A broker-dealer agreed to pay $125,000 to settle FINRA charges for sending false asset valuations to customers in their consolidated reports. A "consolidated report" combines information about a customer's assets that are held at entities other than the SEC-registered broker-dealer.
According to FINRA, U.S. Boston Capital Corporation ("USB") sent over 100 erroneous consolidated reports to customers from 2015 to 2017. FINRA found that the reports were prepared by a former administrative employee whose work was unsupervised. The reports were then sent to customers by registered representatives without supervisory review. FINRA alleged that there were numerous issues including: (i) failing to include certain asset values, (ii) not updating other values, (iii) data entry mistakes and (iv) manual calculation errors. Further, FINRA determined that USB failed to establish, maintain and enforce a supervisory system and written supervisory procedures to ensure that the creation and use of consolidated reports adhered to applicable law.
Commentary / Steven Lofchie
The rules governing the transmission of "consolidated statements" (more commonly referred to as "hearsay statements") are clear: (i) a broker-dealer must send a statement as to the customer's assets held at the broker-dealer and (ii) a broker-dealer also may send a hearsay statement showing assets held away from the broker-dealer, provided that there is a clear delineation between the broker-dealer statement and the hearsay statement.
The enforcement action raises another issue that a broker-dealer may wish to consider: how confident is the broker-dealer that the asset values provided on the hearsay statement are, in fact, reasonable? Notwithstanding the existence of a disclaimer on a hearsay statement to the effect that asset values provided by other entities are not the responsibility of the broker-dealer, it is prudent to confirm that the other entities providing valuations are doing so in compliance with sound procedures.
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