Finra actions highlight focus on individuals, compliance challenges at smaller firms

In the past two months, the chief self-regulatory body of the nation’s securities’ sector has been increasingly going after individuals, in particular those with oversight of financial crime compliance programs, according to an analysis of penalty documents.

The Financial Industry Regulatory Authority (Finra), in its last two disciplinary reports covering September and October, has sanctioned five firms and nearly a dozen individuals for anti-money laundering (AML) and other supervisory failures, of which six of those individuals were the designated chief or financial crime compliance officer.

The recent actions by Finra follow a trend gaining momentum in the past few years of federal and state regulators responsible for examining financial institutions – including banks, money services business, casinos and other entities subject to AML rules – going more aggressively after individuals in the case of egregious compliance failures and related monetary penalties.

In the most high-profile case in August, Finra fined firm Aegis Capital $950,000 for sales of unregistered penny stocks and AML violations, including Charles Smulevitz and Kevin McKenna, who served successively as chief compliance and AML compliance officers at the time of the violations, and agreed to 30- and 60-day principal suspensions, and fines of $5,000 and $10,000, respectively.

“Personal liability is the thing everyone is concerned about,” said Chris Focacci, the Chief Information Officer, at New Jersey-based TransparINT, a compliance technology firm, and a former compliance officer at several large domestic and international banks.

Broadly, at a large bank, the bulk of compliance staffers don’t “have anything to worry about” if they are doing their best and make relatively minor mistakes, he said, noting that regulators and investigators are looking more for individuals at a “very senior level who are doing something egregiously wrong.”

But that dynamic can change for a chief or AML compliance person at a smaller bank or securities firm who is doing compliance while also juggling other duties and responsibilities, Focacci said.

“The bigger the institution, the more siloed the AML function is,” he said. “At a big bank, there is literally such a small division of labor that potentially name screening could be your only job. But the smaller the institution, the more responsibility each compliance person has and the more things they have to do,” making it harder to focus just on, say, improving financial crime detection and prevention procedures.

As well, in the case of Aegis, Finra found that the firm, as well as Smulevitz and McKenna, as the firm’s AML compliance officers, “did not adequately implement the firm’s AML program, as they failed to reasonably detect and investigate red flags indicative of potentially suspicious transactions.”

Specifically, the firm did not investigate the deposits of unregistered securities, followed shortly thereafter by liquidations.

These sometimes occurred at the same time periods of suspicious promotional activity were undertaken and amounted to large percentages of the daily trading volume, and transfers of the resulting proceeds out of the accounts shortly after the liquidations, according to Finra.

“These failures evidenced the firm’s inadequate system to detect, investigate and, where appropriate, report suspicious activity to the Financial Crimes Enforcement Network,” the regulator stated.

“Firms who open their doors to penny stock liquidators must have robust systems and procedures to ensure strict adherence to the registration and AML rules given the significant risk of investor fraud and market manipulation,” said Brad Bennett, Finra’s executive vice president and chief of enforcement.

“The compliance officers sanctioned in this case were directly responsible for supervising sales of restricted securities but failed to conduct a meaningful inquiry in the presence of significant red flags indicating the sales could be illicit distributions of unregistered stocks.”


Other Finra actions against compliance officers include:

Dominick Anthony Del Duca: Was suspended from association with any FINRA member in any principal capacity for 75 days.

Without admitting or denying the findings, Del Duca consented to the sanction and to the entry of findings that while serving as his member firm’s AML compliance officer (AMLCO) and CCO, he failed to establish and implement a supervisory system, including written procedures, tailored to the firm’s primary business line of extending direct market access (DMA) to domestic and foreign active-traders, including foreign financial institutions.

The findings stated that the firm’s measures were not reasonably designed to identify suspicious or potentially manipulative trading activity. In particular, the reliance on a manual real-time review by a principal to detect suspicious activity was entirely unreasonable given the number and frequency of DMA customer orders processed daily.

The findings also stated that Del Duca, as AMLCO, was responsible for implementing and enforcing his firm’s AML compliance program procedure but failed to ensure that the required periodic reviews were conducted.


J.H. Darbie & Co., Inc. and Wolf A. Popper, Inc.: Was censured; fined $230,000, $10,000 of which is joint and several with Popper; and is required to comply with undertakings in the order.

The findings also stated that both firms failed to develop and implement an anti-money laundering (AML) program reasonably designed to achieve compliance with the Bank Secrecy Act and its implementing regulations to detect and cause the reporting of suspicious transactions.

Popper’s AML program was not reasonably tailored to the risks posed by the penny stock liquidation business and failed to adequately scrutinize customer accounts, account relationships, the customer’s expected activity, the low-priced securities, share amounts, share volumes, promotional activity and liquidation patterns for suspicious activity.

As a consequence of its deficient AML system, Popper failed to appropriately identify, investigate or respond to the red flags, and consider whether or not to report the activity as suspicious.

Moreover, Popper failed to maintain evidence that account activity was being monitored for potentially suspicious activity. The findings also included that Darbie and Popper failed to conduct independent AML tests. Additionally, Darbie’s AML tests were inadequate as they failed to address its low-priced security deposit and liquidation business.


Robert Rabinowitz: Was fined $15,000 and suspended from association with any FINRA member in any principal capacity for 30 days. Without admitting or denying the findings, Rabinowitz consented to the sanctions and to the entry of findings that as his member firm’s AML compliance officer, he failed to establish and implement a reasonably designed AML program at the firm.

The findings stated that Rabinowitz failed to detect, investigate and respond appropriately to various red flags that suggested potentially suspicious activity associated with customer liquidations of low-priced securities that might have required the filing of a suspicious activity report.

Rabinowitz gathered information about certain stock deposits and separately reviewed daily or monthly commission runs or daily trade blotters, but did not monitor appropriately for patterns of suspicious trading. Rabinowitz failed to evidence reviews that may have been conducted to investigate red flags indicative of potentially suspicious trading activity in customer accounts.


Particularly, there can be issues when “you are just one compliance guy and you wear more hats,” Focacci said, adding that can happen at smaller operations such as regional banks, credit unions and other entities subject to AML rules, like securities and trading firms.

That can result in situations like the ones Finra is pointing out, where the core components of the four-pronged compliance program have been out for years, but some firms are still unable to create any semblance of a program or hire individuals with the requisite experience, he said.

The compliance infractions Finra examiners are noting are “really basic things, the low hanging fruit,” Focacci said, such as properly identifying the more obvious red flags of fraud, including those around penny stocks, the proper degree of due diligence or even identifying and classifying higher risk customers.

“These are blatant missteps that in this day and age, you just have to get those things done” regardless of the size of the operation, he said.