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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. 

Online Broker Fined $5.5 Million for Ignoring Short Sale Red Flags

FINRA fined a global online broker $5.5 Million for allowing naked short selling in violation of Regulation SHO despite red flags raised by FINRA as well as its own compliance and internal audit departments.  FINRA maintains that, over a three-year period, the BD did not timely close out fail-to-deliver positions, unlawfully routed short sale orders, and did not issue required client pre-borrow notices.  The firm’s Compliance Technology Department had advised senior management to fix systems that failed to account for segregation deficits.  The firm’s Internal Audit Department also highlighted deficiencies.  FINRA noted red flags in three consecutive examinations.

OUR TAKE: The regulators will react swiftly and harshly to a registrant that knows about compliance problems but appears to flout the requirements by failing to take remedial action.  When assessing compliance programs, senior executives should first ask whether the firm has addressed previously-identified deficiencies.