Brickell Global Markets, also known as E.S. Financial Services, Inc., based in Miami, Florida, was censured and fined $275,000 by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm had charged customers unreasonable fees, failed to deliver prospectuses, allowed unauthorized individuals to direct trading in accounts, among other violations. Letter of Acceptance, Waiver and Consent, No. 2015045608701 (Nov. 23, 2015).
According to the AWC, from September 1, 2011 through October 31, 2012, the firm had charged its customers a fixed transaction fee of $75.00 in addition to mark-ups or mark-downs on all fixed income transactions. The firm generated $225,695.32 in transaction fees as a result. FINRA found that the fee was not reasonably related to any direct transaction-related services performed by the firm or transaction-related expenses incurred by the firm. The AWC stated that the fee was essentially a commission for the firm, was mischaracterized to investors, and resulted in the firm understating the total amount of commissions charged by the firm.
Further, with regard to fixed income transactions, the AWC reported that the firm had charged customers who maintained more than $500,000 with the firm fifteen basis points on the market value of their securities, and where customers who maintained under $500,000 were charged twenty-five basis points. These fees, according to the AWC, were identified as custody fees, yet the firm’s custodial agent had only charged the firm $70,000 in custody fees for the relevant period. FINRA found that the firm had given customers a false impression that the amount was related to custody fees, when it was actually an additional source of revenue that far exceeded the amounts the firm actually paid. FINRA found that the firm’s aforementioned conduct was violative of NASD Rule 2430, FINRA Rule 2010, and Exchange Act Rule 10b-10.
The AWC additionally stated that from February 2012 – February 2014, the firm sold commercial paper for one of its indirect affiliates, ESFIL. The firm reportedly sold $331,000,000 worth of the commercial paper to forty investors. The firm’s supervisory procedures and systems required the firm’s registered representatives to provide prospectuses to customers prior to sales, yet ten of the forty investors did not actually receive a prospectus. The firm reportedly failed to have supervisory procedures to ensure that the registered representatives delivered the prospectuses to customers. FINRA found that the firm’s conduct violated Section 5 of the Securities Act, and FINRA Rule 2010 and NASD Rule 3010(a) and (b) in this regard.
Further, the AWC stated that a financial institution and indirect affiliate of ESF, Central American Bank, maintained a brokerage account at the firm for many years. There was one individual and eight entity clients of the bank that engaged in securities transactions via the bank’s brokerage account. An estimated eighteen individual beneficial owners of the eight entity clients of the bank had worked with ESF personnel to effect securities transactions through the bank’s brokerage account. Five of the eighteen beneficial owners did not have an account with ESF.
According to the AWC, from April 2003 – August 2013, three of the clients directed transactions in the bank’s brokerage account with some or all of the owners who did not maintain an ESF account. In turn, ESF relationship managers reportedly accepted orders and executed one hundred and thirty unauthorized transactions in the bank’s brokerage account for individuals without trading authority on the account. There were additionally no supervisory systems in place to prevent the unauthorized trades in the bank brokerage account. FINRA found that ESF violated NASD Rules 3010(a) and (b), 2110, and FINRA Rule 2010 in this regard.
Securities brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of suitability, unauthorized trading, or excessive activity. FINRA Conduct Rule 3010 specifically provides that each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association. Final responsibility for proper supervision shall rest with the member.
Firms and individuals, not surprisingly, are prohibited from unauthorized use of customer funds, borrowing of a customer’s securities or funds, forgery, non-disclosures or misstatements of material facts, and various deceptions and manipulations. Such conduct can also be found to violate criminal and other civil laws, and be subject to sanction from the federal and state government bodies.
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