Finra homes in on supervisory failures tied to rogue brokers

Sending a message that brokerage firms may need to step up their monitoring for rogue brokers, the Financial Industry Regulatory Authority Inc. said Monday it had reached a nearly $1 million settlement with two firms for failing to supervise wire transfers.
Morgan Stanley Wealth Management and Scottrade Inc. agreed to pay $650,000 and $300,000, respectively, over allegations that gaps in their compliance systems allowed brokers to improperly move funds into their own personal accounts without being detected. In both cases, the firms had been warned in 2011 of the gaps but did not take corrective action, Finra said.
“Firms must have robust supervisory systems to monitor and protect the movement of customer funds,” Brad Bennett, Finra’s chief of enforcement, said in a statement. “Morgan Stanley and Scottrade had been alerted to significant gaps in their systems by Finra staff, yet years went by before either firm implemented sufficient corrective measures.”
Morgan Stanley, which has around 16,000 brokers and advisers, and Scottrade, which has around 2,000 registered brokers, agreed to the sanctions without admitting or denying the charges.
A spokesman for Scottrade, Whitney Ellis, said in a statement that the firm has resolved the issue after updating its procedures in 2013 and improving the notification process for third-party transfers.
“Today, clients receive multiple notifications of wire transfers and the appropriate supervisory procedures are in place,” Mr. Ellis said.
Christine Jockle, a spokeswoman for Morgan Stanley, did not return a request for comment.
ROGUE BROKERS A CONSTANT CONCERN
Rogue brokers who use their position to circumvent firm policies are a constant concern for firms, according to Todd Cipperman, a compliance consultant with an eponymous firm.
“The scary part for firms is that you get a lot of brokers and then it’s hard to supervise them all,” Mr. Cipperman said. “It’s hard to stop someone from forging signatures unless you require two signatures, but then they just forge the second signature, too.”
The violations at Morgan Stanley occurred from June 2009 to November 2014, according to Finra’s complaint. Finra said that Morgan Stanley failed to have “reasonable supervisory systems and written procedures” regarding the transfer of money from a customer account to third party account.
The firm had inadequate identification requirements for third-party transfers to compare customer signatures for a forgery, for example, Finra said. The firm also failed to do adequate reviews when there were multiple transfers of funds to the same third party account and had issues with a third-party service provider who mislabeled transfers, according to the complaint.
As a result, three brokers in two offices in Paramus, N.J., and Fort Lauderdale, Fla., were able to convert nearly $500,000 through fraudulent wire transfers and forged signatures, according to the complaint.
Finra said all three brokers were terminated from Morgan Stanley when the violations were uncovered, and they had since been barred from the industry.
For two years from 2011 to 2013, Scottrade had similar issues and failed to obtain customer confirmations for third-party wire transfers of less than $200,000, according to Finra.
“Any time you get money movement out of client accounts, that always raises concerns and will get Finra’s attention,” Mr. Cipperman said. “Firms have to be cognizant of their policies and procedures about supervising money movement.”