FINRA penalized three Cetera entities with a fine of $1.1 million and a censure after identifying systemic deficiencies in their anti-money laundering protocols and oversight of low-priced securities. The regulatory body determined that from March 2019 through August 2021, the Cetera Firms operated a compliance program that was not reasonably designed to detect or report suspicious transactions. These significant lapses permitted customers to liquidate hundreds of millions of shares while the firms neglected to investigate obvious red flags of potential market manipulation and illicit financial activity. This enforcement action highlights a broader failure to supervise electronic deposits and maintain accurate records of consolidated financial reports.
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Weaknesses in Anti-Money Laundering Controls for Low-Priced Securities
The regulatory investigation revealed that Cetera Advisors, Cetera Wealth Services, and Cetera Investment Services failed to implement a written anti-money laundering program capable of monitoring the specific risks associated with their business model. Although the firms processed approximately 800 million shares of low-priced securities during the relevant period, their internal policies did not provide adequate guidance on identifying suspicious patterns. For a significant duration, the firms conducted monthly reviews of deposits but neglected to scrutinize those transactions for potential money laundering or market abuse. Even after implementing daily report reviews in late 2019, the systems provided only basic data that lacked historical context, making it nearly impossible to identify coordinated trading or long-term layering schemes.
The firms specifically failed to incorporate established red flags identified by regulators into their automated or manual surveillance systems. This omission meant that the firms were not effectively looking for customers who deposited large blocks of thinly traded stocks only to liquidate them immediately and wire the proceeds out of the account. Because the anti-money laundering compliance program lacked risk-based procedures for ongoing monitoring, once an initial deposit was reviewed, subsequent liquidations and fund transfers often went entirely unmonitored. This procedural gap created a fertile environment for potential pump and dump schemes and other forms of securities-driven money laundering.
Failure to Investigate Suspicious Penny Stock Activity and Red Flags
A critical component of the regulatory findings involved the firms’ repeated failure to act upon obvious indicators of illicit activity. In one instance, three seemingly unrelated customers opened accounts at the same time and collectively deposited over 100 million shares of a single over-the-counter issuer. Despite these accounts representing up to 88 percent of the daily market volume for that security, the firm did not conduct a reasonable investigation into the suspicious coordination. One customer even participated in a promotional campaign for the issuer and sold millions of shares the following day, which is a classic signal of potential market manipulation often linked to money laundering operations.
Furthermore, the firms’ reliance on third parties and clearing firms proved insufficient for meeting their own regulatory obligations. Many low-priced securities were deposited electronically, yet the firms did not require representatives to complete detailed questionnaires for these digital transfers until April 2021. This allowed customers to move assets through the financial system and exit their positions before any meaningful due diligence could be performed. The lack of a searching inquiry into why shares were not restricted or who the ultimate beneficial owners were meant that the firms effectively facilitated the distribution of unregistered securities without verifying if legal exemptions applied.
Supervisory Gaps in Consolidated Report Retention and Accuracy
Beyond the direct anti-money laundering violations, Cetera Advisors demonstrated a profound failure in supervising the creation and dissemination of consolidated financial reports. These reports, which aggregate a client’s total holdings, including assets held outside the firm, were often created manually or through third-party platforms without any oversight. The firm’s procedures required representatives to verify manually entered data, but supervisors were not required to check if those verifications actually occurred. This lack of internal control resulted in at least one instance where a representative provided customers with inaccurate valuations of their holdings, which remained undetected by the firm for over a year.
The record-keeping failures were equally extensive, as the firm failed to preserve tens of thousands of these reports in its official books and records. Because many reports were shared via web-based portals or direct emails from third-party systems, the firm had no mechanism to track who received them or what information was being communicated. This transparency void not only violated exchange act rules regarding communication retention but also hindered the ability of compliance teams to identify fraudulent activity or misleading statements made to investors. The inability to quantify the volume of disseminated reports underscored a systemic breakdown in the firm’s technological and administrative supervision.
Remediation and Future Compliance Obligations for the Cetera Entities
The settlement with the Financial Industry Regulatory Authority requires more than just a monetary penalty, as it mandates a comprehensive overhaul of the firms’ internal controls. Under the terms of the agreement, a senior officer from each firm must certify in writing that they have remediated the specific issues related to penny stock supervision and anti-money laundering monitoring. This undertaking ensures that the firms develop and implement a written program that is not only compliant with federal law but also tailored to the actual risks presented by their customer base. The firms must now prove that their systems can effectively flag coordinated trading and the rapid movement of funds that typically characterize money laundering.
By accepting the censure and the $1.1 million fine, the Cetera entities acknowledge the necessity of rigorous oversight in the broker-dealer space. The case serves as a warning to the broader financial industry that manual processes and a lack of historical data analysis are insufficient for modern regulatory expectations. Moving forward, the firms are expected to maintain more transparent records of consolidated reports and ensure that all electronic deposits of high-risk securities undergo the same level of scrutiny as physical certificates. The focus remains on preventing the financial system from being used as a conduit for the distribution of unregistered or illicitly obtained assets.
Key Points
- FINRA fined the Cetera Firms $1.1 million and issued a censure for failing to maintain a reasonable anti-money laundering program between 2019 and 2021.
- The firms allowed the liquidation of 800 million shares of low-priced securities while ignoring red flags such as coordinated trading and immediate fund withdrawals.
- Cetera Advisors failed to supervise or retain tens of thousands of consolidated financial reports, leading to the potential for inaccurate asset valuations.
- Regulatory findings highlighted a lack of risk-based procedures for monitoring electronic deposits of penny stocks and the absence of historical data in trade reviews.
Related Links
- FINRA Rule 3310 Anti-Money Laundering Compliance Program Requirements
- SEC Investor Bulletin on Microcap Stock Risks and Money Laundering
- FATF Guidance for a Risk-Based Approach for the Securities Sector
- FINRA Regulatory Notice 19-18 on Suspicious Activity Monitoring
Other FinCrime Central Articles About FINRA’s Latest Penalties
- FINRA Hits Osaic Institutions with $650000 Fine for Reporting Failures
- FINRA Fines Mundial Financial Group $100,000 for AML Program Failures
- Intesa Sanpaolo faces 125k FINRA fine for critical TRACE errors
- FINRA Fines BMO Capital Markets $300k Over Late Reporting Failures
Source: FINRA
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