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CCO Again Loses Appeal that He Failed to Conduct Adequate Email Reviews

 The Chief Compliance Officer of a broker-dealer lost another appeal of FINRA discipline for failing to review emails.  The firm’s Written Supervisory Procedures required daily email reviews, but the CCO only sporadically reviewed emails and completely ignored email reviews for three months.  Although the WSPs stated that the CEO had email review responsibility, the CCO knew that the CEO was not conducting email reviews and that the job fell to the CCO.  The SEC rejected the CCO’s attempts to blame the third party email service.   The same CCO lost a similar appeal last year with respect to his prior employer.  The SEC notes that the firm and the CEO had responsibilities, but those obligations did not exculpate the CCO.

CCOs must proceed with caution with WSPs and work expectations to avoid assuming responsibilities that s/he will not or cannot undertake.  You may think you’re helping out or just being a good team player when, in fact, you are assuming significant regulatory liability.  No good deed goes unpunished when the work doesn’t get done.

Firm’s Weekly Email Reviews Were Not Adequate According to FINRA

FINRA censured and fined a broker-dealer for inadequate email reviews.  Although the firm, through its President/CCO, conducted weekly reviews, FINRA charges that the firm’s random sampling and lexicon-based reviews were not sufficient given the firm’s size and risk areas.  The firm used 24 search terms provided by its email provider, but FINRA asserts that the search terms did not reflect a meaningful assessment of risk areas and resulted in a large number of false positives.  FINRA faults the firm for failing to change the email reviews “[d]espite the obvious indications that the firm’s lexicon system was not reasonably designed.”  FINRA also criticizes the firm’s Written Supervisory Procedures for omitting specific email review procedures. 

Just doing email reviews isn’t enough.  A firm must conduct effective email reviews that can statistically assess whether supervised persons are complying with the securities laws.  We call this “compliance alchemy” i.e. the appearance of compliance without the implementation of adequate procedures and testing.

Broker-Dealer Fined for Failing to Produce Emails

The SEC fined and censured a broker-dealer for failing to produce requested emails as part of an enforcement investigation related to potential money laundering activities.  Despite repeated requests, the respondent could not produce emails for a 4-month period relevant to the subject activity.  The firm initially represented that it produced all required emails, but ultimately found 40,000 missing emails from 30 employees maintained on a back-up email archive.  The SEC noticed that the document production omitted emails from the correspondent firm through which the potential money laundering activity occurred.  Rule 17a-4(j) of the Exchange Act requires broker-dealers to promptly furnish to the SEC any required records.  The SEC also charged the firm with failing to file Suspicious Activity Reports.

OUR TAKE: Don’t tell the SEC that you have complied with their document requests unless you have conducted adequate internal due diligence.   The Enforcement staff will not look kindly on reckless or intentional misrepresentations during investigations.  Also, lying to the staff can result in criminal penalties.


Adviser Jailed for Fraud Based on Emails that Crossed State Lines


A financial adviser was sentenced to 10 years in prison and ordered to make $2.9 Million in restitution because his emails that furthered his activities were transmitted over state lines, thereby constituting federal wire fraud.  The SEC alleged that the defendant used cross-border emails and a web-based portal to provide false account statements and Ponzi-like payments.  The SEC asserts that he misappropriated client funds by stealing their checks and depositing them into his bank account.  The U.S. Attorney brought a criminal indictment against him for wire fraud based on the emails.

OUR TAKE: Federal wire fraud crime carries big prison and financial penalties.  In this case, the U.S. Attorney leveraged the SEC charges into a federal conviction based on his cross-state emails.