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Large BD Pays $5.3 Million to Settle Fail-to-Supervise Charges

A large broker-dealer agreed to pay over $5.3 Million in remediation, disgorgement, fines, and interest to settle charges that it failed to properly supervise the traders and salespeople working on its non-agency CMBS desk.  Additionally, the head of the CMBS desk was fired, fined, and suspended from the industry for failing to supervise.  The SEC alleges that the CMBS desk regularly misrepresented terms and parties on the other side of secondary market CMBS transactions.  Although the firm had policies and procedures and conducted training, the SEC faults the firm for not conducting “specialized training regarding the opaque CMBS secondary market” and for weak surveillance that “used generic price deviation thresholds in its trade surveillance to flag potentially suspicious trades instead of ones tailored to specific types of securities.”

OUR TAKE: This case is an example of what we call “compliance voodoo” i.e. the appearance of a compliance program that does not actually discover or stop wrongdoing.  Sure, the firm had policies and procedure prohibiting making misrepresentations.  Sure, the firm provided compliance training.   Yet, the compliance and surveillance team completely missed the ongoing scheme of misrepresentations on the CMBS desk.