The US’ Financial Industry Regulatory Authority (FINRA) announced today that it has fined two companies – Morgan Stanley Smith Barney (Morgan Stanley) and Scottrade – a total of $950,000 for failing to implement adequate supervisory systems.
The fines stem from warnings dating back to 2011 when FINRA alerted the companies to “significant gaps in their systems”, noting that their monitoring of the transmittal of customer funds to third parties was sub-standard.
Firms must have robust supervisory systems to monitor and protect the movement of customer funds.
As such, the US financial watchdog declared that Morgan Stanley and Scotttrade will receive penalties of $650,000 and $300,000 respectively. According to the press release, both companies “failed to implement reasonable supervisory systems and procedures” to monitor for wires from multiple customer accounts to, in some cases the same, third-party accounts.
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In the case of Morgan Stanley, three registered representatives were able to fraudulently transfer customer funds to their own personal bank accounts or other self-interested receivers. While Scottrade was found not to have obtained appropriate confirmations for executing third-party wire transfers. Consequently, “the firm processed over 17,000 third-party wire transfers totaling more than $880 million” since 2011.
FINRA’s Brad Bennett, Executive Vice President and Chief of Enforcement, stated that “Firms must have robust supervisory systems to monitor and protect the movement of customer funds”.
The fines represent increased expectations on firms to share the regulatory burden.
The relatively modest sums buck the trend of larger and fewer fines on behalf of regulators – FINRA’s average financial penalty having risen 146% from 2013 to 2014. Indeed, the tendency has been to focus on complex, high-profile cases and leverage massive penalties.
However, the fines do represent increased expectations on firms to share the regulatory burden through the implementation of advanced, centralised monitoring systems. Indeed, across the Atlantic, the European Securities and Markets Authority (ESMA) has passed legislation that will raise reporting requirements from January 2017 and compel firms to snuff out market abuse by monitoring all orders, trades and e-communications across all five asset classes from July 2016.