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FINRA Fines Broker-Dealer $3 Million

Failing to protect customers’ funds and securities from broker-dealer misuse caused the Financial Industry Regulatory Authority (FINRA) to censure and fine Pershing LLC $3 million for violating the Customer Protection Rule and for related supervisory failures.

The Securities and Exchange Commission (SEC) rule also requires that assets be available for distribution in the event of the broker-dealer’s insolvency, according to a news release by FINRA on Dec. 29.

“Customers’ assets were at risk because Pershing failed to establish systems to vet procedural changes with material impact to the reserve and possession and control positions,” said Brad Bennett, FINRA’s executive vice president and chief of enforcement.

The SEC Customer Protection Rule is intended to protect customers’ funds held by their broker-dealers and to prohibit broker-dealers from using customer funds and securities to finance any part of their business unrelated to servicing securities customers. The rule requires the broker-dealer that maintains custody of customer securities and cash to comply with two requirements:

  1. To obtain and maintain physical possession or control over customers’ fully paid and excess margin securities;
  2. To maintain a reserve of cash or qualified securities in an account at a bank at least equal in value to the net cash the broker-dealer owes to customers.\

FINRA investigators found that from November 2010 to August 2011, Pershing failed to maintain adequate reserves to meet its reserve deposit requirements with reserve deficiencies ranging from approximately $4 million to $220 million. From July 2010 through September 2011, Pershing also failed to promptly obtain and later maintain physical possession or control of certain customers’ fully paid and excess margin securities. During that period, the firm’s failures caused 47 new possession or control deficits, and an increase in a significant number of existing possession or control deficits. These failures exposed customer funds and securities to risk.

The firm’s supervisory systems and procedures were inadequate and it failed to implement a system to review and approve procedural changes with material impact to the requirements of the Customer Protection Rule.

In settling this matter, Pershing neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Bob Pepalis

Posted in: Independent Broker Dealer News

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Broker-Dealers Fail to Meet Anti-Money Laundering Rule

A software design flaw cost a pair of St. Louis-based broker-dealers, Wells Fargo Advisors and Wells Fargo Advisors Financial Network a joint fine of $1.5 million by the Financial Industry Regulatory Authority (FINRA) for failing to meet anti-money laundering compliance.

FINRA explained in a news release that broker-dealers – including these two, who were under common control, must establish and maintain a written Customer Identification Program that enables them to verify the identity of each customer opening a new account. The problem arose when a design flaw caused the software to sometimes recycle old identifiers from accounts that were closed. Because these customer identifiers were previously used for other customers, the identities of the new customers weren’t properly checked.

FINRA announced that for nine years the firms failed to comply with this aspect of the anti-money laundering compliance program for broker-dealers for approximately 220,000 new customer accounts. Another 120,000 accounts that had never been subjected to identity verification were already closed when the problem came to light.

Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, ” While the firms eventually discovered the flaw in their own systems, it took far too long, resulting in hundreds of thousands of accounts to open and often close without the required identification process ever taking place.”

In settling this matter, WFA and WFAFN neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck at or by calling (800) 289-9999.


FINRA Bars Broker for Stealing from an Elderly Customer

By Bob Pepalis

Stealing almost $89,000 from an elderly customer caused FINRA to permanently bar a broker from the securities industry. The broker was working for Wells Fargo Advisors, LLC and an affiliated bank in Chico, California. The affiliated bank has since made the customer whole for her losses.

FINRA investigators report that from December 2012 to August 2014, Jeffrey C. McClure wrote himself 36 checks totaling $88,850 drawn on the customer’s bank account without her knowledge or consent. The elderly customer gave him access to her accounts when she authorized him to pay her rent and other expenses. Instead, FINRA said in a news release that McClure deposited the checks into his personal bank account and used the funds for his personal expenses.

In settling this matter, McClure neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Posted in: Independent Broker Dealer News

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Did Cetera’s President Reassure Broker Dealers?

By Bob Pepalis

Cetera Financial Group’s Larry Roth told ThinkAdvisor that the firm, a group of independent broker-dealers, won’t be sold or spun off in the near future.

The rumblings of the possibility arose after sister firm American Realty Capital Properties (ARCP) revealed $23 million of accounting errors in late October.

RCS Capital Corp., which acquired Cetera less than a year ago from Lightyear Capital in a $1.15 billion deal, pulled out of a deal to buy part of Cole Capital from ARCP in November. All options were being considered, according to company officials on a call with investment analysts in November.

Roth, Cetera’s president, said it’s business as usual at the firm. The more thousands of financial advisers with Cetera were surprised by the acquisition from Lightyear early this year, so they can be forgiven if they don’t have the same thoughts.

Posted in: Independent Broker Dealer News

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