American Portfolios Financial Services Settles with FINRA for $225,000

American Portfolios Financial Services, Inc. has agreed to a settlement with the Financial Industry Regulatory Authority (FINRA), which includes a $225,000 fine and a censure. The settlement addresses several compliance failures related to the firm's handling of low-priced securities between January 2019 and August 2022.

According to FINRA, American Portfolios opened multiple accounts that involved transactions in low-priced securities. During this period, ten customer accounts deposited over 48 million shares, liquidated more than 42 million shares, and generated nearly $17 million in proceeds. Despite the high-risk nature of these transactions, the firm's AML procedures were found to be inadequate. The procedures failed to effectively detect and report suspicious activity, such as issuer promotional activity, atypical trading patterns, and suspiciously timed transactions.

American Portfolios' AML compliance program was criticized for not providing clear guidance on how to identify and investigate red flags associated with low-priced securities. The firm relied solely on an exception report from its clearing firm, which did not provide comprehensive historical data or patterns necessary for detecting suspicious activities. Furthermore, the firm's procedures lacked sufficient direction on how to conduct investigations or document reviews of identified red flags, and did not incorporate appropriate risk-based measures for ongoing customer due diligence.

The shortcomings were exemplified by the firm's failure to monitor and investigate numerous transactions that raised red flags in at least ten accounts held by four customers. These accounts exhibited suspicious patterns, including large deposits of low-priced securities followed by rapid liquidations and fund withdrawals. For instance, a customer deposited 330,000 shares of a low-priced security in January 2021, liquidated them the same day, and withdrew the proceeds amidst a promotional campaign. Despite multiple warning signs, the firm did not take appropriate action to investigate this activity.

In addition to AML issues, American Portfolios was found to have inadequate supervisory procedures for complying with Section 5 of the Securities Act, which deals with the registration requirements for securities transactions. The firm's written procedures did not provide adequate guidance on determining compliance with these requirements. The firm's reliance on a low-priced security questionnaire, which lacked detailed instructions and did not ensure the collection of necessary documentation, led to inconsistent assessments of whether deposited securities were freely tradeable. On several occasions, the firm failed to conduct independent due diligence when advised of changes to the status of restricted securities.

As a result of these violations, including failures to adhere to FINRA Rules 3310(a), 3310(f), 2010, 3110, and 2010, American Portfolios has agreed to pay a $225,000 fine and accept a censure.