FINRA raises AML stakes for broker-dealers

FINRA announced last week that it will fine Cantor-Fitzgerald $6 million plus an additional disgorgement fee of $1.3 million. The fine applies to what FINRA describes as Cantor-Fitzgerald’s sales of unregistered microcap shares, for which the firm lacked an adequate AML program designed to flag suspicious activity in this type of trading. In addition to the company fines, a Cantor executive and the main equity trader in this matter were both suspended and were fined as individuals.

According to the FINRA press release, “Cantor Fitzgerald & Co. and Joseph Ludovico, as the broker of record, sold billions of shares of thinly traded microcap securities between March 2011 and September 2012 without adequate review and due diligence, a significant portion of which were neither registered nor exempt from registration. These violations were accompanied by a failure to implement an adequate AML program tailored to detect red flags and patterns of potentially suspicious money laundering activity related to these sales.”

Further, Jarred Kessler, the executive managing director of Equity Capital Markets of Cantor Fitzgerald during this period, “failed to respond adequately to a number of red flags indicating the firm’s existing supervisory system was insufficient to support the expansion of Cantor & Co.’s microcap liquidation business. In particular, Kessler knew that the expanding microcap business posed unique challenges and was generating an increasing number of regulatory inquiries, but nonetheless delegated his supervisory responsibilities to a central review group without taking sufficient steps to investigate the adequacy of their efforts,” according to FINRA.

Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “If a broker-dealer is looking to increase its revenues by expanding a high-risk business line, the firm and its supervisors must tailor their supervision to the risks associated with those businesses. This is especially true when the new business involves the mass liquidation of microcap securities, which presents overwhelming risks of fraud and investor harm. FINRA has no tolerance for firms and business executives who choose to engage in this business without robust systems designed to ensure that they do not become participants in illegal, unregistered distributions.”

While various AML and Compliance issues are priority items for broker-dealers, FINRA’s focus on microcap shares at Cantor-Fitzgerald is expected to be applied to other broker-dealers conducting similar business.

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