Nickel-and-dime Trading Violations Yield Big Fine for Small Firm
A small Florida broker-dealer whose former chief executive and head trader worked out a scheme to game a fee agreement it made with a registered investment advisory firm, has agreed to a regulatory fine of $100,000 after paying the RIA’s customers more than $117,000 in restitution.
BAC Florida Investments Corp., a unit of BAC Florida Bank in Coral Gables, signed a letter of acceptance, waiver and consent accepted by the Financial Industry Regulatory Authority on Wednesday agreeing to a censure and fine for violating best-execution, trade reporting, supervisory and just and equitable principles of trading rules.
The agreement highlights the complexities for retail investors of understanding fixed-income markups and markdowns, even when their investment managers do their best to control trading costs.
BAC Florida Investments had contracted with the unnamed RIA firm in July 2013 to charge its customers no more than 15 basis points on fixed-income securities bought or sold for its customers, according to the settlement letter, which BAC Florida signed without admitting or denying the findings.
To jack up the underlying cost of the trade, and thus circumvent the markup/markdown limitation, former BAC Florida Investments Chief Executive and head trader Alejandro Falla bought and sold fixed-income securities transacted in the open market at better prices than those that he billed the RIA’s customers, according to Finra investigators. He tried to cover his tracks by using a third-party firm that pre-agreed to buy or sell the securities from him at the inferior prices so he could report the doctored prices. He compensated that firm by reversing the trades at slightly better prices shortly after completing the transactions with the RIA.
For example, in October 2013 Falla—who was subject to a separate Finra disciplinary action in December 2016—bought 500 securities in the open market at a price of $99.95 after the RIA said “it would be nice to buy [them] at 100,” bought the same amount from the third-party firm at $100.125 and billed RIA customers at the higher price plus a 15 basis-point markup, according to the FINRA settlement order.
In total, the firm and Falla generated $99,543.21 in fees above the 15-basis-point limit they had negotiated with the RIA through 61 pre-arranged transactions in the space of a year, Finra said.
Before Finra finished its investigations, BAC Florida Investments repaid $117,123.35 in commissions and interest to the 18 customers who were overcharged, according to the Finra letter. It also hired an independent consultant to identify weaknesses in its supervisory procedures related to bond trading, and now prohibits its chief compliance officer from serving in that role for the firm and its affiliated bank, the Finra settlement letter says.
BAC Florida, a registered Finra firm for almost 31 years, fired Falla in September 2014 and has also terminated its former chief compliance officer, Jose Luis Leon, who had been with the firm for 29 years, according to his BrokerCheck report.
Falla was indefinitely barred by Finra in February 2017 for failing to disclose that he used “non-market foreign exchange rates in connection with a series of bond swap transaction in retail customer accounts,” according to his BrokerCheck history.
Leon, in a separate consent letter that Finra accepted on Wednesday, agreed to a $10,000 fine and a six-month suspension from working with a Finra member in any capacity.
Genemarie Eguilior, who replaced Leon as chief compliance officer in 2014, said BAC Florida Investments has no comment beyond the consent letter that it signed. She declined to identify the registered investment advisor that had negotiated the 15-basis-point commission agreement.
BAC Florida Investments, which continues to operate under new CEO and President Ralph Tipple, is unrelated to Bank of America (whose ticker symbol is BAC). It had no previous history of regulatory actions, according to the Finra letter and to its BrokerCheck report.