Poor Planning Leads to Charges For Facilitating Trades For Unregistered Firm

Dealing with an unregistered broker-dealer is sometimes a problem for investors, and one that is easily avoided, simply by checking FINRA's website if the firm is not known. Dealing with an unregistered broker-dealer is less of a problem for broker-dealers, but when it happens, the penalties can be significant.

In a recent SEC case, a broker-dealer agreed to pay $850,000 to settle charges that it agreed to agreed to serve as the broker-dealer of record in name only for approximately 100 trades in asset-backed securities that were actually introduced by the unregistered firm.

According to the press release, while five of the unregistered firm's employees were registered with the BD but they performed their work in the offices of the unregistered firm, which retained sole authority over their trading decisions and determined their compensation. The BD had no involvement in the trading or compensation decisions while the registered representatives executed the trades through its systems on behalf of the unregistered firm. The BD did all of this for 15 percent of the compensation generated by these trades and sent the remaining balance to the unregistered firm.

This sort of arrangements raises a host of compliance and registration issues, which were exasperated by the fact that the BD did not perform routine supervisory functions over the 5 reps. It did not preserve communications with them and did not insure that the unregistered firm performed such recordkeeping duties either. According to the SEC, due in part to the lack of recordkeeping, one of the registered representatives was able to conceal two trades.

While I was not involved in the underlying case, I have assisted firms in entering into agreements which accomplish the same goals, which are legal and compliant. Once again, hiring a securities attorney to assist in non-traditional transactions might have some upfront costs, but it is certainly better than paying back all of your profits, plus hundreds of thousands of dollars in interest and penalties.

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.