by Howard Haykin

In FINRA’s September Report on Disciplinary Actions, two broker-dealers were cited for deficient supervision and record retention involving consolidated reports - created and disseminated by registered persons to firm customers.

"Consolidated report" is a document provided by a broker to a customer that combines information regarding most or all of the customer's financial assets. Consolidated reports are communications with the Defipublic and therefore must be clear, accurate, and not misleading. In Regulatory Notice 10-19, FINRA cautioned that consolidated reports, "[i]f not rigorously supervised . . . can raise a number of regulatory concerns" and noted that firms "must ensure that the size and complexity of [a] consolidated reporting program does not exceed the firm's ability to supervise the activity and to subject it to a rigorous system of internal controls."

FINRA Case #2017052293001.   A Portland, OR-based FINRA member firm since 1997 with 849 registered individuals in 178 branch offices.

From December 2013 through June 2015, some 405 Registered Reps created and disseminated consolidated reports to firm customers. Yet, during this period, the broker-dealer had no written supervisory procedures (WSPs) that directly addressed how such consolidated reports were to be supervised. Further, the firm didn’t maintain or review consolidated reports as communications with customers and did not maintain or review the supporting documents related to assets and asset values entered manually by Registered Reps in the consolidated reports.

Following a FINRA exam in 2015, the broker-dealer corrected its supervisory deficiencies by requiring Registered Reps and branch offices to submit for review and approval on a weekly basis copies of all consolidated reports (with supporting documentation) that were made available to firm customers or prospective customers. The WSPs further prohibited the dissemination of consolidated reports unless and until approval was provided by the firm.

Based on its supervisory deficiencies, the broker-dealer was cited with violations of NASD Rule 3010 and FINRA Rule 3110 (Supervision) and FINRA Rule 2010 (Standards of Commercial Honor and Principles).

In this AWC Letter, the firm was also cited with failing to supervise $19 million in private securities transactions sold by a Registered Rep. Collectively, the firm agreed to pay a $135K fine.

FINRA Case #2014038972001.    A Littleton, CO-based FINRA member firm since 1995 with 719 Registered Reps in 26 branch offices and 460 non-branch locations.

From February 2014 through at least September 2014, numerous Registered Reps created and distributed consolidated reports to firm customers. The broker-dealer, however, had no WSPs governing consolidated reports, no system to detect the use of consolidated reports, and no method to review such reports for accuracy. Moreover, the programs the firm used did not retain copies of and were unable to identify the number of consolidated reports that were prepared and transmitted by its Registered Reps to firm customers during this 8-month period.

Based on its supervisory deficiencies, the broker-dealer was cited with violations of NASD Rule 3010 and FINRA Rule 2010. By failing to preserve consolidated reports sent to firm customers, the firm was further cited with violations of Section 17(a) of the Exchange Act, Exchange Act Rule 17a-4(b) (Books and Records), FINRA Rule 4511 (Books and Records), and FINRA Rule 2010.

In this AWC Letter, the firm was also cited with other significant violative conduct, including: (i) failure to inspect non-branch offices; (ii) deficient heightened supervision procedures; (iii) failure to supervise outside business activities; and, (iv) failure to supervise and retain email communications. Collectively, the firm agreed to pay a $95K fine.

These cases were reported in FINRA Disciplinary Actions for September 2018.

For details on either case, go to ...  FINRA Disciplinary Actions Online, and refer to the Respective AWC Number.