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Flaws in Share Class Selection Technology Costs Large Firm Nearly $14 Million

 

The dually-registered IA/BD affiliate of a large investment bank agreed to reimburse clients over $12 Million and agreed to pay a $1.5 Million fine because its advertised system failed to recommend the most economical fund share classes.  The respondent marketed an automated mutual fund share class selection system that purported to pick the least expensive share classes for certain retirement plan and charitable organization customers.  The SEC asserts that the system had programming and design flaws and that the respondent failed to adequately test and validate whether the system worked as advertised.  Over the course of a 7-year period, the respondent overcharged over 18,000 clients.

Automated compliance systems are helpful, but they are not a cure-all.  Like any tool, a compliance technology is only as good as the people using it.  Bad inputs cause bad outputs.  Also, firms can’t just “set it and forget it,” hoping that the system works. 

FINRA Whacks Large BD with $10 Million Fine for AML Compliance Failures

FINRA has fined a large broker-dealer $10 Million for widespread anti-money laundering compliance failures arising from failed systems, insufficient resources, and poorly-designed supervision.  FINRA charges that the firm’s wire transfer surveillance system failed to collect required data and thereby omitted information that should have been transmitted to the AML surveillance system.  FINRA also faults the firm for significantly understaffing the AML surveillance team, resulting in cursory reviews.  The firm was also faulted for improperly allocating supervisory responsibility over surveillance of penny stock trades.  FINRA rules require member firms to implement an anti-money laundering program to ensure compliance with the Bank Secrecy Act.  A FINRA Enforcement official chided the industry, noting that the regulator “continues to find problems with the adequacy of some firms’ overall AML programs, including allocation of AML monitoring responsibilities, data integrity in AML automated surveillance systems, and firm resources for AML programs.”

Anti-Money Laundering compliance remains a huge challenge for broker-dealers that must spend significant resources on both technology and personnel to ensure adequate monitoring.  Regardless, we recommend upgrading your systems and processes before the regulators force your hand with enforcement actions and multi-million fines.