New York Securities Lawyer Blog
Recently, World Equity Group, Inc. (“World Equity”), a broker-dealer, submitted a Letter of Acceptance Waiver and Consent (“AWC”) wherein it agreed to a censure and a $225,000 fine to settle allegations of violations of federal securities law as well as National Association of Securities Dealers (“NASD”) and Financial Industry Regulatory Authority, Inc. (“FINRA”) rules relating to its supervisory and compliance procedures. Although, World Equity did not admit or deny the allegations contained in the AWC, it agreed, as a condition of the AWC, to refrain from taking any action that would deny the allegations or create the impression that the findings of the AWC lacked a factual basis.
World Equity was formed in 1992 and has its home office in Arlington Heights, Illinois. From 2009 through 2012 (the “Relevant Period”), World Equity maintained 68 registered branch offices and employed approximately 160 registered representatives.
Specifically, FINRA alleged in the AWC that during the Relevant Period, World Equity failed to implement supervisory systems adequately designed to detect and prevent rule violations. FINRA alleged that: (1) World Equity failed to preserve e-mails communications with customers, in violation of SEC Rule 17a-4(b)(4) & (f), NASD Rule 3110 and FINRA Rule 4511; (2) World Equity failed to create and record account records for thirteen customer accounts as well as obtain and record suitability information for those customers, in violation of SEC Rule 17a-3(a)(17)(i)(A) and NASD Rules 3110 and 2310(b); (3) World Equity failed to implement supervisory systems designed to ensure the suitability of customer transactions in leveraged exchange traded funds, in violation of NASD Rule 3110; (4) World Equity failed to document that adequate due diligence was conducted, or improperly relied on issuers’ due diligence in connection with private placements and illiquid real estate investment trusts, in violation of NASD Rule 3010; (5) World Equity failed to establish an adequate supervisory system for the review of options trading activity and subsequently allowed such options trading activity to occur in unapproved accounts, in violation of NASD Rule 3010(b) and FINRA Rule 2360(b)(16)(A); (6) World Equity failed to effectuate a reasonable supervisory system to ensure compliance with Section 5 of the Securities Act of 1933, in violation of NASD Rule 3010; (7) World Equity failed to adequately enforce its “Chinese Wall” procedures designed to prevent conflicts of interest, in violation of NASD Rule 3010; (8) World Equity failed to implement a reasonably designed anti-money laundering (“AML”) program to detect, investigate and report suspicious activities, in violation of FINRA Rules 3310(a) and 2010, and NASD Rule 3011(a); and (9) in 2011, World Equity failed to conduct an adequate AML independent test, in violation of FINRA Rule 3310(c).
Both the NASD and FINRA Rules place an affirmative duty on broker-dealers to establish the necessary compliance procedures to ensure member firm’s registered representatives and brokers conduct their business in accordance with the law. Specifically, NASD Rule 3010(a), which has since been replaced by FINRA Rule 3110(a), provides that: “Each member shall establish and maintain a system to supervise the activities of each registered representative, registered principal, and other associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable NASD [FINRA] Rules.” Generally, financial institutions will ensure their registered representatives’ compliance with the applicable rules and laws through written supervisory procedures. However, when those written supervisory procedures are insufficient or not followed, the financial institution may be found liable to their customers for broker misconduct or face an investigation by FINRA, the Securities and Exchange Commission, state security regulators, or other regulatory body.
Prior to the instant enforcement action, regulators had investigated World Equity at least six times since 1997. These past investigations also revealed supervisor failures including: that a World Equity registered representative published advertisements to customers that made exaggerated and unwarranted statements about investments; and that another registered representative made 45 transactions to customers without first conducting a suitability analysis for those customers. While each of those previous investigations resulted in civil fines, amongst other penalties, the civil fine imposed in the instant enforcement action more than doubled the combined sum of all previous civil penalties.
If you have any questions about your broker-dealer’s duty to supervise its registered representatives or believe that your broker may have engaged in other misconduct in your account, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.