December 18, 2014
In a recent FINRA regulatory settlement, 18 registered folks sort of fell off their firm's compliance radar. It's not a case involving earth-shattering misconduct. Sometimes stuff just falls through the cracks. Every wrong on Wall Street isn't intentional. Ya got yer accidents. Ya got yer negligence. Nonetheless, after you've read today's column, walk about your branch office and make sure everything is plugged in and turned on.
Case In Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Commerce Brokerage Services, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Commerce Brokerage Services, Inc., Respondent (AWC #2014039170501, December 11, 2014).
Commerce Brokerage Services, Inc. has been a FINRA member since 1986 and employs about 93 registered individuals at 44 branch offices. The AWC asserts that the firm had no prior relevant disciplinary history.
Off The Radar
As required pursuant to former NASD Rule 3010(a) and (d), in order to comply with its obligations to reasonably supervise, Commerce was required to review the business-related electronic correspondence of its registered representatives. The AWC alleged that from October 2012 through April 2014, Commerce failed to include the email addresses of 18 reps in its electronic communication surveillance system; and, consequently, failed to review said communications of the unmonitored individuals.
FINRA deemed Commerce's conduct to constitute violations of both NASD Rule 3010 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Commerce a Censure and $10,000 fine.
Bill Singer's Comment
Alas, FINRA does have this annoying tendency to stay tight lipped.
How come the Respondent member firm didn't monitor those 18 folks? Dunno 'cause the AWC doesn't say.
Was it a glitch? Dunno.
Did some third-party contractor screw up? Dunno.
How did FINRA find out that there was a failure to monitor? Hey, who the hell knows -- so stop asking me all these questions without apparent answers.
The expression goes: Out of sight, out of mind. Clearly, FINRA doesn't think that the aforementioned should be a compliance department's motto, and it's hard to argue with that perspective. At first blush, 18 unmonitored reps doesn't come off as a particularly huge number; however, when you consider that it was about 20% of Commerce's staffing, that does present a legitimate regulatory concern.
Ultimately, it would have been helpful for this AWC to explain how these 18 folks fell through the cracks so that other FINRA member firms could learn from that lesson. Regardless, one beneficial aspect of reporting about these types of miscues is that it often prompts others to check their own compliance policies and see if they too have similar problems. So . . . you've been warned!
As now set forth in relevant part of current FINRA Rule 3110. Supervision
(b) Written Procedures
(1) General Requirements
Each member shall establish, maintain, and enforce written procedures to supervise the types of business in which it engages and the activities of its associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.
. . .
(4) Review of Correspondence and Internal Communications
The supervisory procedures required by this paragraph (b) shall include procedures for the review of incoming and outgoing written (including electronic) correspondence and internal communications relating to the member's investment banking or securities business. The supervisory procedures must be appropriate for the member's business, size, structure, and customers. The supervisory procedures must require the member's review of:
(A) incoming and outgoing written (including electronic) correspondence to properly identify and handle in accordance with firm procedures, customer complaints, instructions, funds and securities, and communications that are of a subject matter that require review under FINRA rules and federal securities laws.
(B) internal communications to properly identify those communications that are of a subject matter that require review under FINRA rules and federal securities laws.
Reviews of correspondence and internal communications must be conducted by a registered principal and must be evidenced in writing, either electronically or on paper.