City National Securities, Inc., headquartered in Beverly Hills, California, has been censured and fined $250,000.00 by Financial Industry Regulatory Authority (FINRA) based upon consenting to findings that the firm failed to properly supervise outside business activities and private securities transactions. Letter of Acceptance, Waiver and Consent, No. 2014043089901 (Aug. 24, 2017).
According to the AWC, between January of 2008 and September of 2014, the firm’s written supervisory procedures warned staff about effecting securities outside the firm’s auspices – wherein the firm referred to securities sold away from the firm as an infraction of FINRA rules. Yet, these supervisory procedures were reportedly deficient because they only took into consideration when customers of the firm were party to private securities transactions. They neglected to detail when registered representatives effected private securities transactions with non-firm customers.
Evidently, the firm’s written supervisory procedures also indicated that brokerage accounts held away from the firm would be approved by the firm’s president on a case by case basis, where an approval necessitated the firm’s chief compliance officer’s review of confirmations and account statements. The firm reportedly failed to require that representatives furnish information to the firm before establishing an outside account or transacting in one. Additionally, the firm lacked a requirement for its registered representatives to inform outside institutions about their involvement with CNS.
The AWC revealed that a registered representative, DZ, conducted business activities away from the firm while he was associated with City National Securities, where he worked as an investment fund’s managing member. DZ purportedly utilized his role as managing member to facilitate investors’ transactions, in which he placed trades on the investment fund’s behalf in accounts held away from the firm.
The AWC stated that DZ ultimately engaged in an outside business activity that caused a customer to complain to City National Security, resulting in the firm’s investigation into his misconduct. According to the AWC, a customer complained that DZ made misrepresentations to the customer about the fund to hide the fund’s 2007 investment losses. Critically, customers funds were only worth a small portion of the amount that DZ stated. DZ was cited in the AWC as having participated in a large amount of outside business activities concerning the investment fund that had never been made known to the firm; conduct FINRA found to be violative of FINRA Rule 3270 and 3030.
However, FINRA indicated that the firm was cognizant of the investment fund’s existence from DZ’s former representations to his firm; yet the firm never analyzed whether the fund necessitated disclosure or required a written confirmation of his involvement. Consequently, the firm failed to conduct an evaluation of DZ’s activities according to FINRA Rule 3270.
Moreover, DZ reportedly failed to notify the firm in writing about the securities transactions he effected away from the firm, but the firm was deemed by FINRA to have had knowledge about investors who made contributions in the investment fund and were cognizant of trades effected by DZ on behalf of the fund in accounts held away from the firm. City National Securities reportedly failed to analyze DZ’s activities to conclude whether they constituted private securities transactions that demanded disclosure by DZ. The firm also purportedly failed at gaining disclosures in writing in regard to DZ’s activities. Ultimately, DZ’s private securities transactions were not approved by the firm, nor were they placed on the firm’s records or books and supervised accordingly. FINRA found that the firm’s supervisory failures were violative of FINRA Rule 2010 as well as NASD Rules 2110 and 3010.
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