A large bank-affiliated broker-dealer/adviser agreed to pay over $5.1 Million in disgorgement, interest and penalties for failing to stop its brokers from churning/flipping high-commission market-linked investment products. The SEC alleges that the respondent knew that its brokers engaged in flipping transactions as far back as 2005 but took inadequate measures to stop the misconduct. For several years, the firm relied on supervisor pre-approval but failed to provide supervisors adequate guidance or training, resulting in routine approvals. The firm finally stopped the unlawful activity by implementing a centralized electronic supervisory pre-approval process.
OUR TAKE: The regulators will not give credit for “voodoo compliance” whereby a firm superficially creates a compliance infrastructure, but the designated policies and procedures fail to stop unlawful conduct. Ad hoc supervisory reviews rarely serve as adequate tools to check brokers with a significant financial incentive.