FINRA alleged that starting around May 2009 through March 2010, Respondent Lane delegated all compliance related duties, including:

• the drafting and amending of the Firm’s Written Supervisory Procedures (“WSPs”); and
• responsibility for ensuring that the Firm’s Greenwich, CT branch office was appropriately supervised.

The AWC asserts that these supervisory delegations were given to the Firm’s then Chief Compliance Officer (“CCO”), who served in that capacity as a part-timer. While it may not necessarily be the soundest proposition to hand off the supervision of a FINRA member firm to a part-time CCO, the regulator’s rules don’t prohibit such a practice.  Moreover, with smaller firms, the compliance workload may not require a full time compliance officer and the cost of hiring such an under-utilized employee could be prohibitive.

The problem in this FINRA regulatory case is that Respondent Lane delegated the Firm’s compliance duties to not only a part-time CCO but also to an individual who simultaneously served as a compliance officer and/or part-time Financial and Operations Principal (“FINOP”) at other FINRA firms — and it is alleged that Lane was aware of these outside responsibilities.  These factors set the stage for questioning whether the delegation of compliance duties by Lane was “reasonable” given the attendant circumstances.

The Firm’s Greenwich Branch opened in May 2009 and the two primary registered representatives in that office had significant disciplinary histories, which were the subject of Stipulated Agreements between the Firm and the State of Connecticut’s Department of Banking.   During the roughly ten-month employment of the CCO at issue, he visited the Greenwich Branch about ten times but the bulk of those visits apparently occurred during the earlier days of the location’s opening.

Reservations

The AWC asserts that the part-time CCO expressed reservations about his being able to adequately supervise the two primary registered representatives with disciplinary histories.  Worse for Respondent Lane, FINRA alleged that he was aware of his CCO’s concerns and the fact that the CCO was making infrequent visits to the Greenwich Branch.  Notwithstanding his apparent notice of the CCO’s reservations and the scattered nature of on-site supervision, Respondent Lane allegedly failed to take reasonable steps to follow up and ensure that his delegation of supervisory responsibility was effective and that the Greenwich Branch was reasonably supervised.

Additionally, the AWC alleges that from March 2008 through March 2010, Respondent Lane failed to prepare an annual certification of his firm’s processes to establish, maintain, review, test and modify written compliance policies and written supervisory procedures reasonably designed to achieve compliance with applicable FINRA rules and federal securities laws.  Further, Lane was charged with failing to certify that he had, in fact, conducted one or more meetings with the Firm’s CCO in the preceding twelve months to discuss the firm’s compliance/supervisory processes.

Consequently, the AWC alleged that Lane failed to

• effectively delegate supervisory responsibility;
• ensure that the firm established, maintained and enforced supervisory control procedures;
• create a report detailing the results of a test of the firm’s supervisory controls system; and
• certify to the firm’s supervisory controls.

FINRA deemed such failures to constitute violations of NASD Conduct Rules 3010, 3012, 3013 and 2110 and FINRA Rules 3130 and 2010.  According to the terms of the AWC, Respondent Lane was fined $20,000 and suspended for 30 calendar days in a principal capacity only.

Bill Singer’s Comment

On one level, if the facts as alleged are correct, FINRA’s charges and sanctions are appropriate.  Given the recent negative publicity attendant to Wall Street’s lackadaisical supervision of its registered persons and their business, it would seem a sensible cornerstone of regulation to insist that qualified supervisors reasonably discharge their duties.

As I said, that’s one level of this issue.  Digging down a bit, I’m struck by the seeming hypocrisy of certain aspects of this case.

For starters, how is it that it took until 2012 for FINRA to get around to sanctioning the failed supervisory conduct of Respondent Lane? Given the relatively minor nature of the misconduct cited in this case, why did it take so long to resolve the issues, some of which originated in 2008 — and what does such delayed regulation say about the pace of more important matters?

Perhaps FINRA needs to re-examine its own supervisory policies when it comes to triaging investigations and moving forward to hearings.  One need only wonder whether ineffective supervision at the self-regulatory organization itself permitted the widespread investor carnage of the past decade.  If FINRA itself is held to the “knew or should have known standard” of reasonable regulation, what are we to infer when reading about the past decade’s regulatory failures at the likes of Madoff, Stanford, MF Global, Merrill Lynch, Citigroup, Wachovia, Bank of America, Goldman Sachs, and UBS?

Although FINRA makes much about the fact that the Greenwich Branch had two “Bad Boys” on its roster, that recitation strikes me as a quite disingenuous.

FINRA knew that the two key brokers at the Firm’s Greenwich Branch had troubled regulatory histories that warranted action by the State of Connecticut’s Department of Banking — that information was a regulatory record available to FINRA, a regulator.  Keeping with that record issue, FINRA maintains the Central Registration Depository (“CRD”), a database of all registered persons and their member firms.  Consequently,  how could FINRA itself have been unaware that the Firm’s CCO was a part-timer with simultaneous roles as a compliance officer and FINOP at other member firms?  All that information was logged in to CRD.  If a lowly FINRA examiner had logged on to the CRD system, the CCO’s multiple registrations with multiple FINRA member firms would have revealed themselves in all their troubling glory.

That’s really absurd, if you think about it.  The same bright, red warning flares that illuminated the dark corners of this regulatory nightmare for Respondent Lane glowed equally crimson for FINRA. I mean, seriously, a phone call from FINRA to the Firm in 2009 could have stopped this whole brewing mess in its tracks. Hey, Lane, no way — we’re not going to let you delegate supervision to a part-time CCO with multiple outside compliance and FINOP roles, particularly with those two characters in the Greenwich office. Of course, that’s what I would call “proactive” regulation and, sadly, there just doesn’t seem to be much of that around these days.  Instead, we got a lot of regulating by looking in the rear view mirror.

Inherent in having the two bad boys registered at the branch was the fact that FINRA had not barred those brokers. Given that these two folks were allowed to be registered with a FINRA member firm, then FINRA had to accept its obligation as a regulator toensure that the pubic was fully protected against further harm — and such a role would seem to require more on-site and hands’-on involvement than leaving the task to the best intentions of a member firm. In this case, FINRA didn’t seem to impose meaningful restrictions upon those registered representatives and their employing FINRA member firm; for example, why not simply prohibit the utilization of a part-time CCO at this member during the employment of the two brokers?  Also, why not have scheduled a few surprise inspections of the Firm and the Greenwich Branch in 2009 and 2010?

Oddly missing from the recitation of facts in the AWC is whether the two registered representatives with regulatory histories engaged in any misconduct during the tenure of the part-time CCO.  You’d sort of think that the regulator would have included such assertions in the language of the settlement — all the more to underscore the dangers of unreasonable delegation and oversight. Similarly, the injection of the whole story about the two troubled brokers, comes off as an attempt to add a bit of notoriety to an otherwise bland case.

As a result of Lane’s dubious delegation and lax follow-up, how was the public harmed? It may well be that the two Greenwich brokers engaged in massive fraud costing millions in customer damages.  It may also be that notwithstanding the allegedly failed supervisory practices, nothing was amiss. What is beyond dispute is that the AWC doesn’t connect the dots and serves little remedial purpose because of its omission of such critical information.