A large broker-dealer agreed to pay $26.4 Million in client reimbursements and fines for failing to supervise traders that lied to customers about CMBS and RMBS transactions over a multi-year period. The SEC asserts that the traders misled customers about bond prices, bids/offers, compensation, and ownership in very opaque secondary trading markets. The SEC alleges that targeted reviews of electronic correspondence would have uncovered the illegal activity, thereby constituting a failure to supervise in violation of Section 15(b)(4)(E) of the Exchange Act. As part of the remediation, the firm has implemented additional procedures for targeted reviews of communications relating to transactions that fall within certain risk-based parameters.
The most interesting legal point is that the SEC argues that the failure to implement compliance policies and procedures that would have uncovered wrongdoing can serve as a predicate for a failure to supervise charge. In the past, the regulators generally separated the compliance program from the supervisory obligations. Does this mean that a compli-pro can be charged with aiding and abetting his/her firm’s failure to supervise if the compliance monitoring program fails to detect wrongdoing?