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.
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.