April 15, 2020
FINRA recently approved a Letter of Acceptance, Waiver and Consent (AWC) submitted by Northwestern Mutual Investment Services, LLC (NMIS), a brokerage firm that has 11,000 registered representatives in 866 branch locations and whose headquarters is located in Milwaukee, Wisconsin.
According to the AWC, NMIS failed to properly supervise a registered representative that converted $473,496 from five customers’ variable annuities over twelve years. From September 7, 2005 to February 28, 2017, the NMIS representative effected $121,123 in unauthorized fund transfers from two customers’ variable annuities to another customer’s bank account. The representative forged customers’ signatures on variable annuity distribution requests. These requests falsely stated that funds would be electronically transferred to the customer’s bank account. At the same time, the representative submitted fake blank checks with his customers’ names and addresses, but the bank account and routing number for his own bank account. According to the AWC, the representative told some clients that he was re-investing their funds in a non-existent foreign currency fund at NMIS and created fake NMIS documents to perpetuate this misconduct.
FINRA asserts that these activities were meant to conceal the representative’s conversion from the customers during a time in which the representative was experiencing personal financial difficulties. The registered representative was fined by an NMIS affiliate on four occasions for missing minimum earnings requirements and the representative had multiple IRS tax liens for several years of unpaid taxes.
FINRA claims that NMIS failed to establish, maintain, and enforce a supervisory system and written supervisory procedures reasonably designed to review and monitor the fund transmittals from the customer accounts to third party accounts and outside entities. The firm did not take proper steps to verify that the customers controlled the bank accounts on the fund transfer forms. In 2013, NMIS’ electronic systems flagged three withdrawals totaling over $97,000 for review. However, FINRA claims that NMIS did not have a reasonable supervisory system to: 1) review transfers of customer funds to third party accounts and outside entities; 2) monitor for multiple fund transfers from multiple customers going to the same third party accounts; 3) review patterns of multiple wire requests and checks by multiple customers to the same third party bank account; and 4) compare customer signatures on firm forms to signatures on file. The firm’s failure to detect the representative’s misconduct resulted in 23 transfers totaling over $473,000 to his own bank account. After learning of the misconduct, NMIS reimbursed all of the customers.
To resolve the allegations, NMIS consented to a censure and $350,000 fine and agreed to provide a certification from an NMIS officer with supervisory authority stating that the firm enhanced its supervisory systems and written supervisory procedures.