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Broker Ignored Compliance Training and Churned Accounts


The SEC barred a broker from the industry for recommending an unsuitable in-and-out trading strategy that generated significant commissions.  The SEC asserts that, given the costs, returns, and customers, the defendant had no reasonable basis to determine that a high volume trading strategy was suitable.  According to the SEC, the broker should have known better because he attended firm-wide compliance training that addressed the importance of reasonable basis suitability.

OUR TAKE: Compli-pros should take comfort that the compliance training helped insulate the firm from liability against the rogue actions of this employee.  Also, firm leaders should note that the SEC will prosecute individuals that violate the securities laws as part of its effort to root out bad actors.


Broker and His Client Charged in IPO Kickback Scheme

The SEC has charged a broker and his customer for conspiring to conceal alleged kickbacks in exchange for preferred IPO and secondary offering allocations.  According to the SEC, the defendants agreed that the customer would kick back 24% of his trading profits.  The defendants attempted to conceal the scheme by laundering the payments through multiple bank withdrawals of less than $10,000.  The SEC maintains that the broker and the client repeatedly lied on compliance certifications about conflicts of interest and payments, which were required by the firms’ policies and procedures that specifically prohibited any type of conflict, allocation or payment scheme.

OUR TAKE: The SEC properly targets the persons that benefited from the scheme, rather than the firms that had adopted relevant policies and procedures and required specific certifications.  It is also noteworthy that the SEC charged the enriched client and not just the broker.  We believe this case shows the SEC’s continued focus on holding individuals, and not just organizations, accountable for bad behavior.


Bank-Affiliated BD Fined $1.25 Million for Inadequate Employee Screening

FINRA fined a large bank-affiliated broker-dealer $1.25 Million for failing to conduct adequate background checks on over 8,000 associated persons over an 8-year period.  The broker-dealer relied on its bank affiliate to conduct screening of its non-registered associated persons but the bank only screened for bank disqualifying criteria, not the broader categories of disqualification pursuant to Section 3(a)(39) of the Exchange Act and FINRA rules.  Also, the firm completely failed to fingerprint over 2000 employees prior to employment.  Four employees were retained despite statutory disqualifications.  FINRA’s EVP of Enforcement warned, “Firms have a clear responsibility to appropriately screen all employees for past criminal or regulatory events that can disqualify individuals from associating with member firms, even in a non-registered capacity.”

OUR TAKE: FINRA has previously warned that it would review how firms screen for brokers with disciplinary records.  The regulator wants to put pressure on the industry to drive out the bad brokers.