A brokerage firm agreed to pay $6.25 million in fines and approximately $780,000 in restitution to settle FINRA sanctions that it (i) inadequately supervised customer use of leverage in their brokerage accounts, and (ii) lacked adequate supervisory systems and procedures to ensure the suitability of transactions in certain Puerto Rican ("PR") securities.
According to FINRA, the sanctioned firm lacked adequate supervisory systems and procedures to monitor customers' use of proceeds from "loan management accounts" ("LMAs"), which are lines of credit that allow a customer to borrow money from an affiliated bank of the broker using the securities held in the customer's brokerage accounts as collateral. FINRA found that although the firm's policies and the terms of certain "non-purpose" LMA agreements prohibited customers from using LMA proceeds to buy many types of securities, the firm's supervisory systems and procedures were not reasonably designed to detect or prevent such use from January 2010 through November 2014.
FINRA determined that between January 2010 through July 2013, the firm did not establish and maintain adequate supervisory systems and procedures to ensure that transactions were suitable in light of certain customers' risk tolerance objectives. The firm also did not identify the profiles for those customers that were both highly concentrated in PR municipal bonds and PR closed-end funds ("PR Securities") and using leverage. As of July 2013, several hundred customer accounts in the firm's Puerto Rico branch (with only modest net worth and conservative or moderate investment objectives) had 75% or more of their account assets invested in PR Securities. Of those accounts, close to fifty were also leveraged. Approximately half of those leveraged accounts were eventually forced to liquidate PR securities at a loss (approximately $1.2 million in the aggregate) as a result of receiving margin or maintenance calls.
In settling this matter, the sanctioned firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
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