IMPACT ANALYSIS: FINRA’s charges against ex-Morgan Stanley traders hired by UBS raise background questions

September 27, 2016

By Julie DiMauro, Regulatory Intelligence

(Thomson Reuters Regulatory Intelligence) – The Financial Industry Regulatory Authority’s (FINRA) charges against John Batista Bocchino and his sales assistant, Rafael Barela Jacinto, over unauthorized trading of $190 million worth of Venezuelan bonds and falsifying records have cast light on the significance of disciplinary histories in employing brokers.

The complaint charges the two brokers with opening nominee accounts in the names of “well-known financial institutions” to avoid the anti-money laundering (AML) review Morgan Stanley’s AML and compliance teams would have performed on personal accounts. The two men had been hired by UBS Financial Services in New York only days after being dismissed by Morgan Stanley for carrying out improper securities transactions.

In April 2011, Morgan Stanley tightened its AML policies by requiring brokers to provide buy-side confirmations on Venezuelan bond trades at the time of sale to show that they were bought in U.S. dollars. The firm further strengthened its AML regime in January 2012 by prohibiting Venezuelan securities transactions with any financial institutions, with a few exceptions.

According to the complaint, Bocchino received gross compensation of about $2.3 million in 2011 and $2.3 million between January and March 2012, making him “one of the largest producers at Morgan Stanley’s Madison Avenue branch.”

FINRA also notes that both men moved to and were hired by UBS Financial Services in New York within 2 1/2 weeks of their termination by Morgan Stanley in March 2012. A UBS spokesperson declined to comment on this matter, citing the continuing investigation.

Bocchino states through a summary of the case on FINRA’s “BrokerCheck” system that the activities for which he was dismissed by Morgan Stanley involved trades for institutional customers through outside prime brokers that were made as per his clients’ instructions. Barela’s similarly states that he conducted trades in the nominee accounts at the instruction of institutional account holders and his employer.

The brokers’ statements specify that the investigations do not involve their activities at UBS. has reported that the two men declined to comment on the FINRA charges, and that UBS declined to comment on their employment status. Bocchino’s LinkedIn profile describes him as currently employed with UBS. Barela’s profile includes a UBS affiliation but does not specify his employment status.

Fictitious account names, suspicious transactions

At the time of Bocchino’s and Barela’s suspected violations, Venezuela was designated a state sponsor of terrorism, and was a country with close economic ties with Iran.

In addition to being on the list of sanctioned nations that Morgan Stanley could not transact business with, the two brokers’ alleged use of fictitious names for clients violated company policy and occurred without permission the banks labeled as owners of the accounts.

FINRA’s complaint notes that the agency is seeking disgorgement of the brokers’ “ill-gotten gains.” By creating fictitious account names for 13 clients — without the permission of those banks whose nominee accounts were being used — the brokers impeded Morgan Stanley’s efforts to document accurate ownership and trading records, FINRA states.

One of the 13 clients was Miami-based Global Strategic Investments LLC, which FINRA censured in June 2015 and fined $200,000 for failing to detect, investigate and report potentially suspicions transactions.

The amount and quality of background checking that UBS performed on each of these brokers could not be determined. What is known is that the Zurich-based bank expanded the number of employees subject to internal background checks to around 15 percent of its workforce in August 2015 — a move that came in the wake of an international probe into rigging of the global foreign exchange market. The probe was conducted by multiple regulators, including the Securities and Exchange Commission (SEC), and Britain’s Financial Conduct Authority.

Background checks for new hires and transfers

FINRA member securities broker-dealers are mandated to conduct background investigations of applicants for registration with a member firm, including verifying the accuracy and completeness of information reported to the Central Registration Depositary (CRD) using the form U-4, “Uniform Application for Securities Industry Registration or Transfer.”

In January 2015, the SEC approved a proposed rule by FINRA to strengthen the quality of the background checking requirements of member firms.

In July 2015, Rule 3110 went into effect. It requires member firms to have documented procedures for collecting information and conducting background checks on new hires and those who transfer from other firms.

Organizations must validate that the Form U-4 information provided by the candidate is complete and accurate within 30 days of its filing; that is, that it contains detailed information and prior disclosures regarding such things as bankruptcies, liens/judgments, criminal histories, and prior/pending civil litigation.

The new rule expands what the firm’s “investigation” should encompass before the U-4 is filed — when the firm is reviewing the candidate’s most recent Form U-5, which details the broker’s termination from a member firm.

FINRA offers guidance to firms about conducting this investigation, recommending a check of credit reports, fingerprint records, a national public records database (like Westlaw or LexisNexis), and a review of any consolidated report from a specialized provider (such as Business Information Group, Inc.) that includes financial and criminal records.

In addition to the initial background check performed by the member firm, FINRA will conduct periodic reviews to validate the information in the U-4 and other records about individual brokers that are available to investors, regulators and firms.

FINRA states that the search of “reasonably available public records” must be “national” in scope, although there may be circumstances in which a search in foreign jurisdictions is warranted.

Best practice considerations

Regulators expect broker-dealers to meet their significant responsibilities in performing background checks on those persons that will be handling customer money for them. The failure to meet these obligations can result in enforcement actions, not to mention negligent hiring claims in arbitrations.

FINRA is not advocating the use of one screening tool over another or even suggesting that using one constitutes some sort of “safe harbor.”

The agency is, however, underscoring its commitment to review how diligently and promptly member firms have demonstrated a commitment to vetting those potential employees who will be handling client accounts.

Maintaining such “evidence of compliance,” is one of the essential practices of any compliance process.

On employment issues, firms should seek to document what procedures they have used to learn as much about a prospective broker as possible and relevant to the job at hand and to note precisely the findings and any reasons for delays.

The broker-dealer should have internal policies outlining the steps required in this type of investigation, specifying exactly who carries out which steps.

Service providers exist that will create disclosure monitoring reports so broker-dealers can obtain reports on applicants, but those services should be vetted for how well they work, what troubleshooting they provide and how well they will meet your business’s needs as it evolves.

It is a good sign if the vendor is as selective of its customers as the firm is of its vendors.

When checking credit histories of a prospective broker, it is important to be aware of Fair Credit Reporting Act (FCRA) requirements. Under the FCRA, it is necessary to get permission from the subject of a prospective credit report. Also, if a hiring decision is made based on a candidate’s financial history, the FCRA requires notices to the applicant, both before and after the adverse hiring decision is made. Failure to do so can trigger monetary penalties.

The FCRA process enables applicants to challenge decisions made on credit histories and establish whether information in them is erroneous.

In examining information concerning a broker, any red flag should be documented and followed up promptly. Turning a blind eye to such information can lead to severe consequences.

Departments in a firm must coordinate their efforts regarding background checks and their documentation. Human resources and compliance departments, for example, should agree on allocating task responsibilities, sharing of information and record maintenance.

Finally, firms must have policies addressing current employees and their annual affirmations about the accuracy of the information on their U-4 forms. Specifically, firms must decide if they will rely on these attestations, or if they will independently verify on an annual basis the currency and accuracy of such data.

While broker-dealers cannot rely on the affirmation of a new applicant, they can rely on them at the annual certification stage. But actively verifying, if only randomly, brokers’ annual attestations can help a firm look more diligent about compliance. The exercise would also prepare the firm for the possibility of FINRA making such verification a requirement.

(Julie DiMauro is a regulatory intelligence and e-learning expert in the GRC division of Thomson Reuters Regulatory Intelligence. Follow Julie on Twitter @Julie_DiMauro. Email Julie at
(This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Sept. 23. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters)
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