Interesting Facts from FINRA’s 2013 Year in Review Including ETFs, Structured Products and Non-Traded REITS

January 9, 2013 By Jay Eng

On January 8, 2013, FINRA issued a release discussing highlights from 2013. In 2012, FINRA assessed $68 million in fines, ordering a record $34 million in restitution to injured customers.

According to the report, FINRA’s Office of Fraud Detection and Market Intelligence referred 692 cases of potential fraud to the Securities and Exchange Commission and other law enforcement agencies.  Among the cases referred were 347 insider trading matters and 260 other fraud-related matters.

FINRA counted as significant accomplishments concerning actions WR Rice, Hudson Valley and TWS Financial.  As to WR Rice, FINRA filed an action to halt fraudulent sales activities by WR Rice Financial Services and its owner, as well as the conversion of investors’ funds or assets.  As to Hudson Valley, FINRA expelled the firm and barred the CEO for defrauding its clearing firm and customers by using their funds and securities to cover losses caused by the CEO’s manipulative day trading.  As to TWS Financial, FINRA filed a complaint alleging affinity fraud targeting the Polish community.

Disciplinary actions included cases involving , among other things, exchange-traded funds, structured products and non-traded REITs.  As to these complex products, FINRA pointed to the following actions:

Non-traded REITs – FINRA sanctioned David Lerner Associates, the firm’s founder, President and CEO, and the firm’s head trader in an action related to the non-publicly traded Apple REITs involving suitability and supervision violations. The settlement also consolidated numerous matters, including a municipal and CMO markup case, a pending enforcement investigation of more recent municipal and CMO markups, and 10 pending market regulation matters involving municipal markups identified through surveillance reviews.

Improper Sales of ETFs – FINRA sanctioned Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse ETFs without reasonable supervision and for not having a reasonable basis for recommending the securities. The firms were fined more than $7.3 million and are required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases. In addition, FINRA also brought similar cases against Merrill Lynch and Scott & Strongfellow.

Structured Products – Merrill Lynch was fined $450,000 for supervisory failures relating to the sales of structured products to retail customers. The firm relied upon automated exception-based reporting systems to flag transactions and/or accounts that met certain pre-defined criteria, but did not specifically monitor for potentially unsuitable concentration levels.

Finally, FINRA highlighted its efforts to protect investors including the implementation of “a new suitability rule requiring a broker-dealer or their associated persons to have a ‘reasonable basis’ to believe a recommended transaction is suitable for the customer, based on information obtained through ‘reasonable diligence’ to understand a customer’s investment profile.” FINRA published a FAQ on the rule.

 

 

 

FINRA Sanctions Citigroup, Morgan Stanley, UBS and Wells Fargo over Unsuitable Severaged and Inverse ETFs

May 12, 2012 By Jay Eng

FINRA has announced that three of the country’s largest brokerage firm: Citigroup Global Markets, Inc (“Citigroup”); Morgan Stanley & Co., LLC (“Morgan Stanley”); UBS Financial Services (“UBS”); and Wells Fargo Advisors, LLC (“Wells Fargo”) were sanctioned for sales of leveraged and inverse exchange-traded funds (“ETFs”) without reasonable supervision and without a reasonable basis for recommending these ETFs. The firms were fined more than $7.3 million. FINRA’s press release stated that:

FINRA found that from January 2008 through June 2009, the firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers. The firms’ registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile.

Inverse and leveraged ETFs have been under scrutiny for several years. Many investors purchased inverse ETFs believing that these products would protect them by market downturns. However, the design of the products did not protect investors from the protracted and volatile downturns in the 2008 market collapse. In 2009, FINRA issued a regulatory notice stating that “inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.”

FEDERAL HOUSING FINANCE AUTHORITY(FHFA) SUES BANKS OVER MBS

September 4, 2011 By Jay Eng

The Federal Housing Finance Agency as conservator for Fannie Mae and Freddie Mac filed suit against a number of financial institutions. The suits allege, among other things, violations of federal securities laws and common law in the sale of residential private-label mortgage-backed securities. The entities sued include:

1. Ally Financial Inc. f/k/a GMAC, LLC
2. Bank of America Corporation
3. Barclays Bank PLC
4. Citigroup, Inc.
5. Countrywide Financial Corporation
6. Credit Suisse Holdings (USA), Inc.
7. Deutsche Bank AG
8. First Horizon National Corporation
9. General Electric Company
10. Goldman Sachs & Co.
11. HSBC North America Holdings, Inc.
12. JPMorgan Chase & Co.
13. Merrill Lynch & Co. / First Franklin Financial Corp.
14. Morgan Stanley
15. Nomura Holding America Inc.
16. The Royal Bank of Scotland Group PLC
17. Société Générale

CITIGROUP FINED $1.5M OVER SUPERVISION ISSUES

June 1, 2010 By Jay Eng

On May 26, 2010, FINRA announced “that it has imposed a monetary sanction of $1.5 million against Citigroup Global Markets Inc. for supervisory violations relating to its handling of trust funds belonging to cemeteries in Michigan and Tennessee.” According to FINRA, “over a period of more than two years, Citigroup failed to reasonably supervise the handling of these accounts by inadequately responding to a succession of ‘red flags’ – failures that permitted the scheme to continue undetected until October 2006.” Among the “red flags” were “unusual transfers of cemetery trust funds to accounts opened in the names of third parties.”

See the Acceptance, Waiver and Consent (AWC) here.