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Large BD Pays $5.3 Million to Settle Fail-to-Supervise Charges

A large broker-dealer agreed to pay over $5.3 Million in remediation, disgorgement, fines, and interest to settle charges that it failed to properly supervise the traders and salespeople working on its non-agency CMBS desk.  Additionally, the head of the CMBS desk was fired, fined, and suspended from the industry for failing to supervise.  The SEC alleges that the CMBS desk regularly misrepresented terms and parties on the other side of secondary market CMBS transactions.  Although the firm had policies and procedures and conducted training, the SEC faults the firm for not conducting “specialized training regarding the opaque CMBS secondary market” and for weak surveillance that “used generic price deviation thresholds in its trade surveillance to flag potentially suspicious trades instead of ones tailored to specific types of securities.”

OUR TAKE: This case is an example of what we call “compliance voodoo” i.e. the appearance of a compliance program that does not actually discover or stop wrongdoing.  Sure, the firm had policies and procedure prohibiting making misrepresentations.  Sure, the firm provided compliance training.   Yet, the compliance and surveillance team completely missed the ongoing scheme of misrepresentations on the CMBS desk.

 

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.

https://www.sec.gov/litigation/complaints/2017/comp-pr2017-223.pdf

Large BD to Pay $15 Million for Failing to Properly Train Reps

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A large broker-dealer agreed to pay over $15 Million in disgorgement and fines for failing to adequately train its reps about the risks of structured notes sold to retail investors.  The SEC maintains that its rep training did not include sufficient information about volatility and breach risk such that the reps could satisfy their reasonable basis suitability obligations.  Over a 3-year period, the firm sold over $500 Million (notional amount) in the subject structured notes to more than 8,000 retail customers.  The SEC charges the firm with failure to supervise.

OUR TAKE: What is interesting about this case is that the SEC holds the firm accountable for failure to properly train the reps, rather than pointing the finger at the compliance department or the reps themselves.  This continues the trend of holding organizations and senior executives accountable for compliance failures.  Also, firms have a high regulatory burden when selling complex financial products to retail investors.

http://www.sec.gov/litigation/admin/2016/34-78958.pdf