Even officials on the front lines of catching wrongdoing at broker-dealer and advisory firms can be guilty of wrongdoing themselves.
The law firm Sutherland found a bevy of violations during its annual look at Securities and Exchange Commission and Financial Industry Regulatory Authority disciplinary actions targeting chief compliance officers and in-house counsel for BDs and advisory firms.
From July through December 2012, Sutherland found that FINRA and the SEC brought disciplinary actions against CCOs and in-house counsel for a range of conduct, including failure to supervise; aiding, abetting and causing primary violations; anti-money-laundering (AML) deficiencies; making false representations to staff; FINRA Rule 8210 violations; and registration deficiencies.
Following are some of the notable violations Sutherland highlights in each area: Supervisory Systems
Simply having procedures is usually not enough. In general, firms must also enforce those procedures. In an October settlement, FINRA alleged that a CCO failed to enforce his firm’s procedures in connection with excessive trading in four customer accounts.
Specifically, FINRA alleged that the CCO failed to:
—Conduct quarterly reviews of customer accounts to detect excessive trading as required by his firm’s written supervisory procedures (WSPs);
—Contact customers whose turnover ratios exceeded six (a threshold set in the firm’s procedures), despite a requirement in the procedures that he should take “immediate steps to determine that such trading activity is acceptable to customers”; and
—Send an activity letter as required by the WSPs to account holders whose accounts had a turnover rate of greater than two or had more than eight trades in one month.
For these and other alleged failures, FINRA suspended the CCO for 30 days in a principal capacity and fined him $20,000.
Written supervisory procedures are not one-size-fits-all because BDs engage in different types of business. Consequently, it is important that procedures are tailored to the firms’ business lines.
In a December complaint, FINRA alleged that a firm’s written supervisory procedures were inadequate with respect to the sale of unregistered securities. In 2009, the firm allowed a customer (a corporation engaged in stock promotion) to deposit nearly a billion shares of unregistered, nonexempt securities into firm accounts and then to liquidate the positions, resulting in significant commissions for the firm.
With respect to the firm’s WSPs, FINRA alleged that, while the firm had procedures related to the sale of unregistered securities, they “were not tailored to the securities liquidation business that [the firm] conducted.”
In an October settlement, FINRA alleged that a CCO “had supervisory responsibility” over the firm’s president and owner and that the CCO “was responsible for reviewing transactions at the firm, including trades and wire transmissions, for potentially suspicious activity and other irregularities.”
Between July 2008 and April 2009, the firm’s president had a client who controlled three accounts: two maintained by hedge funds and one maintained by the client’s wife. The client engaged in a scheme that involved reallocating profitable trades from the hedge funds’ accounts to his wife’s account and unprofitable trades in the other direction.