The Financial Industry Regulatory Authority Inc. issued six-figure fines Monday to three brokerages for lapses in supervising reports to clients that summarize all their assets, including those not handled at the firms. The regulator cited concerns about the potential for the reports to conceal fraudulent activity.
H. Beck Inc., LaSalle St. Securities and
J.P. Turner & Co. were hit with fines of $425,000, $175,000 and $100,000, respectively. All three were deficient in reviewing and verifying the account information on the consolidated reports, according to Finra.
The firms settled with Finra without admitting or denying the charges.
“Inadequate controls around consolidated reporting create the risk that unscrupulous representatives will provide inaccurate and misleading reports to their clients to conceal fraud and theft,” Fina executive vice president and chief of enforcement Brad Bennett said in a statement. “These actions, along with previous actions involving consolidated reports, should be a message to firms that we will continue to examine for this issue and sanction firms that are not supervising the function properly.”
LaSalle St. had written procedures in place for compiling and disseminating the reports, but didn't follow them, according to Finra. The other two firms lacked formal procedures.
LaSalle's disciplinary action also involved problems related to private placements, while
H. Beck's included violations surrounding sales of unit investment trusts.
It's not so much the reports themselves that have Finra bearing down in this area. The regulator's concern involves brokerages' other activities, such as at an affiliated advisory firm, that are reflected in the reports, according to Todd Cipperman, principal at Cipperman Compliance Services.
“The bigger issue is brokers doing business away from the brokerage firm,” Mr. Cipperman said. “Those outside business activities create a higher level of compliance infrastructure.”
The proliferation of money management options for clients makes it difficult for brokerages to crystalize a client's financial life in one document. Keeping track of all the moving parts increases the compliance burden for advisers.
“The problem is so many things are being held away from the firms today,” said Philip Wilson, president of Advisory World, a technology compliance consulting firm.
Another stumbling block is analog processes for compiling consolidated reports. Part of H. Beck's violation involved mistakes brokers made when they manually entered valuations for illiquid investments.
Generating consolidated reports requires a “clear, repeatable and scalable methodology,” Mr. Wilson said. “Firms need to do this on a firm-wide basis, and I don't think they are.”
In April 2010, Finra issued a
regulatory notice outlining best practices for firms to use in compiling consolidated reports.
