SEC/FINRA Officially Issues Warning on Unregistered Broker Dealers

This says it all. So much for firms like Cy Group, Paramount and Epiphany. This says if you have a Master Account and Sub-Accounts you need to treat the sub-accounts like individual customer accounts (and follow $25k PDT and 4-1). Unless of course you are a Registered Broker Dealer.

I told everyone this was coming. I would not have any money at any firm that isn't registered.

http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p121247.pdf

 

Are you tryin to screw everyone? To hell with the Sec

 

You might want to re-read that reg. I don't think it states what you think it does. It imposes obligations on FINRA BD's, not on the private-equity firms/funds/LLCs, etc., that use them. The latter, I'm guessing (not a lawyer!), probably still have leeway to organize their own operations and relationships with no obligation to be transparent (to their BDs or anyone else) about them.

 

Indirectly it would impose restrictions on the equity firms / funds / LLCs as this article is stating the responsibility falls on the broker dealers that have accounts that establish a master / sub account that is in violation of FINA rules.

However note that the article really states anything new. It states that if a firm has a master / sub account relationship that they must conform to the FINRA rules that's it.

Of course this is a big gray area. Are these sub llcs giving people greater than the 4:1 leverage or are their members paying for "trading memberships" and the members are trading only the firms capital.

Currently the SEC is leaving these firms alone unless the firm does something illegal. Tuco was shut down not because it gave greater than 4:1 leverage or allowed people to trade with accounts under $25,000, it got shut down because the main guys used the money from the co mingled funds (basically taking a loan). So in essence Tuco was operating as a ponzi scheme. Of course once the SEC came in, they basically through the whole book at them.

I don't think this article really says anything new. To me is basically says their stance on the issue, and will continue to do what they are doing allowing firms to operate in the gray area unless a major violation occurs.

* I do not work for or have any financial interest in any firm

 

FINRA reglates FINRA member firms. I am not sure that this notice is applicable to all firms in the bussiness. It sounds to me like FINRA does not want to be accussed of dropping the ball, should it be determined that a finra member firm was (or is)unregistered.

On the other hand, the SEC may agree with Finra's description of the SEC requirement and if that's true than non registered firms are at a serious risk of regulatory complications IMO.

DISCLAIMER:
This post is opinion only and not to be considered as legal or financial advice. The author disclames any liability for those who take action based upon this post.

 

This notice specifically excludes registered firms:

"Similarly, in omnibus clearing arrangements, a broker-dealer that
is registered with the Securities and Exchange Commission (SEC) pursuant to the Securities Exchange Act of 1934 (referred to as a “registered IBD”) may procure clearing services for the customer accounts it services on a basis in which the identities of the sub-account owners are not disclosed to the clearing broker-dealer. In these limited cases involving a bona fide IA or a registered IBD, FINRA generally will permit a firm to rely upon the information provided to it by the bona fide IA or the registered IBD as to whether to treat a master/sub-account as having a single beneficial owner."

Keep in mind, this falls on the BD or clearing firm to know their client. If your client is a BD, the above says they are pretty much excluded from this bulletin and can have Master/Sub relationships without an issue. Think Bright Trading...everyone trades in his account at Goldman. Goldman (the clearing firm) does not have to enforce this rule with Bright because he is a registered BD. Also, since Goldman is obviously a FINRA member they need to follow this bulletin.

Using an example of ABC Trading, a non-registered LLC like CY, Paramount, or Epiphany. Most of these LLC's clear at Penson, who is a member of FINRA. Penson must now ask themselves if the LLC's fall into any of the 10 examples in the bulletin....obviously they do. Penson must now treat each sub-account as separate accounts and enforce FINRA rules. PDT mostly which means $25k and 4-1.

Basically this is one more way they can shut down unregistered LLCs. All they have to do is call the clearing firm or BD (which all LLC's have) and say you are violating FINRA and SEC laws. The clearing firm will shut down the firm overnight. We have already heard that Penson threw out WTC last month. More will follow.

Sorry people, this bulletin is huge. Someone posted that there is nothing new in this...and that might be true. But what is new is that they are now putting out official notice that they are going to be enforcing this. I don't think the Pensons and Wedbushs (another big clearing firm for LLCs) are going to subject themselves to huge fines to accommodate this business after they have been officially warned by their regulator, FINRA.

If anyone has a question about the interpretation of this bulletin there are phone numbers on the first page to call. If you have money at one of these firms don't rely on a post on Elitetrader to determine if your money is safe, call FINRA.

 

First, thank you Itrade2009 for posting this and staying on top of the unregulated LLC's trying to act like BDs. I appreciate you trying to protect traders who have a tough enough time making money in the markets and not have to worry about their money being stolen.

Yellow123, I think you are very wrong about your statement. They do not regulate these LLCs so they can't know if a "major violation occurs". By that time it is too late and the money is gone. Just like Tuco and Valez. I have read this over and over and agree that they are going to use this to shut these firms down at the clearing level. My advice is to get your money out now before there is a "run on the bank" and there is no money left when you decide to cash out.

 

ITrade, props for the info and interpretation. But there is a loophole here that no one has mentioned:
'However, there are other legitimate business arrangements where the identities of the beneficial owners are not disclosed to the firm. For example, FINRA recognizes that an “investment adviser” as defined by the Investment Advisers Act of 1940 and acting in such bona fide capacity (referred to as a “bona fide IA”), may employ sub-accounts for each account it advises without identifying the beneficial owner of each account for which it advises.'
In plain terms what does this mean? The prop firm continues with their "training fee" scam and claims all these subaccounts are actually accounts that are being advised within the framework of the "training" they provide.
I am not justifying the prop firms. I think most of them are out to rip off the unsuspecting trader. But where there is a will (or a smart enough lawyer), there is a way.

 

I have had both good and bad experiences with unregistered prop shops in the past. The search feature on ET is far better
to screen out shady firms than SEC enforcement actions. Best not to prejudge all or most prop shops as being dishonest. There are legit firms out there that are dedicated to excellence.

 

aren't there way more unregistered props like cy, epiphany, etc.? so they are all going to be shut down now one by one?
and if they are, why does it have to be that your money will be stolen unless the shop was run by real crooks like valez or tuco ponzi? wouldn't sec make an effort to see that money is returned to account holders?