Stifel, Nicolaus & Co. Inc. has agreed to pay $40,000 to settle charges that it violated a municipal securities rule after the Financial Industry Regulatory Authority found it did not have a supervisory system reasonably designed to identify and prevent prohibited pre-arranged transactions.
The firm agreed this week to pay the fine and be censured while neither admitting nor denying FINRA’s finding that it violated Municipal Securities Rulemaking Board Rule G-27 on supervision.
From Oct. 31, 2017 through Feb. 27, 2020, Stifel did not have a supervisory system, including written supervisory procedures, reasonably designed to detect and prevent its broker-dealers from executing pre-arranged transactions, FINRA found. During that time, Stifel did not allow its broker-dealers to execute pre-arranged transactions.
“While Stifel prohibited pre-arranged transactions, it did not have a supervisory system, including WSPs, that was reasonably designed to ensure that Stifel prevented its registered representatives from executing such transactions during the review period,” FINRA wrote.
Stifel did not have exception reports, trade alerts, or other ways to find potential pre-arranged transactions. Instead, the firm relied on its supervisors to detect and prevent those transactions as part of their daily review of thousands of transactions, according to FINRA.
“Though Stifel's automated reviews of its trade blotters flagged some types of prohibited transactions for supervisory review, they did not flag pre-arranged transactions,” FINRA determined. “Therefore, Stifel's supervisory system was not reasonably designed.”
In those three years, a former Stifel registered representative effected 56 pairs of pre-arranged transactions in municipal securities between the accounts of Stifel’s customers by trading with another broker-dealer. Those transactions were done similarly, where Stifel would sell the municipal bonds as agent on behalf of one of Stifel’s customers to another broker-dealer and then buy the same bonds back on the same day from the same broker-dealer as agent on behalf of another Stifel customer, FINRA said.
“Since Stifel's automated trade/account review system did not include exception reports or trade alerts designed to detect pre-arranged transactions, none of these transactions were flagged for further review and action by a branch manager,” FINRA said.
Stifel declined to comment. The firm is headquartered in St. Louis and has 4,950 registered representatives and 430 branch offices throughout the country.
