The Financial Industry Regulatory Authority (FINRA) has fined Herold & Lantern Investments, Inc. $125,000 and issued a censure for failing to maintain an adequate anti-money laundering (AML) compliance program. This action stems from violations between November 2020 and May 2024, when the Melville, New York-based broker-dealer did not properly detect or investigate suspicious transactions in low-priced securities. The firm, a FINRA member since 1993 with 67 registered representatives across 10 branches, settled without admitting or denying the findings.
Low-priced securities, often called penny stocks, generated about 4% of the firm’s total revenue during this period, highlighting the material risk these activities posed. Following a 2020 merger with another FINRA member, the firm acquired customer accounts that frequently deposited and sold such securities, yet its AML systems proved insufficient. FINRA cited breaches of Rules 3310(a), 3310(f)(ii), and 2010, which mandate risk-based AML programs designed to identify and report suspicious activities.
Key Compliance Failures
Herold & Lantern’s AML procedures identified red flags for low-priced securities but lacked guidance on investigating them, leaving staff without clear protocols for follow-up. Exception reports excluded transactions in accounts under tri-party clearing agreements until August 2022, creating surveillance blind spots for high-risk trades. These reports also failed to aggregate data on customer patterns over time, missing ongoing suspicious behaviors.
The firm neglected ongoing customer due diligence for accounts heavily involved in low-priced securities, despite their elevated money laundering risks like pump-and-dump schemes. Specific red flags went uninvestigated, including a foreign customer depositing a large block of low-priced shares, liquidating them, and wiring out proceeds—representing a massive portion of the security’s daily volume. Another case involved liquidating over 65 million shares and wiring $1.6 million, classic indicators of illicit activity.
Physical certificates for low-priced securities added further vulnerability, as they are harder to track than electronic transfers, yet the firm continued accepting them until May 2024. Tri-party agreements between Herold & Lantern, its clearing firm, and another FINRA member compounded oversight issues, excluding key accounts from monitoring.
FINRA’s Investigation and Violations
FINRA’s cycle examination uncovered these systemic weaknesses, emphasizing that firms must bridge automated flags with human intervention for effective AML. The regulator stressed a risk-based approach tailored to business lines, including mergers that introduce high-risk accounts. Without historical data in reports, isolated trades appeared benign, evading detection.
Violations of FINRA Rule 3310(a) involved failing to establish a reasonably designed AML program, while Rule 3310(f)(ii) covered inadequate suspicious activity reporting procedures. Rule 2010 requires high standards of commercial honor, breached by these lapses. The Bank Secrecy Act underpins these rules, obligating reports to the Financial Crimes Enforcement Network (FinCEN).
Firm Background and Context
Herold & Lantern Investments, Inc. (CRD# 30996, SEC# 8-45285) operates from Melville, New York, focusing on brokerage services. The 2020 merger expanded its customer base but exposed AML gaps in handling low-priced securities, a sector prone to manipulation and laundering. Despite prior regulatory notices, like FINRA’s 2019 guidance on penny stock red flags, the firm did not adapt promptly.
This case aligns with FINRA’s broader enforcement on AML, targeting broker-dealers vulnerable to financial crimes via microcap stocks. Recent actions include fines against Cetera ($1.1M) and Osaic ($650K) for similar issues, signaling intensified scrutiny.
Remediation Steps Taken
By August 2022, the firm integrated tri-party accounts into low-priced securities surveillance. In May 2024, it halted deposits of physical low-priced security certificates, curbing entry points for laundering. These changes address core risks, though implemented years after issues arose.
The settlement requires ongoing enhancements, underscoring proactive compliance over reactive fixes. FINRA views such steps positively but penalizes prolonged deficiencies.
Broader Industry Implications
This enforcement highlights AML challenges for smaller firms post-merger, where scaling surveillance lags risk growth. Low-priced securities remain a hotspot for laundering due to opacity and volume. Regulators demand integrated systems covering all agreements and sophisticated analytics for pattern detection.
Firms must invest in training, software, and audits to meet risk-based mandates, as technical excuses fail under scrutiny. The $125,000 fine—modest relative to revenue impact—serves as deterrence, protecting market integrity.
Expert Perspectives on AML Enforcement
Industry observers note that tri-party exclusions and due diligence gaps are common pitfalls, especially with physical certificates. Post-settlement, Herold & Lantern must foster a compliance culture prioritizing investigation. This action reinforces FATF and SEC guidance for securities sector risk management.
For compliance professionals, it signals ramped-up exams on penny stocks amid rising crypto and digital asset laundering concerns. Robust programs prevent fines exceeding remediation costs.