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BD Fined $2 Million for Under-Resourcing Compliance Monitoring

FINRA 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.

OUR 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. 

BD Fined $16.5 Million for Under-Resourcing AML Compliance

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FINRA fined a large broker-dealer $16.5 Million for failing to devote sufficient resources to anti-money laundering compliance.  According to FINRA, the firm’s AML monitoring analysts were “negatively impacted by the level of resources dedicated by the firm to AML surveillance.”  With respect to exceptions generated by an automated system, FINRA claims that the internal staff was overwhelmed: “The number of analysts employed by the firm at any time (ranging from 3 to 5) did not have the ability to adequately review the tens of thousands of alerts generated.”  FINRA also faults the firm for mis-programming an automated surveillance system and for over-relying on sales traders to report suspicious AML activities when most order flow came into the firm electronically.

OUR TAKE: The regulators have increasingly examined the level of resources devoted to compliance monitoring as an indication of a firm’s commitment to compliance.  While every firm must assess its own needs, firms should spend no less than 5% of revenue on compliance monitoring.

http://www.finra.org/sites/default/files/CreditSuisse_AWC_120516.pdf