Broker-dealers should be extremely sensitive to the risks posed by inappropriate record keeping and communications, the need to keep track of brokers who require heightened supervision and the ever-looming specter of complex products sold to retail customers, according to securities regulators who spoke on the "enforcement developments" panel Tuesday morning at the Financial Industry Regulatory Authority Inc.'s annual meeting in Washington.
One speaker, Melissa Hodgman, associate director of division of enforcement at the Securities and Exchange Commission, pointed to a $125 million settlement the SEC reached in December with JPMorgan Chase & Co. as a wider heads-up for the securities industry.
The SEC said at the time that from January 2018 through November 2020, employees of J.P. Morgan Securities, a broker-dealer subsidiary of JPMorgan Chase, often communicated about business on their personal devices, using text messaging applications such as WhatsApp and personal email.
But the firm didn't preserve the written communications, a violation of securities laws. Its deficient record keeping hampered several SEC investigations, the agency said.
“For the commission, these records are sacrosanct,” Hodgman said.
Another regulator, Jessica Hopper, executive vice president and head of enforcement at Finra, pointed to a case from December that involved SagePoint Financial Inc., one of the Advisor Group broker-dealers. SagePoint reached a $700,000 settlement after facing claims that it had failed since 2013 to have an up-and-running system that adequately supervised brokers with histories of misconduct.
One SagePoint broker was altering variable annuity documents, never went on heightened supervision and wound up taking withdrawals from customer accounts without client permission, Hopper said, adding that the firm's failure to oversee its advisers was not confined to that one instance. "This is much broader than one representative,” she said.
Finra is also focused on brokers selling complex products, Hopper said, noting that in March the broker-dealer self-regulator issued a request for comment about its oversight of risky, complicated investments such as leveraged and inverse exchange-traded products and options.
She raised concerns about whether firms and brokers understand so-called "alternative" mutual funds, which use risky options as part of their investment strategy.
"We have retail investors who suffered 80% losses on their investments, and the firm was responsible for understanding what they were selling," Hopper said.
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