Global Arena Capital Corp., headquartered in New York, New York, was fined $1,000,000 and expelled by the Financial Industry Regulatory Authority (FINRA) per the terms of a Default Decision by the Office of Hearing Officers which contained findings that the firm charged customers unfair and unreasonable prices and excessive markups, along with failing to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with securities laws, FINRA and NASD rules, all concerning the fair pricing of corporate bond transaction markups/markdowns. Department of Market Regulation v. Global Arena Capital Corp, Disciplinary Proceeding No. 20110265443-01 (Dec. 7, 2015).
According to the Decision, Global Arena purchased and sold corporate bonds via other broker/dealers to sell to retail customers, charging them markups on the bonds. The Decision stated that the firm bought bonds from its retail customers and then sold them to other broker-dealers, charging customers markdowns. FINRA found that the transactions at issue were riskless principal transactions which involved purchases and sales of the same bonds on the same day with customers on one or both sides of the transactions.
According to FINRA NASD Rule 2440, any member who sells or buys a security to or from a customer is required to do so at a price which is fair, taking into account all relevant circumstances. FINRA considers such circumstances to include the market conditions pertaining to the security, the expense involved in executing the transaction, and the value of the member’s service to the customer based on the member’s experience and knowledge of the security, while also considering the member’s right to a profit. FINRA disallows members from charging a price that is not reasonably related to the current market price of a security or an unreasonable commission.
According to the Decision, the Department of Market Regulation reviewed trade reports and records of four hundred and ninety-five transactions and interviewed the firm’s employees to examine markups/markdowns charged, and the supervision of corporate bond transactions. FINRA found that Global Arena had charged considerably more than other brokers for the bonds in same period, while not having justification for the higher markups/markdowns that the firm had charged its customers.
In FINRA’s review, it was discovered that the firm had charged customers unfair and excessive prices in the aforementioned transactions, which ranged from 3.01% – 13.86%. The markups and markdowns were reportedly at least 33% more than the next highest charged by other members for like transactions for similar corporate bond transactions within a month or after the transaction(s) at issue. FINRA therefore found that Global Arena had violated NASD Rules 2440, IM-2440-1, IM-2440-2, and FINRA Rule 2010.
The Decision further indicated that the firm had failed to establish, maintain, and implement a supervisory system, including written supervisory procedures reasonably designed to achieve compliance with applicable rules concerning providing customers with reasonable prices. FINRA found that the firm had failed to supervise markups/markdowns that its registered representatives were charging, and their written procedures did not contain reasonable measures to guide the firm’s registered representatives to conform to pricing bonds and setting markups/markdowns per NASD IM-2440-1 requirement. FINRA found that Global Arena had violated NASD Rule 3010 and FINRA Rule 2010 in this regard.
FINRA found that in consideration of the firm’s lack of mitigating factors, the firm’s pricing violations were egregious and that expulsion of the firm was the appropriate action. In addition to the $1,000,000 fine, FINRA also ordered the firm to disgorge $333,083.26, plus interest, for charging customers unfair and unreasonable prices and excessive markups, and for supervisory failures.
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.
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