Spotlight on FINRA: SRO Disciplines Brokerages That Ignore Red Flags, Warns About Retirement Plan Rollover Conflicts, & Investigates for Stock Trade Incentives

FINRA Fines COR Clearing LLC $1M for Disregarding Red Flags
The Financial Industry Regulatory Association is continuing to crack down on brokerage firms that don’t detect and investigate “red flags” indicating possible suspect activity. Earlier this month it fined COR Clearing LLC $1 million for its purported failure to put into place procedures to detect and report suspect account activity.

The self-regulatory organization said that while the broker-dealer used a “tagged identifier list” to identify the entities and individuals linked to high risk accounts, the list only worked effectively when cross-checked against a demographic AML system, which included customer data that the firm had collected but was maintained by a third-party. However, the DAML database was incomplete because it did not include the names of COR Clearing’s introducing brokers.

FINRA cited the firm for not making sure its employees knew the criteria for detecting red flags warnings that there might be possibly suspect activity. It also said that COR Clearing’s AML program did not sufficiently deal with the fact that the business model involved services for introducing firms that engaged in microcap securities and third party wire activities, or that the program depended on these firms to look out for any signs of misconduct.

FINRA Watches Out for Broker Conflicts in Retirement Plan Rollovers
FINRA says it is on the lookout for possible conflicts of interest that could impact brokers when they roll over a customer’s company 401(K) plan into an individual IRA. These representatives typically have an economic incentive to move such funds into IRAs that they sell.

FINRA wants brokerages to make sure that their representatives are trained to comprehend related rollover implications, including fees and taxes. The SRO said that brokers should be careful in how they pitch IRAs to customers to ensure that they don’t give them any misleading or false information.

The SRO put out a regulatory notice telling member firms that they should not advise this type of transfer if it is better to keep the money in a customer’s company plan or move the funds to the plan of a new employer. The notice reminded brokerage firms that any recommendation to hold, buy, or sell securities must be suitable for each customer and the financial interests of the registered representative should not be an influencing factor.

FINRA to Look At Whether Brokerages Are Letting Incentives Impact Stock Trades
According to a recent study from Indiana University and the University of Notre Dame, brokers usually will send stock orders to the US market that pays the highest, making their own earnings more important than ensuring that their customers get the best prices. FINRA Market Regulations EVP Thomas Gira says that the SRO wants to make sure that its broker-dealer members are not making such decisions for their primary benefit, while shirking their obligation to ensure that investors’ best interests are the priority.

Gira says that the regulator expects to send some brokers a questionnaire this year so it can better understand how they choose among the over 50 exchange and alternative venues where American share trading take place. The venues make up the $22 trillion US equity market. They offer different order types and pricing schedules to get traders to use them.

FINRA Arbitration
Our FINRA arbitration lawyers represent investors with securities claims against financial firms and/or their representatives. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Regulators Plan Investigation of U.S. Stock Brokerage Incentives, SFGate, January 3, 2013

FINRA Fines COR Clearing LLC $1 Million for Extensive Regulatory Failures, FINRA, December 16, 2013

Finra warns against conflicts in retirement-plan rollovers, Investment News, December 30, 2013

More Blog Posts:
FINRA to Go After Rogue Brokers, & Includes REITs, Municipal Bonds, & Frontier Markets Among Its Enforcement Priorities for 2014, Stockbroker Fraud Blog, January 3, 2014

FINRA Arbitration Panel Says Wells Fargo Must Repurchase $94M of Auction-Rate Securities from Investors, Stockbroker Fraud Blog, December 29, 2013
FINRA Considers System That Would ‘Red Flag’ Customer Accounts at Brokerage Firms, Institutional Investor Securities Blog, December 27, 2013