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Three Firms Fined $6 Million for IT Breakdowns that Caused Inaccurate Reporting


The SEC fined three broker-dealers more than $6 Million for providing inaccurate securities trading information to the regulator over several years.  The SEC asserts that coding errors caused the firms to provide inaccurate blue sheets for millions of trades.  The SEC faults the BDs for failing to implement a supervisory and control structure to ensure that they provided accurate information.  Two of the firms hired regulatory professionals to oversee the re-vamping of the underlying reporting systems.

Most larger firms rely on fintech for a variety of heavy-lifting tasks including collecting data for the regulators.   Management must integrate the compliance and regulatory professionals with the IT folks to ensure that the systems match the legal requirements.   Compli-pros must learn to “speak tech” to properly advise their employers and clients. 

Over-Reliance on Automated Surveillance Tools Costs IA/BD $4.5 Million

The SEC fined a large BD/IA $4.5 Million for overly relying on flawed compliance technologies that failed to prevent 5 registered representatives from stealing over $1 Million from clients over a 4-year period.  One of the systems, which was designed to compare disbursement addresses against controlled addresses, contained a technical error that resulted in a failure to generate the necessary red flags for further investigation.  The other system, a transaction-monitoring tool, had a design limitation that required an exact word-for-word address match, thereby failing to identify suspicious addresses.  Complementary manual supervision and monitoring also failed to uncover the conduct.  The SEC charges the firm with failures to supervise and to implement reasonable policies and procedures.

OUR TAKE: We love compliance regtech as a tool to leverage compli-pros’ efforts to uncover wrongdoing.  However, over-reliance on technology without professional judgment and intervention will lead to a false sense of compliance security.  An automatic hammer will not build a house without the architects and the builders.


SEC Issues Robo Guidance on Disclosures, Suitability, and Compliance


The SEC’s Division of Investment Management has issued regulatory guidance for robo-advisers to meet their disclosure, suitability, and compliance obligations.  The IM staff recommends robust disclosures about the algorithm (functions, limitations, risks), overrides, third parties, fees, and client information.   The staff also urges robo-advisers to adequately disclose limits on the models and to ensure that all disclosures are sufficiently clear and prominent.  The staff stresses that robo-advisers must satisfy their suitability obligations by ensuring adequate and clear questionnaires, which would include a process to reconcile inconsistent responses.  The Guidance requires robo-advisers to enhance their compliance programs to include policies and procedures to test the algorithm, analyze the questionnaires, oversee third parties, ensure proper disclosures, monitor social media, and protect against cyber-threats.  The IM Staff warns that it “will monitor these innovations and implement safeguards, as necessary, to help facilitate such developments and protect investors.”

OUR TAKE: The SEC has been taking a hard look at robo-advisers and whether the digital advice model is consistent with securities laws.  This Guidance will force many fintechs to increase compliance and operations spending to satisfy all the requirements described in this Guidance Notice.