Reflecting increased regulatory willingness to discipline principals and supervisors, FINRA recently announced that it had imposed an industry bar on the former president of a defunct broker-dealer, along with five registered representatives who likewise were barred in all capacities. FINRA also barred two former principals from continuing to act in a principal capacity and imposed additional sanctions on other former employees.
These disciplinary actions arise from a 2014 on-site examination which found a number of violations, including misleading sales pitches, high-pressure sales tactics and churning. Inexperienced brokers were instructed to make cold calls to potential customers using misleading sales scripts and, once accounts were opened, more senior brokers recommended frequent in-and-out trading at high commissions, causing significant customer loss.
In her Letter of Acceptance, Waiver and Consent, the former president consented to the entry of findings by FINRA that she knowingly allowed the brokers under her supervision to engage in the misconduct. In particular, the letter recites that the former president arranged for the alerts generated by the firm’s electronic systems to identify excessive trading to be automatically approved by the firm’s principals even when there was no basis for approving the activity. She also was charged with suppressing additional excessive trading alerts, sending misleading activity letters to customers, making statements to customers that she should have known were false, and concealing evidence from FINRA staff during their examination.
Although this matter appears to be an extreme case of the principal’s alleged participation in the wrongdoing, supervisors at all firms should be reminded that regulators will invariably ask “who let this happen?” each time they uncover misconduct, and that supervisors will be directly within the regulators’ field of vision.