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BD President Sanctioned for Failing to Supervise Inexperienced CCO

The President of a broker-dealer was fined and barred for failing to supervise an inexperienced and ineffective Chief Compliance Officer.  The CCO failed to properly monitor and halt excessive mutual fund trading by a registered rep.  The CCO had difficulty analyzing the firm’s trade blotter and mutual fund reports even after a compliance consulting firm was hired to assist.  FINRA faults the President for failing to recognize the CCO’s failures and take the necessary action to implement an adequate supervisory system.  FINRA blames the President because he “was ultimately responsible for supervision.”

OUR TAKE: Do you know if your CCO is competent?  Firm leaders do not satisfy their obligations to implement a compliance and supervisory system by merely calling somebody the Chief Compliance Officer.  A CCO must be competent, have the necessary resources, effectively implement policies and procedures and test them.  Then, firm management must monitor the CCO to ensure that the CCO adequately performs the role.


SEC Fines and Bars CCO for Ignoring Compliance Problems

The SEC fined and barred an adviser’s Chief Compliance Officer from acting in a compliance or supervisory capacity because of his failures to remedy compliance deficiencies.  The adviser hired an outside compliance consultant which recommended 59 compliance action items.  The SEC alleges that the CCO failed to address many of the issues raised including failures to (i) ensure a surprise audit pursuant to the custody rule, (ii) retain emails and other electronic records, and (iii) implement policies to protect customer information.  The SEC also charges the CCO with compliance program deficiencies including failures to update the compliance manual or conduct any meaningful annual review of the compliance program.  The firm’s president/principal was also censured and fined.

OUR TAKE: The SEC doesn’t often prosecute standalone (i.e. not dual hat) CCOs without an underlying client loss, but it will if the CCO ignores obvious compliance deficiencies of which he has notice.  This is what we call “compliance voodoo” i.e. an appearance of compliance infrastructure without an effective program.  This CCO had a compliance manual, did some quarterly testing, and hired a third party consultant.  But, neither the CCO nor the firm took any action to actually implement relevant procedures to address cited compliance deficiencies.


CCO Barred and Fined $250,000 for AML Compliance Breakdowns

The Chief Compliance Officer of a money transmitter agreed to pay a $250,000 penalty and a 3-year bar from serving in a compliance function in connection with anti-money laundering compliance failures.  As part of his settlement with FinCEN and the U.S. Attorney, the CCO also admitted to failing to stop potential money laundering despite being “presented with information that strongly indicated that the outlets were complicit in consumer fraud schemes” and implementing an inadequate AML program.  The settlement concludes the case which had initially imposed a $1 Million fine, which could have been as much as $4.75 Million based on the statutory penalty of $25,000 for each failure to file a Suspicious Activity Report.  The Acting U.S. Attorney explained the decision to prosecute a CCO: “Compliance officers perform an essential function, serving as the first line of defense in the fight against fraud and money laundering.”

OUR TAKE: Compliance officers that assume anti-money laundering duties are subject to prosecution and significant fines by both FinCEN and the DoJ (in addition to FINRA and other financial regulators).  Nobody condones the CCO’s conduct in this case, but one question many compli-pros have asked is why has the CCO been singled out for personal liability?  Why didn’t the feds pursue the operations folks that vet clients or the senior executives in charge?   And, why does the CCO pay a fine when he did not financially benefit from the misconduct?


CCO Used Position to Aid/Abet Brothers’ Securities Fraud Scheme

The Chief Compliance Officer of a broker-dealer was barred from the industry for mis-using his position to assist his brothers’ securities fraud scheme.  According to the SEC, the brothers engaged in a long-running securities fraud to fleece foreign investors with phony offerings, fake names and bogus fees.  The SEC charges that the respondent used his privileged position as a broker-dealer’s chief compliance officer to create accounts and move funds without supervision.  The SEC asserts that he created “house” accounts and mis-labeled wires to hide the scheme.  The SEC charges that the CCO thereby aided and abetted violations of the anti-fraud, reporting, and books and records rules.  The SEC waived the disgorgement order but ordered a permanent bar based on his conduct and his incarceration on related criminal charges.

OUR TAKE: It is the CCO’s job to monitor others to prevent misconduct, but who watches the CCO?  With unfettered access and knowledge, a CCO has a higher duty to follow and enforce the securities laws.  Firms should also ensure that somebody reviews the CCOs personal dealings.


RIA Failed to Conduct Annual Compliance Reviews and Appointed Admin as CCO

three 3D men as symbol of say, see or hear nothing

The SEC fined and censured a registered investment adviser for failing to conduct annual compliance reviews and appointing a chief compliance officer without relevant experience.  The SEC asserts that the respondent, which registered in 2010, never conducted an annual review of its compliance policies and procedures as required by the compliance rule (206(4)-7).  In fact, according to the SEC, neither the firm nor the CCO were even aware of the requirement.  The SEC also faults the firm for appointing as chief compliance officer an inexperienced administrative assistant who spent most of her time on administrative duties.

OUR TAKE: Compliance programs, at their most fundamental, must include the implementation of effective policies and procedures reasonably designed to achieve compliance with the Advisers Act, the appointment of a qualified and dedicated chief compliance officer, and annual reviews of the compliance program.  The SEC will bring an enforcement action for a weak compliance program even in the absence of any other regulatory violation or client harm.