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Broker Ignored Compliance Training and Churned Accounts


The SEC barred a broker from the industry for recommending an unsuitable in-and-out trading strategy that generated significant commissions.  The SEC asserts that, given the costs, returns, and customers, the defendant had no reasonable basis to determine that a high volume trading strategy was suitable.  According to the SEC, the broker should have known better because he attended firm-wide compliance training that addressed the importance of reasonable basis suitability.

OUR TAKE: Compli-pros should take comfort that the compliance training helped insulate the firm from liability against the rogue actions of this employee.  Also, firm leaders should note that the SEC will prosecute individuals that violate the securities laws as part of its effort to root out bad actors.


Hedge Fund Firm Failed to Stop Sharing of Confidential Information

The SEC fined and censured a hedge fund firm for failing to stop its research analyst from sharing confidential information with his wife, who ran another hedge fund.  The research analyst helped his wife start the competing firm and provided internal confidential information including investment models, research and recommendations.  In fact, holdings of the two hedge fund firms significantly overlapped.  After the respondent become aware and warned the research analyst about sharing confidential information, it failed to stop the conduct despite policies and procedures about email review and maintaining confidential information.  The SEC faults the firm for failing to supervise and for failing to implement an adequate compliance program that would effectively monitor and halt unlawful conduct.

OUR TAKE:  You must walk the compliance walk, not just talk the compliance talk.   Registered firms must implement compliance policies and monitoring, not simply adopt broad policies and procedures that sound good.