Large BD to Pay $35 Million for Failing to Supervise
A large broker-dealer agreed to pay nearly $35 Million to settle SEC and FINRA charges that it failed to supervise a broker that encouraged customers to borrow from an affiliated bank to purchase proprietary closed-end funds. Although the broker received compensation when his clients secured the loans, customers were prohibited from using loan proceeds to purchase securities. The SEC alleges that the broker encouraged customers to bypass this restriction by routing the loan funds through a third party bank, thereby escaping detection. The scheme ultimately came to light when the closed-end funds declined in value and customers complained about margin calls. The SEC alleges that the respondent ignored red flags including outsized loan production in the offending office.
OUR TAKE: Perhaps the bigger mistake was compensating brokers for encouraging customers to secure loans from an affiliated bank. The respondent practically encouraged its brokers to violate its own policies.