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FINRA Safe Harbor Doesn’t Save Barclays From Big SEC Fine

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Barclays Capital has agreed to pay $28 million in restitution, fines, interest and disgorgement for failing to properly supervise two brokers that the Securities and Exchange Commission alleges made misrepresentations about prices and profits in connection with secondary market trading of non-agency residential mortgage-backed securities occurring nearly five years ago.

Cipperman Compliance Services asserts that the agency is breaking new legal ground in its May 1 action against Barclays in that the agency is “explicitly linking underlying securities law violations by registered reps as a predicate to a failure to supervise charge and charging a firm even though it complied” with a stated Financial Industry Regulatory Authority safe harbor.

According to the SEC’s order, from June 2009 through December 2012, traders on Barclays’ non-agency RMBS desk “knowingly or recklessly made false or misleading statements to Barclays customers and/or charged Barclays customers undisclosed excessive markups.”

Barclays, the SEC asserts, “had the means to monitor communications for false or misleading statements but failed to identify this misconduct.”

In some instances, the two reps “made false or misleading statements directly to customers. In other instances, they made false or misleading statements to Barclays salespersons, and the salespersons then communicated the false or misleading information to customers,” according to the order.

Also, Barclays “failed reasonably to detect and review whether its markups for certain non-agency RMBS transactions were reasonable,” and the firm maintained a compliance system that was designed to “detect transactions with markups above a certain threshold for further review, but that system was defective.”

As a result, the order states, “Barclays did not detect and review excessive markups on the intraday trades in non-agency RMBS that are the subject of the order.”

In commenting on the order, Cipperman says that the SEC faults Barclays for failing to implement a system to monitor customer communications. “This compliance breakdown constituted a failure to supervise because ‘the failure to have compliance procedures directed at [an underlying securities law violation] can be evidence of a failure reasonably to supervise.’”

The SEC further faulted Barclays for charging excessive markups, Cipperman said, even though such markups were within FINRA’s 5% safe harbor policy because “Regardless of the applicability of the five percent guidance, the FINRA was explicit in stating that ‘[a] broker-dealer may also be liable for excessive markups under the antifraud provisions of the Securities Act and the [Exchange] Act.’”

The two brokers were also fined and suspended.

The SEC’s action, Cipperman opines, proves that the securities regulator “continues to move to a strict liability standard such that any violation by an employee constitutes a failure to supervise. Also, broker-dealers must be wary about relying on stated FINRA safe harbors.”

— Check out LPL Fined $900K Over Failure to Send 1.6M Notices to Clients  on ThinkAdvisor.


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