On May 16, 2024, FINRA accepted a Letter of Acceptance, Waiver and Consent (AWC) from Kayan Securities, Inc. (CRD #156175) and Yong Soo Kim (CRD #1747849) in a significant FINRA enforcement action. This blog post will provide an overview of the case and its implications for securities firms and their supervisory practices.
Background of the Case
Kayan Securities, Inc., based in Los Angeles, California, and Yong Soo Kim faced serious allegations regarding their supervisory practices. FINRA issued a Letter of Acceptance, Waiver, and Consent (AWC) to address these issues, resulting in the following penalties:
- The firm was censured and ordered to pay $50,000 in partial restitution to a customer, plus interest.
- Kayan Securities, Inc. was required to certify that it had reviewed and remediated the issues identified in the AWC and implemented a reasonably designed supervisory system, including written supervisory procedures (WSPs).
- Yong Soo Kim was fined $5,000, suspended from association with any FINRA member in any principal capacity for two months, and required to complete 20 hours of continuing education concerning supervisory responsibilities, particularly related to excessive trading.
Key Findings
Supervisory Failures
The central issue in this case was the failure of Kayan Securities and Kim to establish, maintain, and enforce an adequate supervisory system to ensure compliance with FINRA Rule 2111 and the Care Obligation of Rule 15l-1 of the Securities Exchange Act of 1934 (Regulation BI or Reg BI). Specifically, the findings highlighted the following points:
- Inadequate Supervisory System: The firm’s method for detecting and investigating potential excessive trading involved Kim reviewing daily order logs and monthly active trading reports. Despite updating its WSPs to include sections on Reg BI and the Care Obligation, the firm failed to address excessive trading supervision adequately.
- Red Flags Ignored: The firm and Kim failed to supervise a former registered representative effectively, neglecting to respond to red flags indicating unauthorized and excessive trading in customer accounts. Notably, one of the affected customers was a senior.
- Lack of Investigation: After a customer complained about the representative’s trading, the firm and Kim did not conduct a reasonable investigation. Even after the representative admitted to unauthorized trading in two customer accounts, the firm allowed him to continue trading in other accounts until FINRA barred him.
- Failure to Disclose: Kayan Securities did not disclose two customer complaints or its conclusion that the representative engaged in unauthorized trading to FINRA. Consequently, the firm failed to update the representative’s Form U4 and Form U5 to report these violations.
Implications for Securities Firms
This case underscores the critical importance of robust supervisory systems in securities firms. Firms must ensure their WSPs are comprehensive and regularly updated to address all aspects of trading activities, including excessive and unauthorized trading. Key takeaways for securities firms include:
- Proactive Supervision: Firms must actively monitor trading activities and respond promptly to any red flags indicating potential violations.
- Comprehensive WSPs: Written supervisory procedures should be thorough and cover all regulatory requirements, including Reg BI and suitability rules.
- Transparency with Regulators: Firms must disclose all relevant customer complaints and findings of unauthorized trading to FINRA and update regulatory forms accordingly.
Conclusion
The enforcement action against Kayan Securities, Inc. and Yong Soo Kim serves as a stark reminder of the consequences of failing to maintain adequate supervisory systems. For firms looking to avoid similar pitfalls, it is essential to implement proactive supervisory practices, ensure comprehensive WSPs, and maintain transparency with regulatory bodies.
For more information on securities litigation and regulatory compliance, contact Bakhtiari & Harrison, your trusted partner in navigating complex securities regulations.