Case in Point
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, Fortrend Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Fortrend Securities, Inc., Respondent (AWC 2014039056101, October 12, 2016).
Since 1993, Respondent Fortrend Securities, Inc. has been a FINRA member firm, which the AWC explains as being:
colocated in Melbourne, Australia with its Australian affiliate, Fortrend Securities Pty Ltd, which is an Australian financial services firm. Fortrend Securities' business primarily consists of introducing U.S. equity transactions to Fortrend Securities's U.S.-based clearing firm, on a fully-disclosed basis, on behalf of Australian customers.
The AWC asserts that Respondent Fortrend had no prior relevant disciplinary history.
The AWC alleges that from August 2011 to July 2012, Respondent charged 15 customers $250 for Automated Customer Account Transfers ("ACATs"), allegedly resulting in a $190 profit per transfer. The AWC notes that FINRA has "repeatedly emphasized to member firms its concern about charging fees unrelated to actual costs for account transfers via ACAT." Based upon FINRA's analysis of the actual ACAT fees charged by Respondent's clearing firm and taking into account an industry average charge for such fees, the self-regulator deemed Respondent's $250 ACAT charge to be unreasonable in violation of NASD Rule 2430 and FINRA Rule 2010.
SIDE BAR: As in effect during the relevant times, this rule governed the charges at issue in the Fortrend AWC:
NASD Conduct Rule 2430. Charges for Services PerformedCharges, if any, for services performed, including miscellaneous services such as collection of moneys due for principal, dividends, or interest; exchange or transfer of securities; appraisals, safe-keeping or custody of securities, and other services, shall be reasonable and not unfairly discriminatory between customers.The current rule effective since November 21, 2014 (see if you can spot "Waldo" in the form of the material difference between the old and current rules):FINRA Rule 2122. Charges for Services PerformedCharges, if any, for services performed, including, but not limited to, miscellaneous services such as collection of monies due for principal, dividends, or interest; exchange or transfer of securities; appraisals, safe-keeping or custody of securities, and other services shall be reasonable and not unfairly discriminatory among customers.
allowed its Australian affiliate to process and hold checks and securities for Fortrend Securities' customers (which customers were also customers of the Australian affiliate) and, in limited instances, these checks and securities were not promptly transmitted to Fortrend Securities' clearing firm. As a result, Fortrend Securities was not operating in compliance with its claimed exemption from the Customer Protection Rule and was subject to a $250,000 minimum net capital requirement and failed to maintain an accurate Net Capital computation pursuant to Securities Exchange Act Rule 17a-3(a)(11) and failed to submit Securities Exchange Act Rule 17a-5(a) FOCUS reports containing accurate Net Capital computations.The AWC asserted that as a broker-dealer receiving or holding funds/securities for customers, Respondent Fortrend was required to maintain at least $250,000 in Net Capital pursuant to Securities and Exchange Act Rule 15c3-1 .Under SEC Rule 15c3-3(k)(2)(ii), an exemption from the $250,000 Net Capital requirement is offered to a so-called introducing broker-dealer provided that if such a firm receives customer checks made payable to that introducing broker-dealer, that the introducing firm promptly instructs customers to make checks payable to the clearing broker-dealer. If the prompt notice to customers protocol is complied with, the introducing firm is not deemed to be "receiving customer funds" and would not necessarily be subject to the $250,000 Net Capital requirement. Following such a policy, however, does not provide cover for the ongoing receipt of such checks; and the receipt of checks must be an unusual and infrequent event because the existence of a pattern of such conduct will not permit the application of the exemption.
SIDE BAR: As noted in industry literature and as opined upon by various regulators, for a broker-dealer operating pursuant to the (k)(2)(ii) exemptive provision, "promptly transmit" means the transmission of customer funds and securities by noon of the next business day following receipt.