for similar issues. FINRA, according to reports, said Citigroup failed to have proper procedures in place to supervise the process.

This is the second such snafu by a major American bank resulting in a fine this year. Just this past September, Morgan Stanley said that it would pay for the losses incurred by customers who purchased certain mutual funds, after the bank admitted that it failed to make prospectuses for those funds available on its website. In total, this is believed to have cost Morgan Stanley roughly $50 million.

Financial firms have significant duties to their customers – risk disclosure being one of the most important. Transparency, including risk disclosure, is critical to the efficient functioning of the markets. So, when major financial firms fail to fulfill their duties, meaningful fines should be imposed. Whether or not the fines in these instances are meaningful remains up for debate.

Wall Street Journal Investigation Uncovers “Hot Spots” Where Brokers With “Disciplinary Red Flags” Accumulate

November 14, 2014 | Malecki Law Team

On November 12, 2014, the Wall Street Journal reported the results of an investigation performed of broker records. The article disclosed that the paper identified 16 “hot spots” where “troubled brokers tend to concentrate,” after analyzing about 550,000 records of brokers.

The list of these 16 hot spots include: Fort Lauderdale/Boca Raton, FL; Long Island, NY; Sarasota FL; Collier/Lee Counties, FL; Treasure Coast, FL; Southern Manhattan, NY; Greater Las Vegas, NV; Eastern Maricopa County, AZ; Staten Island, NY/Middlesex & Monmouth Counties, NJ; Greater Sacramento, CA; Southern Miami-Dade County, FL; Greater San Diego, CA; Metro Detroit, MI; North L.A./San Fernando Valley, CA; Orange County, CA; and Western Maricopa County, AZ. The results of the plots on the WSJ’s map show that these hot spots appear to collect around the metro New York area, Southern Florida and Southern California.

The WSJ reported that “troubled brokers” were determined as having three or more disciplinary red flags over their career, including regulatory actions, criminal charges, client complaints, recent bankruptcies and terminations. Regulatory actions include proceedings commenced by regulators, including the Securities and Exchange Commission and Financial Industry Regulatory Authority, which generally seek financial penalties and/or temporary or permanent bars from the securities industry. The article also noted that three red flags is also three times the national average for brokers, many of whom maintain clean records.

Are Some Customers Paying Too Much In Fees? The SEC Cracks Down on Linkbrokers

August 15, 2014 | Malecki Law Team

“Is my stockbroker charging me too much in commissions and fees?” This is a common question many investors frequently have. Unfortunately, all too often, the answer to this question is “Yes.”

In fact, just yesterday, the SEC announced that it had fined a New York based broker-dealer, Linkbrokers (an affiliate of London-based ICAP), $14 million for over-charging its customers in the form of markups (and markdowns), among other things.

Markups are the difference between the lower price a broker-dealer can buy an investment for and the higher price charged to a retail customer when they buy investments directly from the broker-dealer’s inventory, rather than on the open market. For example, if a broker-dealer were able to buy a stock at $10 per share and charge a retail customer $11 for that same share, the markup would be $1. Markups are common in the financial services industry, but to be acceptable, they must not be excessive and must be appropriately disclosed to the customer.

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

April 11, 2014 | Malecki Law Team

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).

Managed Futures Fund Fees: When Is Enough Enough?

April 4, 2014 | Malecki Law Team

When are money management fees too much? It is hard to imagine that any investor who has sought the guidance of professional financial advisors has not asked himself or herself this question at least once – most likely more. In the case of managed futures, the CFTC is asking that question for investors right now. Following an article in Bloomberg Magazine in the Fall of last year, 2013, the CFTC has launched a probe in to the fees charged by those who manage the more than $300 billion in the managed futures market.

According to the Bloomberg report, investors in 63 managed futures funds paid out 89% of the $11.51 billion in gains from managed futures investors in the form of fees, commissions and expenses from January 1, 2003 to December 31, 2012 – more than $10.2 billion.

Bloomberg quoted Mr. Bart Chilton, a member of the Commodity Futures Trading Commission as saying:

Berthel Fisher and PNC Fined In Connection With The Sale Of ETFs

February 25, 2014 | Malecki Law Team

Just yesterday, FINRA announced that it has fined Iowa-based broker-dealer Berthel Fisher $775,000 for failures to adequately train and supervise brokers selling alternative investments, such as real estate investment trusts (“REITs”), and non-traditional exchange traded funds (“ETFs”), including leveraged and inverse ETFs.

In addition to REITs and ETFs, Berthel brokers also reportedly sold managed futures, oil and gas investments, equipment leasing programs and business developments companies, all while having “inadequate supervisory systems and written procedures for sales” of these investments.

Firms are required to have sufficient supervisory systems and written procedures for the sale of such investments to help ensure that these potentially risky and illiquid investments are only sold to investors for whom they are suitable and appropriate. Oftentimes, these investments are not appropriate for your average investor.

Credit Suisse Group AG Admits to Providing Brokerage and Investment Advisory Services Without Registering with the SEC

February 24, 2014 | Malecki Law Team

Money makes the world go ’round and apparently also makes Credit Suisse employees work faster or slower, as the case may be. The Wall Street Journal reported on Friday February 21, 2014 that Credit Suisse Group AG (Credit Suisse) agreed to pay $196 million to settle charges brought by the Securities and Exchange Commission that it provided brokerage and investment services to U.S. clients without registering with the SEC. According to the SEC’s Order, Credit Suisse willfully violated the Exchange Act and Investment Advisors Act by failing to register, in violation of Section 15 of the Securities Exchange Act of 1934 and Section 203 of the Investment Advisors Act of 1940. The SEC announced in a news release on Friday that Credit Suisse admitted to the violations.

In the Order, the SEC noted that Credit Suisse apparently knew the services its relationship managers were providing across borders to U.S. clients was improper, and set up a properly registered entity to transfer the U.S. business. However, the Order went on to detail that the transfers took far more time than was initially planned, partly because Credit Suisse did not properly incentivize its employees to timely transfer the accounts. This, in addition to other wrongful conduct led the Commission to conclude that Credit Suisse failed to implement its own policies and procedures to efficiently move the accounts. The Order and the WSJ article both noted that Credit Suisse has subsidiaries that are properly registered to provide both brokerage business and investment advisory business to U.S. clients. Until the bank completed its exit from its cross-border business, it continued to charge brokerage and advisory fees to the U.S. clients it served.

Registration by brokers, dealers and investment advisors with the SEC or state regulators is a bedrock principle of the securities laws and is designed to protect investors. Section 203 of the Investment Advisors Act regulates and requires registration of brokers, dealers and investment advisors, with limited exception. The SEC regularly fines individuals and entities such as Credit Suisse for failing to follow these laws.