HD Vest Investment Securities has agreed to settle charges that the US Securities and Exchange Commission has levelled against it by paying a financial penalty and retaining an independent compliance consultant to improve its supervisory controls.

The SEC has charged a Texan brokerage firm with breaking its customer protection rules by inadequately supervising its own registered representatives, who misappropriated funds from customers. According to the SEC’s order, which instituted a "settled administrative proceeding," HD Vest has more than 4,500 registered representatives who typically work as independent contractors and who also operate tax businesses independently of their securities businesses.  HD Vest failed to have proper policies and procedures in place to monitor its representatives’ external business activities and, as a result, some representatives used those external 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 states that the firm did not follow customer protection rules once an SEC 'examination' or visit unmasked its representatives. These rules were passed to protect customers' funds and securities in the possession of broker-dealers. They required HD Vest 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.  HD Vest neither made the calculations nor maintained a reserve account. 

The SEC’s order finds that HD Vest violated the supervision requirements of s15(b)(4)(E) Securities Exchange Act 1934 and the customer protection rules found in s15(c)(3) and in Rule 15c3-3.  HD Vest also fell foul of the document preservation requirements in s17(a) SEC Act and in Rule 17a-4(b)(4).  The firm consented without admitting or denying the findings in the SEC’s order to cease and desist from committing these infractions and agreed to pay a $225,000 penalty.  The representatives involved in the misconduct have since been the subject of criminal, civil, or regulatory enforcement actions on the part of the Financial Industry Regulatory Authority, the SEC's 'little brother'. Like most little brothers, FINRA has an inferiority complex.