fined a large broker-dealer $2 Million for under-resourcing its compliance
function, thereby allowing unlawful short-selling. As the firm’s trading activity increased, the
firm continued to rely on a primarily manual system to monitor compliance with
Regulation SHO’s requirements. The
handful of employees tasked with monitoring trading requested more resources as
their 12-hour workdays could not adequately surveil the activity of 700 registered
representatives. FINRA alleges that the
firm routinely violated Regulation SHO by failing to timely close-out
positions, illegally routing orders, and failing to issue required
notices. As part of the settlement, the broker-dealer
also agreed to hire an independent compliance consultant.
TAKE: Firms need to track business activity to ensure that compliance and operations
infrastructure keep up with the business.
A good metric is whether the firm spends at least 5% of revenues on compliance
infrastructure including people and technology.
OUR TAKE: We suspect that many public companies are cheering this action because the SEC seeks to chill a short seller from disseminating negative information for financial gain. In this case, the SEC maintains that the hedge fund made false factual statements. This type of case will not help prevent negative opinions based on accurate facts.
OUR TAKE: The regulators will react swiftly and harshly to a registrant that knows about compliance problems but appears to flout the requirements by failing to take remedial action. When assessing compliance programs, senior executives should first ask whether the firm has addressed previously-identified deficiencies.