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FINRA Q4 2019 highlights

Authored by Christopher Zaffuto

The Financial Industry Regulatory Authority (FINRA) is an independent, nongovernmental organization that writes and enforces the rules governing the ethical activities of all registered broker-dealer firms and brokers, examines firms for compliance with those rules, fosters market transparency and educates investors. FINRA monitors approximately 3,800 brokerage firms, 160,000 branch offices and 630,000 registered securities representatives.

To assist investors in choosing an honest and reliable brokerage firm or individual broker, FINRA releases disciplinary and other action reports on a monthly basis, disclosing individuals who have been sanctioned and firms that have been fined. Below are a few findings from the fourth quarter 2019 report to highlight behavior not tolerated by FINRA.

Recently, a firm and its principal were sanctioned for using unbalanced and misleading communication with the public. The principal used his firm email address to send emails concerning a biotechnology company he co-founded to people identified as being invested or involved with biotechnology companies. The firm and principal collectively owned more than 60% of the company’s common stock. The email omitted key disclosures, such as the firm and principal’s ownership interest in the company, and the fact that it had raised approximately $13 million in capital for the company. Additionally, the firm earned more than $1 million in compensation since the company’s inception.

The findings also found that the firm created and maintained inaccurate books and records. Reimbursements of personal expenses made to the firm and principal for over $60,000 were inaccurately recorded as business expenses rather than employee compensation. This resulted in the firm underreporting employee compensation in its Financial and Operational Combined Uniform Single (FOCUS) report for two years.

In another case, a firm and its financial and operations principal (FINOP) consented to sanctions and to the entry of findings that the firm conducted a securities business while failing to maintain its minimum net capital requirement. The FINOP’s responsibilities include, but are not limited to, calculating the firm’s net capital, maintaining the accuracy of its general ledger, trial balance and balance sheet, and submitting an accurate FOCUS report. The FINOP misclassified receivables due to not taking the necessary steps to understand the nature of the receivables. Specifically, the firm and FINOP failed to correctly classify certain receivables as non-allowable, related to referral fees from an affiliated fund and other investment banking fees the firm had not yet received.

Additionally, the firm and FINOP failed to properly record a liability arising from an SEC administrative proceeding. Lastly, the firm made a material change in its business operations by participating in firm commitment offerings without receiving approval from FINRA. The firm’s membership agreement did not permit it to participate in firm commitment offerings.

In the last case identified by FINRA for the fourth quarter of 2019, an individual consented to the sanction and to the entry of findings that she converted funds from her member firm by requesting and obtaining $23,800 in reimbursement for travel expenses she did not incur. Her supervisor provided her with his login credentials to the firm’s expense reimbursement system so she could approve the expense reimbursement requests of fellow team members; however, she used this access to approve reimbursement of her fictitious expenses.

In conclusion, FINRA’s enforcement of brokers and broker-dealer firms allows investors to safely and securely choose the broker-dealer that best suits their financial goals. These three recent examples highlight the organization’s goal of continual and unbiased investigations. The findings that are released by FINRA also help provide examples for audit firms of potentially risker areas and where additional audit time may be focused. 

Source: FINRA. (n.d.). Retrieved December 27, 2019, from

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