Cetera Fined $1.1 Million Over Supervisory and AML Deficiencies
From the desk of Jim Eccleston at Eccleston Law
The Financial Industry Regulatory Authority (FINRA) has censured and fined Cetera Financial Group $1.1 million after identifying supervisory system and anti-money laundering (AML) failures across several subsidiary broker-dealers, according to a settlement letter reviewed by AdvisorHub.
According to AdvisorHub, FINRA found that from March 2019 through August 2021, three Cetera subsidiaries—Cetera Advisors, Cetera Wealth Services, and Cetera Investment Services—failed to detect, investigate, and report suspicious trading activity involving millions of shares of low-priced securities. FINRA concluded that the firms ignored warning signs commonly associated with potential market manipulation.
FINRA determined that the firms failed to respond appropriately when customer trading represented a substantial portion of a stock’s daily volume. AdvisorHub reports that the regulator also found that the firms overlooked situations where customers acted as promoters for issuers or where customers with minimal account assets deposited significant quantities of penny stocks.
AdvisorHub reports that the settlement cited specific examples of supervisory failures. In 2019, Cetera Advisors failed to identify suspicious activity when three customers, who appeared unrelated, deposited and rapidly liquidated more than 100 million shares of an over-the-counter security in a manner that suggested manipulative trading. In another instance, FINRA found that in 2020, a Cetera Wealth Services customer deposited 75,000 shares of a low-priced security and sold the shares within two weeks, despite acknowledging promotional involvement with the issuer. According to FINRA, the firm did not initiate a review until its clearing firm raised concerns.
According to AdvisorHub, FINRA stated that Cetera customers sold approximately 800 million shares of penny stocks during the two-year review period. According to the regulator, these transactions generated roughly ten percent of each firm’s overall revenue.
FINRA concluded that the firms violated FINRA Rule 3110, which requires broker-dealers to establish supervisory systems reasonably designed to achieve compliance with securities laws and regulations. FINRA also found violations of Rule 2010, which requires firms to maintain high standards of commercial honor and just and equitable principles of trade.
The regulator identified additional supervisory failures involving consolidated financial reports, according to AdvisorHub. FINRA found that from 2017 through 2021, Cetera Advisors failed to reasonably supervise the preparation and distribution of customer performance reports and failed to preserve tens of thousands of those reports, violating books-and-records obligations. FINRA stated that brokers included assets held away from the firm in consolidated reports and manually entered asset values without verifying their accuracy or fairness.
AdvisorHub reports that Cetera Advisors updated its supervisory systems and written supervisory procedures in 2021 to address deficiencies related to consolidated reporting, according to the settlement.
Cetera Financial Group, which oversees approximately 11,400 advisors across four broker-dealer subsidiaries, accepted FINRA’s findings without admitting or denying its findings. The firms also agreed to remediate supervisory deficiencies and implement compliant written AML programs within 180 days.
In a statement reported by AdvisorHub, a Cetera spokesperson said the firm had already addressed the identified issues and strengthened its compliance and supervisory controls. The spokesperson added that the firm remains committed to supporting advisors and protecting clients while meeting regulatory obligations.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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