Comprehensive Asset Management and Servicing, Inc. (CAMS), headquartered in Parsippany, New Jersey, was censured and fined $475,000 by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm had failed to meet supervisory obligations including 1) the review and retention of consolidated reports; 2) private securities transactions; and 3) variable annuities. Letter of Acceptance, Waiver and Consent, No. 2012030675901 (Dec. 9, 2015).
According to the AWC, from February 2008 through July 2013, CAMS had permitted its representatives to create and distribute consolidated reports to customers of the firm that reflected, among other things, investments that customers held away from CAMS. The firm reportedly had no procedures specific to consolidated reports, but rather applied their general procedures pertaining to customer correspondence. Despite the firm’s procedures which required that outgoing correspondence be copied, reviewed by a supervisory principal, and retained for six years, the firm had failed to review or retain consolidated reports in accordance with their procedures.
A consolidated report is a document that is provided by a registered representative to a customer that combines account information concerning most or all of a customer’s assets. FINRA Regulatory Notice 10-19 states that firms are required to supervise the use of consolidated reports by representatives, and that such reports must comply with all FINRA rules and securities laws. FINRA found that by failing to reasonably supervise registered representatives’ use of the consolidated reports, the firm had violated NASD Conduct Rules 3010 and 2110, along with FINRA Rule 2010. FINRA also found that by failing to retain consolidated reports sent to customers, the firm violated Section 17 of the Securities Exchange Act of 1934 and SEC Rule 17a-4 thereunder, NASD Conduct Rules 3110 and 2110 and FINRA Rules 4511 and 2010.
The AWC further stated that from February 2008 – February 2012, nearly ninety percent of the firm’s registered representatives had also functioned as investment advisor representatives and that many operated their own investment advisory firms. The firm’s written supervisory procedures during this period had provided that all private securities transactions be recorded on the firm’s books and records and be supervised as if the transactions had been executed on behalf of the firm. The AWC stated that the firm had failed to identify securities transactions effected by their registered representatives on behalf of their investment advisory clients as “private securities transactions.” FINRA found the firm’s conduct to be in violation of NASD Conduct Rules 3010, 3040 and 2110 and FINRA Rule 2010 in this regard.
Further, the AWC stated that from February 2008 through February 2012, the firm had failed to establish, maintain, and enforce a supervisory system and procedures reasonably designed to supervise variable annuity transactions. Specifically, FINRA noted that the firm had failed to obtain customer information necessary to conduct an adequate supervisory review of variable annuity transactions (e.g. customer ages, investment objectives); implement adequate controls to ensure variable annuity applications were promptly forwarded to a principal for timely approval; and evidence delivery of prospectuses to variable annuity customers.
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.
Selling away, also known as private securities transactions or undisclosed outside business activities, occurs when a stockbroker engages or participates in the sale of securities to investors outside of the formal approval of the securities firm with whom they are associated.
As a general matter, stockbrokers are only permitted to engage in the solicitation or sale of investments and investment related products approved by their firm. However, quite frequently, stockbrokers solicit, participate, or directly engage in the sale of typically unregistered securities or investments without the approval and outside of the auspices of their firm. These investments may take on many forms, and may include the recommendation of an outside money manager, or a hedge fund, which may sometimes turn out to be a Ponzi scheme. Sometimes these outside investments may include off-shore securities, insurance trusts, stocks or ownership interests in small businesses, startup ventures, corporate debentures, mortgage notes, private placements, promissory notes, oil & gas interests, real estate partnerships, pre-IPO shares, and a variety of other investments.
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