Wall Street Compliance Practices Come Under Scrutiny by FINRA and the SEC

February 2, 2012

Recently, Street Sweeper reported on two regulatory settlements by the Financial Industry Regulatory Authority ("FINRA") and the Securities and Exchange Commission ("SEC") that addressed whether the delegation of compliance supervisory roles was reasonable.

In the Matter of John Derek Lane, Respondent (AWC 2010020872301, January 27, 2012), Street Sweeper considered FINRA's allegations against a brokerage firm's CEO, who the self-regulator believed had acted unreasonably in delegating certain supervisory roles to his firm's part-time Chief Compliance Officer.  FINRA appeared troubled by the additional demands imposed upon this CCO by his simultaneous employment at other brokerage firms as a compliance officer and/or a FINOP.  Adding further fuel to this regulatory fire was the existence of two brokers with regulatory histories who were to be directly supervised by the CCO.

Although the regulator's case is commendable on many levels, Bill Singer noted some reservations, among which were:

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.

In the Matter Of 1st Discount Brokerage, Inc. and Michael R. Fisher, Respondents, the SEC tackled a similar situation to that presented in FINRA's Lane.In the SEC case, the federal regulator appeared distraught about why a brokerage firm missed opportunities to detect an ongoing multi-million dollar Ponzi fraud.  Notably and notoriously, the firm was supposed to conduct surprise audits but, instead, sent head's up of the on-site visits.  Worse, the prior years' findings that were memorialized in an audit report were not provided to the subsequent years' audit team.

In discussing this case, Bill Singer warns of the persistent trend throughout the regulatory spectrum:

An unfortunate byproduct of what I view as the overly accommodating nature of Wall Street's present day regulatory scheme is that the cost of maintaining adequate compliance is more easily carried by large firms such as Merrill Lynch, JP Morgan, Morgan Stanley Smith Barney - and by larger organizations such as LPL or TD Ameritrade.  Why is this?  In my opinion, it's because recent regulations have taken on an absurd one-size-fits-all character that imposes reporting obligations upon smaller firms that often amounts to little more than endlessly ticking off "not applicable" or "does not apply."

For more details on the FINRA and SEC cases, READ:

  1. Pre-Announced Compliance Audits Criticized In SEC Ponzi Settlement

  2. FINRA Sanctions Brokerage CEO For Delegating To Part Time Compliance Officer and FINOP