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FYI, FINRA Cites Small Firm For Alphabet Soup of AML,OBA,PST,and WSP
Written: May 25, 2012

A bowl of alphabet soup nearly full, and nearl...

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority (“FINRA”), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Mahler & Emerson Inc. (“M&E”) submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Mahler & Emerson Inc.,Respondent (AWC 2010021073501. May 23, 2012).

M&E became registered as a member firm in 1979, and currently employs five registered individuals and operates from a single branch in New York City. The firm’s primary business is proprietary trading.  The AWC asserts that the firm had no prior relevant disciplinary history with the SEC, any self regulatory organization or any state securities regulator.


The AWC alleges that from at least 2006 to 2010, M&E failed to conduct independent testing of its AML program. Given that FINRA characterized the firm’s securities business as consisting of proprietary trading, the self-regulatory organization asserted that independent tests were required every two years.


Between at least September 2006, and August 2010, the AWC alleged that M&E did not have an adequate system to preserve emails sent or received by the firm. Purportedly, the firm had no written procedures governing the use, review and retention of email correspondence. Allegedly, the firm permitted its five registered representatives during this period to utilize personal email accounts and the firm did not archive emails sent to or from these addresses. As a result, the AWC charged that M&E failed to maintain and preserve copies of all of its internal and external business-related electronic email communications.


Between at least September 2006 and August 2010, the AWC alleged that M&E did not have adequate written supervisory procedures to supervise the firm’s registered representatives’ compliance with NASD Conduct Rules

  • 3030 (Outside Business Activities),
  • 3040 (Private Securities Transactions) and
  • 3050 (Transactions for or by Associated Persons).

Specifically, the AWC alleged that M&E did not have any procedures addressing the three cited rules and, as such, did not take steps to ensure adequate supervision. For example, the firm was unable to provide, and did not utilize, tools commonly employed to assist in supervising these areas such as annual certifications, questionnaires and/or attestations from registered representatives to ensure that the representatives had disclosed outside business activities and/or outside securities accounts to the firm. As a result, FINRA examination staff determined that at least one of the firm’s registered representatives was engaged in outside business activity that was not disclosed in writing on the firm’s records and one representative had securities accounts away from the firm.

In accordance with the terms of the AWC, FINRA imposed upon M&E the sanctions of a Censure and a $10,000 fine.

Bill Singer’s Comment

While not necessarily the Holy Grail of FINRA regulatory charges, the counts noted here certainly form the bulk of many disciplinary cases.  Among the hotter topics of the past couple of years is AML — certainly an area of increasing numbers of fines from FINRA.

Without a doubt the old email basket of troubles continues to generate lost of bucks for the self-regulatory organization.  The more common problems with this issue are off-platform email addresses that registered persons use without prior authorization and which the firm fails to supervise; and the firm’s failure to properly retain and archive business communications.  This area has now morphed into social media platforms and their improper use by registered persons.

Of course, there’s that old WSP standby — member firms are required to maintain a massive compilation of policies and procedures which few, if any, ever fully read but, god bless, every regulator just loves to come in after the fact and issue their form of a parking ticket or summons.  Sorry for the cynicism here but this is one area of regulation that often borders on the silly and exalts form over substance.

Finally, you got the regulatory equivalent of three cash cows: private securities transactions, outside business activities, and employee transactions.  How do we know that the first two violations in the list are frequently charged?  Simple — we professionals refer to them by their acronyms: PSTs and OBAs; and anytime something is know by such initials, you know it’s become popular.  The last cash cow typically involves employees of Brokerage Firm A opening and/or maintaining accounts at Brokerage Firm B, which is often the result of B charging lower commissions than A.  In those situations where these outside or away accounts do pose a sincere regulatory problem, the issue is often one of insider trading or violation of a firm’s no-trade lists.

The issues raised in this modest FINRA case against a small member firm are merely offered to you as a checklist of things to examine at your own brokerage firm.  The sanction of a Censure and $10,000 hardly merit reporting this case but for the interesting panorama of alleged violations.  Similar failures occur at virtually every FINRA firm, everyday.  There is nothing here that hasn’t, doesn’t, and won’t occur at even the largest firms.  One simply needs to read the monthly reports of violations to confirm that even Merrill Lynch, JP Morgan, Morgan Stanley, UBS, Wells Fargo, and others cross the various lines.  Whether the checkbook diplomacy approach of ringing up a regulator’s cash register as a form of penance is effective, is a whole other issue.

Topics: FINRA  AML  OBA  PST  WSP  Bill Singer  BrokeAndBroker  

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