FINRA levied a combined $1.2 million fine against Securities America and Triad Advisors on Wednesday, saying the firms' lax supervision led to some advisors sending inaccurate or misleading investment summaries to customers.
Securities America received a $625,000 fine for its consolidated reporting violations, while Triad Advisors received a $650,000 fine. FINRA also ordered Triad to pay an additional $375,000 in restitution. Both firms are owned by Ladenburg Thalmann Financial Services Inc.
Over the years, both firms allowed their advisors to use consolidated reporting software that gave users the ability to manually enter information, an ability the two firms failed to properly monitor. This lack of supervision of these reports led to clients receiving unintentionally and, in some cases, intentionally false or inaccurate information, FINRA says.
"Absent proper supervision, consolidated reports can be used by unscrupulous representatives to conceal fraud and theft," said Brad Bennett, FINRA executive vice president and chief of enforcement, in a statement. He also noted that it was up to firms to ensure that consolidated reports sent to customers are clear and accurate, not misleading.
In the case of Securities America, the firm allowed at least 1,150 advisors to use the Albridge Wealth Reporting System starting in January 2007, according to FINRA. But while the firm had a reporting and review process in place for these reports, it relied upon the advisors disclosing they were using Albridge and relied upon the broker to provide complete and accurate list each quarter of clients who received the reports.
Securities America became aware of the manual entries and instituted additional procedures in 2012, but the policies were still deficient, FINRA says. The regulator found inaccurate reports slipped through up to March 2013, including reports from hundreds of advisors that provided inaccurate values for investments such as Medical Capital notes and Provident Shale Royalties.
"Securities America and Triad have worked diligently to enhance supervision and books and records requirements for performance reports," representatives for the firms said in a joint statement. "This is an industry-wide issue that requires a significant investment, and we have worked with the most widely used performance report vendors to enhance their systems to help broker/dealers and advisors meet these requirements."
Like Securities America, Triad also provided their advisors with tools to create customized, consolidated reports on most or all of a customer's financial holdings. But according to FINRA, Triad at first did not realize the software allowed the 240 advisors using the Investigo system to manually input account information.
In September 2010 Triad realized the manual capabilities on the Investigo platform and instituted monitoring polices, but failed to adequately supervise manually entered information on other systems.
Because Triad failed to put proper supervision procedures in place, FINRA claims at least two former Triad advisors provided clients with inaccurate reports that contained false assets. One former advisor sold his clients fraudulent promissory notes, while another stole $100,000 from a client—a crime that went undetected for years because the advisor provided multiple consolidated reports false asset information, FINRA alleges. Triad already paid restitution to some of the affected customers, but in Wednesday’s settlement, FINRA ordered the firm to pay $375,000 to the remaining clients impacted.
Additionally, FINRA claimed that Triad failed to maintain proper net capital requirements in November and December of 2009. The firm also did not keep accurate calculations in regards to its net capital from January 2008 through June 2010.
Triad Advisors and Securities America neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
