Home » written supervisory procedures

Tag: written supervisory procedures

Firm Wrongly Relied on Inexperienced Compliance Associate

 

A broker-dealer was censured and fined for delegating certain regulatory obligations to an inexperienced compliance associate.  The firm filed forms with FINRA that certified due diligence about OTC issuers whose quotations it published.  The firm’s policies and procedures required the trader to conduct the necessary due diligence and a firm principal to certify the information.  In practice, an inexperienced compliance associate was tasked with obtaining the information and filing the Form 211s with FINRA by inserting the electronic signature of a principal.

This is an example of what we call compliance alchemy i.e. the appearance of compliance without actually complying.  The firm had the correct procedures and filed the right forms.  However, there was no substance behind the due diligence or the certifications.  The regulators have become wise to firms that simply check the box without actually doing the underlying compliance work. 

Firm’s Weekly Email Reviews Were Not Adequate According to FINRA

FINRA censured and fined a broker-dealer for inadequate email reviews.  Although the firm, through its President/CCO, conducted weekly reviews, FINRA charges that the firm’s random sampling and lexicon-based reviews were not sufficient given the firm’s size and risk areas.  The firm used 24 search terms provided by its email provider, but FINRA asserts that the search terms did not reflect a meaningful assessment of risk areas and resulted in a large number of false positives.  FINRA faults the firm for failing to change the email reviews “[d]espite the obvious indications that the firm’s lexicon system was not reasonably designed.”  FINRA also criticizes the firm’s Written Supervisory Procedures for omitting specific email review procedures. 

Just doing email reviews isn’t enough.  A firm must conduct effective email reviews that can statistically assess whether supervised persons are complying with the securities laws.  We call this “compliance alchemy” i.e. the appearance of compliance without the implementation of adequate procedures and testing.

Weak WSPs Result in Failure to Supervise Charges

The SEC charged a broker-dealer with failing to supervise because its Written Supervisory Procedures failed to adequately detail how firm employees should respond to regulatory red flags.  The SEC asserts that the firm failed to supervise a broker that charged with participating in a penny stock pump-and-dump scheme.  The SEC maintains that the firm uncovered multiple red flags including a supervisor’s report, customer emails, arbitrations, and FINRA examinations.  However, the SEC alleges, the firm’s WSP’s did not specify who should investigate or how such investigations should proceed.  The firm did conduct two “flawed investigations” that failed to document its findings or detail a remedy.  The Director of the SEC’s New York Regional Office advised broker-dealers that this case “sends a clear message that we will not tolerate broker-dealers that fail to exercise appropriate supervision over employees.”

OUR TAKE: We predicted that the regulators would hold brokers accountable for the bad actions of their registered reps.  WSPs should follow the 5 Ws Rule: Who is responsible?  What is to be done?  Why are you doing it?  When is it due?  Where should it be presented?

http://www.sec.gov/litigation/admin/2018/34-82954.pdf