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.