broker-dealer was fined and censured for failing to act against a longtime broker
charged with participating in pump-and-dump transactions. The SEC faults the firm for ignoring red flags
including emails outlining the illegal activity, FINRA arbitrations, and
customer complaints. One supervisor
explained that he did not act more aggressively because the broker worked at
the firm for 30 years and her business partner was a partial owner of the firm.
The SEC asserts that the firm’s supervisory system “lacked any reasonable
coherent structure to provide guidance to supervisors and other staff for
investigating possible facilitation of market manipulation.” The SEC also maintains that the firm “lacked
reasonable procedures regarding the investigation and handling of red flags.”
Reasonable policies and procedures must do more than simply restate the law and the firm’s commitment to comply with the law. The compliance manual or WSPs must specifically describe HOW a firm will prevent and address regulatory misconduct.
OUR TAKE: A motivated miscreant will find the weaknesses in your compliance and supervisory system. To avoid this type of theft, a firm should prohibit any third party money movement without the review of a supervisor or compli-pro.
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.
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.
The SEC fined and censured an IA/BD for failing to supervise its CEO/CCO who was ultimately criminally convicted of stealing from clients. The CEO/CCO used the firm’s consolidated reporting system, which allowed manual inputs of outside investments, as a way to mislead clients about false investments that he siphoned off into his own account. The SEC faults the firm for failing to implement reasonable policies and procedures to review the consolidated reports, which, according to the SEC, would have quickly uncovered the obvious scheme. The SEC charges violations of the antifraud rules and the compliance rule (206(4)-7), which requires firms to adopt and implement reasonable compliance policies procedures to prevent violations of the securities laws.
OUR TAKE: It’s never good when the CEO (or any other revenue-producing individual) also serves as the CCO. Such a structure virtually ensures a lack of proper supervision. Firms must ensure that the CCO, whether inside or outsourced, has significant independence from management and the revenue-producing function. The SEC has brought several enforcement actions against dual-hatted CCOs, who also serve in a management capacity.
A large broker-dealer agreed to pay over $28 Million in restitution, fines, interest, and disgorgement for failing to properly supervise two brokers that the SEC alleges made misrepresentations about prices and profits in connection with secondary market trading of non-agency RMBS occurring nearly 5 years ago. The SEC asserts that the two brokers misled customers about purchase/sale prices and market activity and charged excessive markups. The SEC faults the firm for failing to implement a system to monitor customer communications. This compliance breakdown constituted a failure to supervise because “the failure to have compliance procedures directed at [an underlying securities law violation] can be evidence of a failure reasonably to supervise.” Also, the SEC further faulted the firm for charging excessive markups even though such markups were within FINRA’s 5% safe harbor policy because “Regardless of the applicability of the five percent guidance, the FINRA was explicit in stating that ‘[a] broker-dealer may also be liable for excessive mark-ups under the anti-fraud provisions of the Securities Act and the [Exchange] Act.’” The two brokers were also fined and suspended.
OUR TAKE: The SEC breaks new legal ground in two ways: (1) explicitly linking underlying securities law violations by registered representatives as a predicate to a failure to supervise charge and (2) charging a firm even though it complied with a stated FINRA safe harbor. What does this mean? The SEC continues to move to a strict liability standard such that any violation by an employee constitutes a failure to supervise. Also, broker-dealers must be wary about relying on stated FINRA safe harbors.