AXA Advisors LLC has been fined $50,000 by the Financial Industry Regulatory Authority (FINRA) and censured for its failure to supervise a broker who misappropriated $122,000 from the money market account of a customer, 70 percent of the account’s value.
Letter of Acceptance Waiver and Consent
The firm submitted a Letter of Acceptance Waiver and Consent (AWC) to resolve the disciplinary action without admitting or denying the findings contained therein. FINRA accepted the AWC on March 30 and the findings became part of AXA’s permanent disciplinary record.
The broker who misappropriated the customer funds was identified in the AWC only as TK, a registered representative at AXA. Between January and November 2008, TK send 16 requests for redemptions from a money market fund held in the customer’s account.
These requests for redemption were made without the customer’s authorization or knowledge, and they were all processed, reviewed for suitability and approved through AXA’s electronic suitability review system, the AWC said. The redemptions totaled about $122,000.
This customer’s account had been transferred to AXA when TK registered with the firm in August 2007. At the time of the transfer, TK listed his own office address as the address for the customer’s account. Because TK used a broker-dealer change form and AXA did not review the account, the AWC said. The firm failed to detect the improper address.
Therefore, when the mutual fund that sponsored the money market fund issued the disbursement checks TK had requested from the customer’s account, they went right to TK’s office. He then fraudulently endorsed the checks, deposited them in his personal bank account and used the funds for his own purposes, the AWC said.
AKA Failed to Supervise TK
AXA failed reasonably to supervise TK despite the fact that he had been placed on heightened supervision when he joined the firm because a background check revealed that TK owed $42,000 to creditors.
The heightened supervision meant that all new business generated by TK was to be reviewed by his controls manager, he was to attend monthly meetings with a branch supervisor to review his business practices, his correspondence to customers was to be reviewed and the branch would periodically review the status of his debts, the AWC said. TK was also subject to extra audits.
The problem with the account in question, however, is that it was transferred from TK’s prior broker dealer. As such, AXA did not consider it new business for subject to review by the controls manager, the AWC said.
As noted, TK listed his own office address as the customer’s address on the broker-dealer change form. He also listed his cell phone number as the customer’s phone number, the AWC said. None of this was reviewed or detected by AXA.
In addition, the firm had no system in place to check the accuracy of addresses listed on this particular type of account, so after AXA’s processed the broker-dealer change form, the customer’s account statements and disbursement checks were sent directly to TK’s office.
Although the account was flagged for further review by AXA’s suitability system, the controls manager found that the investment allocation was suitable without noticing that the address of record was TK’s office address, the AWC said.
TK’s misconduct was discovered in March 2009. As part of that year’s audit, a compliance officer for AXA conducted a review in TK’s office, and for the first time, the procedure included a sample review of client files that were not considered new business, the AWC said.
During this review, the compliance officer noticed irregularities in a document associated with the victimized customer’s account.
AKA Investigates and Fires TK
The firm investigated, and TK eventually admitted that he had misappropriated funds from this customer’s account so that he could pay his mortgage and other bills. TK was fired, and AXA reimbursed the customer.
AKA’s Violations
As a result of its lackadaisical review practices up to that point, AXA violated Rule 3010 of the National Association of Securities Dealers (NASD), a FINRA predecessor. Among other things, the rule requires members to establish and maintain a system to supervise the activities of each registered representative that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable NASD rules.
Moreover, the firm violated NASD Rule 2110 and FINRA Rule 2010 concerning commercial honor and equitable principles of trade.
AXA violated Rule 3010 by failing reasonably to supervise TK. Even though he was on heightened supervision, TK was able to pocket $122,000 of a customer’s money.
Despite the a 70 percent plunge in the value of the customer’s account over 11 months, AXA’s systems allowed redemption requests to be approved without individualized review.
More on AKA
A member of FINRA since 1974, AXA is a large, general securities broker-dealer, with about 5,700 registered representatives spread throughout 1,300 branches across the Unites States. The firm, owned by AXA Financial Inc., is mostly engaged in the distribution of mutual funds, variable life insurance, and variable annuity contracts.
Mostly recently, AXA was censured and fined $100,000 by the Securities and Exchange Commission (SEC) for failing to reasonably supervise the activities of a broker who misappropriated $1.2 million from seven customers from December 2005 through December 2008.
The SEC found in January 2012 that AXA’s inadequate a supervision violated Section 15(b)(4)(E) of the Securities and Exchange Act. AXA failed to establish reasonable procedures regarding customer redemptions from variable annuities, and failed to establish reasonable procedures to supervise the activities of brokers on extended leave from the firm. See a report on this incident here.
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