CSG Law Alert: FINRA Sanctions Broker-Dealers for Failing to Supervise “Direct Business Transactions”

Earlier this week, FINRA Enforcement fined a broker-dealer $500,000 for failing to adequately supervise “direct business transactions.” Notably, this is the second action FINRA has issued in recent months charging a firm with failing to supervise direct business transactions.

What are “direct business transactions?” According to FINRA, direct business transactions refer to trades made by a firm’s representatives directly with product sponsors, such as mutual fund issuers. In both recent settlements, FINRA alleged that the firms did not take steps to ensure that their representatives consistently reported these transactions to the firm so that they could be captured on the firms’ trade blotters. Because the trades did not appear on the firms’ trade blotters, they were not subject to firm surveillances designed to identify potentially unsuitable transactions. As a result, FINRA alleged that the firms failed to review for suitability approximately 490,000 and 830,000 direct business trades, respectively. FINRA also required the latter firm to pay more than $500,000 in restitution to customers.

These are novel cases for FINRA and may be a harbinger of similar enforcement actions to come. Broker-dealers that permit representatives to place trades directly with product sponsors should review their systems and procedures to make certain that they are capturing, and supervising, these transactions.

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