More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
While in-house counsel and chief compliance officers at broker-dealer and advisory firms spend quite a bit of their time putting out fires and keeping their firms in line, many CCOs and in-house counsel get burned by regulators for their own misdeeds, according to a new analysis by the law firm Sutherland Asbill & Brennan.
After analyzing disciplinary actions taken by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) against CCOs and in-house counsel from June 2011 through June 2012, Sutherland found a slew of violations.
During this time period, CCOs and in-house counsel faced disciplinary actions for range of conduct, including: playing a role in their firms’ inadequate supervisory systems, inadequate anti-money-laundering (AML) compliance systems and inadequate due diligence of private placement investments; failing to supervise; aiding and abetting underlying violations by their firms; providing inaccurate certifications and reports to regulators; failing to meet reporting obligations; playing a role in books and records violations; failing to abide by the terms of settlement agreements with regulators; and failing to appear for testimony.
“Unfortunately for in-house counsel and CCOs, while tattoos may be removed by lasers, Forms U4 or U5 that have been ‘scorched’ by disciplinary actions are not so easily cleaned up,” Sutherland lawyers Brian Rubin and Katherine Kelly write in their analysis. Indeed, Rubin and Kelly say, “it is better for CCOs and in-house counsel to avoid getting burned in the first place, while still providing advice and guidance that will help their firms comply and grow.”
Some recent supervisory failures involved FINRA fining a couple of firms’ CCOs for failing to tailor supervisory systems to the firm’s business. In a July 2011 settlement, FINRA found that a firm, acting through its CCO, failed to establish and maintain a supervisory system and failed to establish, maintain and enforce written supervisory procedures (WSPs) related to numerous aspects of the firm’s business, including exception report maintenance and review, supervisory branch inspections, and review and retention of correspondence. The firm had purchased off -the-shelf WSPs and, with respect to the areas cited by FINRA, failed to tailor the WSPs to its own business in any way. Based on these deficiencies, the CCO was suspended in any principal capacity for two months and fined $10,000 for this and other violations.
In February, FINRA found that another CCO had failed to tailor his firm’s WSPs to the firm’s business model. In that case, the firm opened a branch office in Greenwich, Conn., but, “[d]espite the fact that the two primary registered representatives in the Greenwich branch, SBS and MSS, had significant disciplinary histories,” the CCO “never amended the firm’s WSPs to address the supervision of the Greenwich branch in general or of SBS and MSS in particular.” FINRA found that the WSPs failed to address other issues related to the branch office such as administrative and branch office functions, an inspection schedule, and while the firm’s WSPs mentioned email retention, they failed to provide any guidance on how the firm would comply with email retention requirements.
For these and other violations, the CCO was fined $20,000, suspended in any principal capacity for 30 days, and required to undertake 16 hours of training concerning supervision.
In other recent actions, CCOs were disciplined because their firms did not have adequate WSPs (or have any WSPs at all) addressing certain areas of their business including exchanging variable annuities, retaining emails, contacting customers after receipt of written complaints, and preventing the sale of unregistered securities.
In a May 2012 case, FINRA disciplined a CCO for failing to supervise two registered representatives who made unsuitable sales of REITs to customers. During the relevant time period, the CCO “was the direct supervisor of the firm’s retail registered representatives and was responsible for conducting suitability reviews for all customer transactions.” FINRA found that the CCO knew or should have known that the investments were speculative and not consistent with the customers’ investment objectives but failed to take reasonable steps to ensure the suitability of the purchases. The CCO was suspended for 18 months in a principal capacity and fined $20,000.
In a September 2011 SEC settlement, a CCO was found to have aided and abetted his firm’s failure to file a suspicious activity report (SAR) in connection with “international pump-and-dump schemes” perpetrated by the broker-dealer. The SEC found that the CCO, who was responsible for daily reviews of employee and customer transactions and responsible for filing SARs in connection with the firm’s AML compliance program, knew or should have known of the firm’s obligation to file a SAR. Accordingly, the CCO was assessed a civil penalty of $20,000.
In a November 2011 order instituting proceedings, the SEC alleged that an IA and its two owners (one of whom was also the general counsel and “managing member”) willfully violated § 17(a) of the Securities Act, § 10(b) of the Exchange Act and Rule 10b-5, and § 206(4) of the Advisers Act, which prohibit fraudulent conduct in connection with the offer or sale of securities, and that the general counsel aided and abetted the IA’s violations of these provisions.
The SEC alleged that the respondents raised approximately $2.2 million for investments in a hedge fund through material misrepresentation and omissions about the fund. Those misrepresentations and omissions included concealing respondents’ history of customer complaints and the IA’s interest in the fund’s underlying investments, and misrepresenting the fund’s liquidity and the nature of its holdings.
Lying to Regulators
A CCO was suspended for one year and fined $40,000 jointly and severally with other respondents in a February 2012 case. The CCO, who was also the CEO of the firm, provided false and misleading information to FINRA in connection with routine examinations. Specifically, the CCO provided backdated branch office inspection reports and Rule 3130 CEO certifications to cover up the firm’s failure to keep such records.