FINRA Fines Cetera Entities $1.1 Million Over AML and Penny Stock Oversight Failures

The Financial Industry Regulatory Authority (FINRA) has levied a $1.1 million fine and issued a censure against three Cetera entities after uncovering systemic deficiencies in their anti-money laundering (AML) controls and oversight of low-priced securities. The regulatory body determined that from March 2019 through August 2021, Cetera Advisors, Cetera Wealth Services, and Cetera Investment Services “operated a compliance program that was not reasonably designed to detect or report suspicious transactions.” According to FINRA, these lapses allowed customers to liquidate hundreds of millions of shares while the firms failed to investigate clear red flags indicating potential market manipulation and illicit financial activity. The enforcement action also highlighted broader failures in supervising electronic deposits and maintaining accurate records of consolidated financial reports.

FINRA’s investigation revealed that the Cetera firms “failed to implement a written anti-money laundering program capable of monitoring the specific risks associated with their business model.” Despite processing approximately 800 million shares of low-priced securities during the period under review, internal policies did not provide adequate guidance for identifying suspicious activity. While the firms conducted monthly reviews of deposits for a significant portion of the investigation period, they largely ignored the need to scrutinize transactions for potential money laundering or market abuse. Although daily report reviews were introduced in late 2019, the system only provided basic data lacking historical context, making it nearly impossible to detect coordinated trading or long-term layering schemes.

The firms also failed to incorporate established red flags identified by regulators into automated or manual surveillance systems. This omission meant that the firms were not effectively monitoring customers who deposited large blocks of thinly traded stocks, only to liquidate them immediately and wire the proceeds out of the account. Because the AML compliance program lacked risk-based procedures for ongoing monitoring, once an initial deposit was reviewed, subsequent liquidations and fund transfers often went entirely unmonitored, creating a fertile environment for potential pump-and-dump schemes and other securities-driven money laundering activities.

A critical component of FINRA’s findings involved the firms’ repeated failure to investigate obvious indicators of illicit activity. In one example, three seemingly unrelated customers opened accounts simultaneously and collectively deposited over 100 million shares of a single over-the-counter issuer. These accounts represented up to 88 percent of the daily market volume for that security, yet the firm did not conduct a reasonable investigation into the suspicious coordination. One of the customers even participated in a promotional campaign for the issuer and sold millions of shares the following day, “a classic signal of potential market manipulation often linked to money laundering operations,” according to the regulatory body.

The investigation further found that the firms’ reliance on third parties and clearing firms was insufficient to meet regulatory obligations. Many low-priced securities were deposited electronically, but representatives were not required to complete detailed questionnaires for these digital transfers until April 2021. As a result, customers could move assets through the financial system and exit positions before meaningful due diligence could be conducted. The failure to perform thorough inquiries into why shares were unrestricted or who the ultimate beneficial owners were effectively facilitated the distribution of unregistered securities without verifying applicable legal exemptions.

Beyond AML violations, Cetera Advisors demonstrated significant weaknesses in supervising consolidated financial reports. These reports, which aggregate a client’s total holdings, including assets held outside the firm, were often created manually or through third-party platforms without adequate oversight. While procedures required representatives to verify manually entered data, supervisors were not obligated to ensure these verifications occurred. This lack of internal control led to at least one instance in which a representative provided inaccurate valuations of holdings that went undetected for over a year.

Record-keeping failures were extensive, with tens of thousands of consolidated reports not preserved in official books and records. Many reports were shared via web-based portals or direct emails from third-party systems, leaving the firm unable to track recipients or monitor the information communicated. FINRA noted that this “transparency void not only violated exchange act rules regarding communication retention but also hindered the ability of compliance teams to identify fraudulent activity or misleading statements made to investors.” The inability to quantify the volume of disseminated reports underscored systemic breakdowns in both technological and administrative supervision.

The settlement requires the Cetera entities to undertake more than monetary penalties, mandating a comprehensive overhaul of internal controls. Senior officers from each firm must certify in writing that they have addressed issues related to penny stock supervision and anti-money laundering monitoring. This requirement ensures the development of a written program compliant with federal law and tailored to the actual risks presented by their customer base. Under the agreement, the firms must demonstrate that their systems can effectively flag coordinated trading and rapid movement of funds typically associated with money laundering.

By accepting the censure and $1.1 million fine, the Cetera entities acknowledge “the necessity of rigorous oversight in the broker-dealer space.” The case serves as a warning to the broader financial industry that reliance on manual processes and limited historical data analysis is insufficient under modern regulatory expectations. Moving forward, the firms are expected to maintain transparent records of consolidated reports and ensure that electronic deposits of high-risk securities receive the same scrutiny as physical certificates. The focus remains on preventing the financial system from being used as a conduit for the distribution of unregistered or illicitly obtained assets.

By fLEXI tEAM