The Securities and Exchange Commission has upheld sanctions levied by the Financial Industry Regulatory Authority against a chief compliance officer for failing to establish a reasonable supervisory system or review electronic messages—a decision that one compliance firm says could have a chilling effect on the industry.
In a unanimous Oct. 29 decision, the SEC upheld an appeal of a Financial Industry Regulatory authority decision on the conduct of Thaddeus North, who served as CCO to Southridge Investment Group LLC.
At the time North was CCO, July 2009 through August 2011, Southridge had about 50 registered representatives in several offices.
FINRA found that North violated the broker-dealer self-regulator and other rules by failing to establish a reasonable supervisory system for the review of electronic correspondence, failing to reasonably review that correspondence himself and failing to report a relationship with a statutorily disqualified person.
FINRA then imposed a two-month suspension in all principal and supervisory capacities and a 30-day suspension in the same, to run consecutively and originally fined North $40,000.
The $40,000 fine was apparently reduced by a FINRA hearing panel to $10,000.
However, one compliance firm warned that the action could have a chilling effect on the compliance industry.
“So long as the SEC continues to hold CCOs liable based on retrospective and subjective determinations of how well the CCO implemented the program, good compliance people will continue to either leave the industry or demand hazard pay,” stated Cipperman Compliance Services of Wayne, Pa., in a statement.
The SEC upheld FINRA’s findings of CCO liability because the CCO abdicated his obligation to review emails and failed to follow up on red flags relating to payments to a disqualified individual,” Cipperman noted.
The firm said it believes the disciplinary standard “should be much higher.”
“A CCO should only be liable if s/he participated in the wrongdoing, actively covered it up, or directly and personally benefited,” Cipperman stated, noting it did not in any way condone the lack of diligence alleged.
The SEC said it agreed that North’s failure to establish adequate written supervisory procedures was serious.
“North admits that over a two-year period he never reviewed the firm’s Bloomberg communications. North’s failure to reasonably review electronic correspondence was egregious,” the SEC decision stated.
“The Bloomberg communications were 85% or more of all of the email [that North] was to review,” according to the SEC document.
North admitted that, from July 1, 2009, through Sept. 1, 2011, he did not review the vendor’s repositories containing the firm’s Bloomberg messages or chats and that at his hearing, he testified that “all email review is boring.”
From June 2010 through August 2011, North reviewed emails only six times and there were significant stretches, ranging from three to five months, in which he failed to review any emails, the SEC wrote.
The agency also pointed out that North didn’t report to FINRA that a Southridge representative entered into a business relationship with a statutorily disqualified individual.
North had appealed to FINRA‘s National Adjudicatory Council.
NAC, in March 2017, affirmed the FINRA panel’s findings of liability but reversed the finding that North violated MSRB Rule G-17, reversed the imposition of a censure and decreased the original suspensions and fines imposed.
MSRB Rule G-17 deals with conduct of its municipal securities business and says brokers must not engage in any deceptive, dishonest or unfair practice.
“The suspension and fine will impress upon North the need to report a relationship with a statutorily disqualified person to FINRA so that he reports such important information in the future. For these reasons, we find that FINRA’s imposition of a 30-business-day suspension in all principal capacities and a $10,000 fine are remedial sanctions and are neither excessive nor oppressive,” the SEC decision stated.
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