Cetera firms recently faced a $1.1 million fine from FINRA for failing to properly prevent money laundering and supervise trading activities. Anti-money laundering, or AML, means keeping an eye on money movement to stop crime and illegal acts in finance.
This topic matters because AML failures can put our investments at risk and harm the trust we place in financial markets.
Between March 2019 and August 2021, three Cetera subsidiaries—Cetera Advisors, Cetera Wealth Services, and Cetera Investment Services—made serious mistakes with monitoring low-priced securities.
We saw cases where customers sold off large amounts of over-the-counter stocks without enough checks in place. One customer alone traded 75,000 OTC shares for nearly $178,000 within only two weeks; sometimes these trades made up almost 88 percent of the daily stock volume.
Key problems also included weak controls over electronic deposits that let customers cash out before reviews finished. About 800 million shares were sold during this review period across these firms; while this was less than one-tenth of their total revenue, it still raised red flags about supervision.
The AML program missed suspicious patterns like quick fund withdrawals or coordinated trading efforts. Only five issues popped up after new daily checks began in December 2019. Supervisors also failed to watch over account reports closely enough between January 2017 and August 2021.
Now senior managers must prove they have fixed all major gaps by creating strong supervisory programs within six months. Our look into this case will help us see why solid controls matter so much for investors like us.
Stay with us as we break down what went wrong and what comes next for Cetera’s future—and ours as investors too.
Key Takeaways
Table of Contents
- FINRA fined Cetera firms $1.1 million for problems in their anti-money laundering (AML) controls and supervision from March 2019 to August 2021.
- Cetera let customers sell about 800 million shares of low-priced securities, with one client selling $178,000 worth in just two weeks. Most activity went unchecked due to poor oversight.
- The firms failed to spot or report suspicious trades, mostly missing red flags linked to market abuse and fraud risks in electronic deposits of low-priced stocks.
- Senior management at each firm must now certify within 180 days that they have fixed all issues as part of the settlement.
- Cetera accepted the sanctions without admitting or denying FINRA’s findings and claims it has since improved its compliance programs.
The FINRA Sanctions
The FINRA sanctions hit Cetera firms with a hefty fine. These penalties stem from serious lapses in their anti-money laundering and supervision practices.
Fines Imposed on Cetera Firms
Let’s break down the fines imposed on Cetera firms. Here are the key facts you need to know:
| Entity | Fine Amount | Reason for Fine | Time Period |
|---|---|---|---|
| Cetera Advisors | Part of $1.1 million total | Deficiencies in AML controls and supervision | March 2019 to August 2021 |
| Cetera Wealth Services | Part of $1.1 million total | Deficiencies in AML controls and supervision | March 2019 to August 2021 |
| Cetera Investment Services | Part of $1.1 million total | Deficiencies in AML controls and supervision | March 2019 to August 2021 |
| All Three Entities | $1.1 million (combined) | Failures in supervisory systems and anti-money laundering programs | March 2019 to August 2021 |
| Each firm accepted the sanctions without admitting or denying FINRA’s findings. | |||
| Senior management must certify in writing that corrective actions are complete within 180 days. | |||
Deficiencies in AML Controls and Supervisory Practices
After discussing the fines imposed on Cetera firms, we need to look at why these penalties happened. We saw big gaps in their anti-money laundering controls and supervisory practices.
The Cetera firms did not set up effective procedures for handling low-priced securities. Their systems and written guidelines failed to meet the requirements of Section 5 of the Securities Act of 1933.
Our review found that they did not properly check if shares were restricted or exempt from registration rules.
Cetera made representatives fill out questionnaires for certificate-form deposits, but ignored electronic deposits. This loophole let some customers sell shares and take out money before a full transaction review took place.
These lapses hurt compliance with key regulations over transactions and supervision. A spokesperson from Cetera said these issues relate to older processes; however, improvements have been put in place since then.
Weaknesses like this show why regulators stress stronger controls, regular assessments, and updates to firm procedures.
Investigation Findings
The investigation revealed that Cetera firms struggled with the supervision of low-priced securities. They also failed to provide adequate customer reporting, which raised significant concerns.
Ineffective Supervision of Low-Priced Securities
From March 2019 to August 2021, our firms failed to provide enough oversight on low-priced securities. We let customers sell about 800 million shares of these risky investments during that time.
One customer at Cetera Wealth Services deposited 75,000 over-the-counter shares and sold them for roughly $178,000 in just two weeks. That same customer made up as much as 88 percent of the daily trading volume for this stock.
This type of trading should have raised several red flags for fraud or market manipulation risks, especially since the customer took part in a promotion campaign. Our lack of proper regulation and surveillance left us exposed to compliance failures and potential misconduct.
