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Misconduct by California Financial Firm Results in Penalty by Private, Independent Regulator

US_Security_and_Exchange_Commission_Office_photo_D_Ramey_Logan.jpgThe Financial Industry Regulatory Authority (FINRA) fined a California broker-dealer $325,000 in November 2014 in connection with multiple complaints, including the alleged sale of unregistered or non-exempt securities. In re BMA Securities, No. 2010023220502, letter of acceptance, waiver, and consent (FINRA, Nov. 11, 2014). FINRA is a private corporation that acts as an independent regulator in the financial industry, meaning that it essentially serves as a way for the financial industry to self-regulate. Member firms and licensed securities brokers agree to abide by FINRA rules, and to accept its jurisdiction over certain complaints brought under federal securities laws. It conducts arbitration proceedings, which are like private trials held before one or more arbitrators trained in dispute resolution, allowing many disputes to bypass the court system entirely.

FINRA is the successor to the National Association of Securities Dealers (NASD) and the regulatory and enforcement arms of the New York Stock Exchange (NYSE). It has quasi-governmental authority over brokerage firms, exchange markets, and others in the financial industry. Arbitration is often mandated by contract for certain disputes between customers and FINRA member firms. The U.S. Supreme Court has ruled that contractual provisions requiring arbitration of disputes arising under the Securities Act (SA) of 1933, 15 U.S.C. § 77a et seq., and the Securities Exchange Act (SECA) of 1934, 15 U.S.C. § 78a et seq., are enforceable. See Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987); Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989). The Securities and Exchange Commission (SEC) has ultimate legal jurisdiction over the financial industry, including over FINRA.

The respondent firm, Los Angeles-based BMA Securities, was the subject of multiple complaints filed with FINRA over various acts allegedly occurring from 2007 until at least December 2013. The firm allegedly sold shares that were not registered and were not exempt from registration, which is prohibited by Section 5 of the SA, 15 U.S.C. § 77e, and FINRA Rule 2010.

The firm also allegedly failed to establish or maintain supervisory systems, policies, or procedures to monitor compliance with Section 5, to “detect or prevent manipulative or fraudulent trading activity,” or to monitor and report suspicious transactions for the purpose of preventing money laundering. BMA, consent at 2. These are required by FINRA Rules 2010 and 3310(a), as well as NASD and NYSE rules for conduct prior to 2008. Finally, the firm allegedly failed to disclose to clients profits received by the firm for trades of low-price stocks during a roughly two-year period from 2009 to 2011, in violation of SEC Rule 10b-10, 17 C.F.R. § 240.10b-10, and FINRA Rule 2010.

In a consent decree approved by FINRA, the firm agreed to a censure for the above-described conduct, along with a fine of $325,000. It also agreed to hire an independent consultant to review, among numerous issues, its anti-money laundering program and its procedures for handling low-priced stocks. By signing the consent decree, the firm waived any right to administrative or judicial review. FINRA waived any further claims against the firm for the same factual findings described in the consent decree.

If you or your business needs assistance with issues like corporate formation, business transactions, or a business dispute, you should consult with a skilled and experienced commercial law attorney. James G. Schwartz has advised businesses and business owners in the Bay Area and advocated for their interests since 1976. Contact us today online or at (925) 463-1073 to schedule a free and confidential consultation.

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