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.”
Pitfalls of Premade Supervisory Systems
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.