These issues tie closely with how we reported customer activity overall, which came under further review by regulators.
Inadequate Customer Reporting
Cetera Firms failed to ensure proper reporting standards for their customers. Their procedures did not mandate representatives to fill out questionnaires for electronically deposited low-priced securities.
This oversight allowed customers to sell and withdraw proceeds without adequate reviews.
The lack of effective internal controls over electronic deposits led to these deficiencies. Customers could act without the necessary due diligence from us as a firm. This situation highlights serious gaps in our transaction monitoring efforts, emphasizing the need for better risk management practices going forward.
We now turn our attention to AML program failures that further complicated these issues.
AML Program Failures
Cetera firms struggled with spotting and reporting suspicious transactions. Their risk-based procedures for monitoring fell short and failed to meet required standards.
Lack of Detection and Reporting of Suspicious Transactions
Our review period revealed a significant failure in the AML program. It did not detect or report suspicious transactions involving low-priced securities. The firms lacked proper policies to monitor activities, such as concentrated trading and quick withdrawals.
Despite implementing daily reviews starting in December 2019, they only flagged five suspicious activity red flags. No additional monitoring guidance accompanied these findings, leaving gaps in their fraud detection efforts.
This lack of oversight raises serious concerns about compliance and customer protection within the financial system.
Insufficient Risk-Based Procedures for Monitoring and Reporting
FINRA found that Cetera firms lacked sufficient risk-based procedures for monitoring and reporting suspicious transactions. This gap in their AML compliance program significantly hampered their ability to detect unusual activities, especially involving low-priced securities.
Without these necessary measures, the firms struggled to identify red flags and report them effectively.
We see how vital proper monitoring is for protecting against financial crimes. Effective transaction analysis requires a strong internal control framework. The absence of adequate due diligence makes it difficult for firms to comply with regulatory requirements and maintain investor trust.
These deficiencies highlight a critical need for improvement in risk management practices across the industry.
Additional Findings Against Cetera Advisors
Cetera Advisors faced serious issues with their handling of consolidated account reports. They failed to establish an effective supervisory framework, which raised red flags for compliance.
Handling of Consolidated Account Reports
Cetera Advisors enabled representatives to create consolidated account reports from January 2017 to August 2021. They used various tools for this process, allowing both firm-held and external assets to combine in one report.
These proprietary planning tools facilitated data aggregation along with manual entry. Reports became accessible to clients, but oversight fell short.
We noticed serious compliance issues with these practices. The lack of a proper supervisory framework contributed to the ineffective handling of important client data. This created potential risks for investors relying on accurate and reliable financial reporting.
Lack of Proper Supervisory Framework
We transition from the handling of consolidated account reports to a significant issue. Cetera Advisors did not implement a proper supervisory framework during the review period. Supervisors had no requirement to verify compliance with procedures for manually entered data.
This gap allowed errors and inconsistencies to go unchecked.
The firm initially missed using its proprietary planning tool for generating consolidated reports. Without effective oversight, we face challenges in data integrity and accountability.
Proper supervision is essential for monitoring our practices and ensuring accuracy in reporting each step of the way.
Enforcement Actions and Requirements
Cetera Firms must now certify their compliance measures in response to the recent fines. The firms have accepted the sanctions and face increased scrutiny moving forward.
Required Certification by Senior Management
Senior management at each broker-dealer must certify in writing. They have 180 days to prove that they addressed all identified issues. This certification confirms that compliant supervisory and AML programs are now in place.
We rely on this accountability to ensure better governance and oversight of our investments. Proper certification shows a commitment to compliance, which is crucial in maintaining trust with investors like us.
It highlights the importance of strong management practices within these firms, reinforcing their responsibility toward effective enforcement actions.
Acceptance of Sanctions by the Firms
The required certification by senior management leads us to consider how the firms have accepted their sanctions. Cetera Firms agreed to a joint fine of $1.1 million imposed by FINRA.
They made this decision without admitting or denying the findings. A spokesperson for Cetera highlighted the firm’s dedication to regulatory compliance and continuous improvements in compliance controls.
Since these issues arose, Cetera has worked hard to enhance its compliance programs. The firm takes accountability seriously and has already implemented remediation measures aimed at preventing future lapses.
We can see that they are committed to strengthening governance and oversight as part of their response.
Conclusion
Cetera firms recently faced a steep fine of $1.1 million for lapses in AML and supervision. We learned that systemic failures, particularly in low-priced securities, significantly contributed to this outcome.
Proper oversight is essential for compliance with regulatory practices; otherwise, firms risk serious penalties. It’s vital that we reflect on our own practices as investors and ensure our brokers maintain robust AML programs.
Adopting these insights can lead to better financial safety and trust within the industry; let’s stay informed and proactive together!
