Cetera firms face $1.1M FINRA fine over AML and supervision lapses

FINRA has censured and fined three broker-dealers in the Cetera network a fine totalling more than a million dollars over systemwide failures tied to low-priced securities supervision, anti-money-laundering controls and customer reporting.

The action covers Cetera Advisors, Cetera Wealth Services, and Cetera Investment Services, all subsidiaries of Cetera Financial Group.

It also comes in the wake of other million-dollar-plus sanctions by FINRA against Osaic's American Portfolios Financial Services and Securities America, a now-closed Osaic broker-dealer.

In an AWC letter published Friday, FINRA found that from at least March 2019 through August 2021, the firms’ supervisory systems and written supervisory procedures “were not reasonably designed to achieve compliance with Section 5 of the Securities Act of 1933.”

The shortcomings centered on how the firms handled deposits and sales of low-priced securities, including weak controls around determining whether shares were restricted and whether sales were exempt from registration.

During the review period, the firms typically required reps to complete questionnaires for low-priced securities delivered in certificate form. But they did not consistently require the same level of information for electronic deposits, even though most low-priced securities at the firms came in electronically. That gap meant some customers could sell shares and wire out proceeds before the firms fully reviewed the transactions.

In one example cited in the document, a customer at Cetera Wealth Services opened an account, deposited 75,000 shares of an over-the-counter issuer and started liquidating less than two weeks later. By mid-September 2020, the customer had sold all of the shares for about $178,000 in proceeds. FINRA said the firm allowed the activity despite multiple red flags, including the customer’s role in an investor promotion campaign and trading that at times made up as much as 88% of the daily volume in the stock.

Over the same March 2019 to August 2021 window, FINRA said the Cetera firms’ AML program was “not reasonably designed to detect and cause the reporting of suspicious transactions” in low-priced securities. Although customers collectively sold about 800 million shares of low-priced securities that generated less than 0.1% of each firm’s total revenue, the regulator said the firms lacked policies and tools to monitor for patterns such as coordinated activity, concentrated trading and rapid wiring of proceeds.

The firms “frequently failed to take reasonable steps to identify, detect, and investigate red flags of potentially suspicious activity,” including situations where customers promoted issuers, dominated daily trading volume or appeared to operate in concert, according to the document.

FINRA acknowledged Cetera Advisors and Cetera Wealth Services set up procedures in December 2019 for daily reviews of reports including basic information about all low-priced security transactions. But while those procedures uncovered five red flags of suspicious activity, the firms nonetheless failed to give additional guidance on how to monitor for those red flags.

"The firms’ AML compliance program failed to include appropriate risk-based procedures for conducting ongoing monitoring to identify and report suspicious transactions in low-priced securities," the FINRA letter said.

FINRA also brought a separate set of findings against Cetera Advisors over its handling of consolidated account reports between January 2017 and August 2021. It said representatives used a proprietary planning tool, third-party vendor platforms, and custom templates to build reports that combined firm-held and away assets, often with manually entered valuations.

The regulator said the firm did not maintain a reasonable supervisory framework around those reports – supervisors were not required to confirm whether representatives were compliying with written procedures around manually entered data, for example. It also didn't address consolidated reports that were shared with customers, thus failing to preserve “tens of thousands” of them as required books and records. 

FINRA pointed out how Cetera Advisors initially failed to spot reps using its proprietary financial planning tool, which allowed reps to aggregate held-away asset data and manually add information, "to generate consolidated reports that customers and representatives could access directly via a firm-sponsored portal." As a result of that blind spot, FINRA said, Detera Advisors wasn't able to review or otherwise supervise the creation of such reports.

Aside from a joint and several fine of $1.1 million for the firms, FINRA's AWC said senior management at each broker-dealer must, within 180 days, certify in writing that the firm has remediated the Section 5 and AML issues identified and implemented supervisory and AML programs reasonably designed to comply with FINRA rules.

The firms agreed to the sanctions without admitting or denying the regulator’s findings.

"This matter relates to historical supervisory processes from several years ago and was resolved through a standard FINRA settlement with no admission of wrongdoing," a Cetera spokesperson told InvestmentNews. 

"The issues identified have already been remediated, and we have further strengthened our supervisory and compliance programs since that time," the spokesperson said in an email. "We take our regulatory responsibilities seriously and continue to invest in robust controls to support our advisors and protect clients."

(Author's note: This story has been updated to reflect Cetera's responses to a request for comment.)