SEC Charges Texas-Based Brokerage Firm With Violating Supervisory and Customer Protection Rules

The Securities and Exchange Commission today charged an Irving, Texas-based brokerage firm with violating key customer protection rules after failing to adequately supervise registered representatives who misappropriated customer funds.

H.D. Vest Investment Securities agreed to settle the charges by paying a financial penalty and retaining an independent compliance consultant to improve its supervisory controls.

According to the SEC’s order instituting a settled administrative proceeding, H.D. Vest has more than 4,500 registered representatives typically working as independent contractors who also operate tax businesses outside of their securities businesses.  H.D. Vest failed to have proper policies and procedures in place to monitor its representatives’ outside business activities, and as a result some representatives used their outside businesses to defraud brokerage customers in such ways as transferring or depositing customer brokerage funds into their outside business accounts.

The SEC’s order further finds that H.D. Vest did not follow customer protection rules in the wake of the wrongdoing by its representatives.  Under these rules to protect customer funds and securities in the possession of broker-dealers, H.D. Vest was required to make certain calculations and, if necessary, deposit funds into a reserve account for the benefit of customers who were harmed by the representatives’ misconduct.  H.D. Vest neither made the calculations nor maintained a reserve account. 

“H.D. Vest lacked sufficient supervisory controls to track the transfer of customer funds to outside entities controlled by its registered representatives,” said David R. Woodcock, Director of the SEC’s Fort Worth Regional Office.  “Firms like H.D. Vest do face greater challenges in supervising their representatives in numerous small branch offices spread across the country, but that doesn’t excuse the firm from establishing adequate policies and procedures to address those challenges.”

The SEC’s order finds that H.D. Vest violated the supervision requirements of Section 15(b)(4)(E) of the Securities Exchange Act of 1934 as well as the customer protection rules found in Section 15(c)(3) of the Exchange Act and in Rule 15c3-3.  H.D. Vest also violated the document preservation requirements in Section 17(a) of the Exchange Act and in Rule 17a-4(b)(4).  H.D. Vest consented without admitting or denying the findings in the SEC’s order to cease and desist from committing these violations and pay a $225,000 penalty.  The representatives involved in the misconduct have since been the subject of criminal, civil, or FINRA enforcement actions. 

The SEC’s investigation was conducted in the Fort Worth office by Michael A. Umayam and Samantha S. Martin.  The SEC examination that led to the investigation was conducted by Aaron Pabst, Paul Rash, and Mary Walters.