The Financial Industry Regulatory Authority ("FINRA) recently announced a regulatory settlement involving a member firm that sort of got it right. It's the "sort of" aspect of the matter that should serve as a warning to all compliance departments and compliance officers. As is often the case, the broker-dealer had a lot of policies and procedures memorialized in its written supervisory procedures and, most critically, had delegated in that document critical oversight to its Chief Compliance Officers and other supervisors. Unfortunately, when it came to following the protocols for advertising, websites, social media, away accounts, and personal email accounts, the ball got dropped . . . over and over again. You only get so many double-dribbles before Wall Street's regulators call a foul.
Case In Point
For the purpose of proposing a settlement of rule violations alleged by FINRA, without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Stock USA Execution Services, lnc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Stock USA Execution Services, lnc., Respondent (AWC # 2013035136402, July 10, 2015).
Since 2001, Stock USA has been a FINRA member firm, which offers directed online brokerage services to customers through seven registered persons. The AWC asserts that Stock USA had no prior relevant disciplinary history with the Securities and Exchange Commission, any self-regulatory organization or any state securities
WSP Designates CCO
During the relevant time from June 201 1 through June 2013, the AWC alleges that Stock USA's written supervisory procedures ("WSP") provided that its Chief Compliance Officer ("CCO") was responsible for pre-approving:
The AWC asserts that notwithstanding those responsibilities, the CCO failed to review and pre-approve:
Moreover, the AWC alleged that Stock USA could not demonstrate that certain posts on Stock USA's social media pages relating to options trading were pre-approved by any Registered Options Principal.
During the relevant time, the AWC further alleges that a number of White Plains, NY Branch registered representatives had conducted webinars touting various online trading strategies; and that the CCO did nor review and pre-approve those webinars.
The AWC asserts that during the relevant time, six Stock USA websites and eight of its social media accounts contained exaggerated, misleading and/or unwarranted statements. By way of example, the AWC offered this online quotes:
Many brokers offer solutions for automated trading, but none have Stock USA's combination of liquidity, speed and affordability"
[Stock USA] provides lower trading fees, so you have more money in your pocket after every trade
[Stock USA] is the best place to trade Stocks and Options
We have helped thousands of traders improve their trading results from day 1
Trained Traders profit in bearish and bullish environments alike
Not had a losing week in the past 9 months!
Also, one of Stock USA's websites and an associated social media page failed to explain the various conditions and exceptions associated with the listed prices of options positions. The website contained a "brokerage comparison" chart comparing the fees charged by Stock USA to other broker-dealers that included an inaccurate and outdated schedule of fees.
Additionally, neither the website nor the associated social media page disclosed in the discussion of pricing options that Stock USA charged an "inactivity fee" to customer accounts that executed less than 15 trades per month. Instead, this information was disclosed in an unrelated section of the website entitled: "About Us."
The AWC alleges that during the relevant time, Stock USA's CCO failed to conduct an adequate review of transactions in outside securities accounts held by White Plains Branch registered representatives. The AWC notes the following WSP provision:
SECURITIES ACCOUNTS - a registered representative who should open a securities account with another FINRA member will provide information regarding this account and confirmations will come to the firm's home office. The CCO will review all trades. All transactions will be initialed and filed in an "Outside Accounts" binder.
The AWC alleged that although the White Plains Branch had maintained hard copies of representatives' outside brokerage account statements, the Branch failed to forward the statements to the s CCO for review and approval. Further, the CCO allegedly failed to send instructions to the outside brokerage firms advising that duplicate statements should be sent to Stock USA's Compliance Department. Finally, the CCO purportedly allowed the White Plains Branch Manager to review and approve his own outside brokerage account statements.
Outside Email Accounts
Although the AWC asserts that Stock USA's WSP's prohibited the use of any outside email accounts for customer-related correspondence, during the relevant time, three White Plains Branch registered representatives apparently used unregistered email accounts for such purposes . None of these email accounts had been registered with the Stock USA's email review system - and exacerbating FINRA's investigation, each of the three reps sent emails from their personal accounts to the CCO and other Stock USA principals, which put the member firm on notice of the existence of those accounts and should have prompted a follow-up compliance inquiry.
Adding It All Up
Based upon the above factors, FINRA alleged that:
In accordance with the terms of the AWC, FINRA imposed upon Stock USA a Censure and $35,000 fine.
Bill Singer's Comment
Compliments to FINRA on presenting a solid, compelling case. Nicely documented with many helpful examples for industry compliance professionals. Finally, the sanction appears fair and balanced. Nice job all around!