An issue sparking recent FINRA enforcement actions is the failure of member firms to adequately supervise the use of consolidated reports.
A consolidated report is a single document combining information regarding most or all of a customer’s financial holdings, regardless of whether those assets are held at the firm or away from the firm.
In April 2010, FINRA issued Regulatory Notice 10-19, which reminded member firms that consolidated reports are communications with the public, and therefore must be clear, accurate, and not misleading. Firms were reminded to supervise the use of consolidated reporting, and ensure that the information reflected on the reports is accurate.
On March 12, 2014, FINRA accepted two Letters of Acceptance, Waiver and Consent from firms that failed to heed the above Notice and monitor their representatives’ use of consolidated reporting.
In the first enforcement action, Securities America, Inc.’s representatives had access to a consolidated reporting system which allowed the representatives to manually input values for assets held away from Securities America. Securities America failed to adequately supervise these reports. In numerous instances, representatives inserted inaccurate values on the consolidated reports sent to customers. Securities America agreed to a censure and a $625,000 fine for its failure to monitor the use of consolidated reporting.
In the second enforcement action, Triad Advisors, Inc. allowed its representatives to manually enter values on a consolidated reporting system without reasonably supervising the use of the system. Triad was unaware for approximately five months that the system even allowed for manual entry. Furthermore, Triad’s supervisory system was inadequate and failed to detect consolidated reports with manually-entered false assets. Because of these and other violations, Triad agreed to a censure, $650,000 fine, and restitution payment of $375,000. Triad further agreed it would conduct a comprehensive review of its supervisory system and adopt new and revised procedures for supervising the use of consolidated reports.
These enforcement actions indicate that firms should be vigilant in their supervision of consolidated reports, particularly when representatives are able to manually enter values. According to FINRA’s 10- 19 Notice, best practices for firms include ongoing audits and reviews, centralized reporting systems, and maintaining supporting documentation for reported assets.
The full settlements can be found at: https://www.finra.org/web/groups/industry/@ip/@enf/@ad/documents/industry/p459637.pdf and https://www.finra.org/web/groups/industry/@ip/@enf/@ad/documents/industry/p459638.pdf.