FINRA Cites RBC Capital Market's Supervisory Review, Personnel Turnover, and Outdated Tech

November 1, 2022

In a recent FINRA AWC regulatory settlement, RBC Capital Markets was cited for the manual nature of its paper statement review process, personnel turnover, and outdated technology systems.  Those are interesting allegations by a Wall Street regulator. In discussing the settlement, we ask some provocative questions about the limits of human oversight. Further, we wonder as to the impact of the Covid Pandemic on personnel turnover. Finally, at what point does tech become outdated?

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, RBC Capital Markets submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. 
In the Matter of RBC Capital Markets, LLC, Respondent (FINRA AWC 2020067000501)

The AWC asserts that  RBC Capital Markets, LLC has been a FINRA Member Firm since 1993 with over 6,000 registered persons at 301 branches.  

2018 - 2021: Supervision of Personal Brokerage Accounts

During the relevant period between June 2018 and February 2021, RBC's written supervisory procedures required employees to disclose their personal brokerage accounts to the firm; however, the AWC alleges in part that:

During the period June 2018 through February 2020, the firm failed to have in place a supervisory system, including written supervisory procedures, reasonably designed to timely review paper statements from employees' outside accounts. For example, the firm had no prescribed time frame to track, reconcile, and review statements. As a result, and due to the manual nature of the paper statement review process, personnel turnover; and outdated technology systems, as of February 2020, the firm had a backlog of approximately 8,950 unreviewed account statements, with some dating as far back as June 2018 2 The firm's review of that backlog was not completed until February 2021.

In addition, the firm manually tracked receipt of paper statements, had no system in place to notify the firm or employees that statements were missing, and had no procedure for following up on missing statements. As a result, in some instances, the firm did not receive paper statements for review, For example, after the firm identified the backlog of unreviewed statements described above, it discovered that approximately 2,600 additional statements had not been mailed to the firm. 

= = =

Footnote 2: FINRA did not identify any transactions that violated the federal securities laws.

20 Months versus 32 Months

The "during the period" timespan noted above for the failed supervision ran from "June 2018 through February 2020;" however, that is in contrast to the more expansive "relevant period" for the overall AWC that ran "between June 2018 and February 2021."  The failed supervision spanned six months in 2018, 12 months in 2019, and two months in 2020 for a total of 20 months. The firm's overall cited misconduct during the more expansive "relevant period" occurred over 32 months and ended in February 2021. At the end of the 20-month failed-supervision period set forth in the AWC, RBC had not reviewed just shy of 9,000 account statements of which some were as old a June 2018. Notably, the AWC asserts that it was not until February 2021 (the end of the "relevant period") when the firm caught up with that cited back-log. The AWC depicts this byproduct of RBC's failed supervision:

First, the manual review process did not include a review for trading ahead of material changes in research. The firm's written policies and procedures prohibited trading based on advance knowledge of material changes in the film's research, including a rating change or initiation or discontinuation of coverage. The firm's procedures required review of certain employee trading in a security within three days prior to the issuance of a report on the issuer containing a material change. Although the firm conducted such a review for electronic statements, it failed to conduct the same or a similar review for paper statements subject to manual review. 

Second, the firm's written policies and procedures required that certain employees who purchased a security hold that security for at least 30 days before the security could be sold. The firm's procedures required review for violations of this holding period policy. Although the firm's review of electronic statements checked for compliance over adjacent months, the paper statement review consisted only of looking at purchases and sales that occurred within the same month. Accordingly, the manual review process would not identify a violation of the holding period when there was a purchase in one month and a corresponding sale within the 30-day holding period in the following month. 

Therefore RBC violated FINRA Rules 3110 and 2010. 


FINRA deemed the above supervisory issues to constitute violations of FINRA Rules 3110 and 2010; and in accordance with the terms of the AWC, FINRA imposed upon RBC Capital Markets a  Censure and a $360,000 fine.

Bill Singer's Comment

Compliments to FINRA

First, compliments to FINRA on an excellent AWC. What I particularly applaud is the thoughtful discussion of what was wrong with RBC's reviews/policies/procedures. As a result of FINRA taking the time to discuss what went wrong and why, the AWC is elevated into something more than a mere wagging of a regulator's finger -- the regulatory settlement serves to educate compliance and supervisory staff as to "Better Practices" and also offers the outline of a debugging routine for similar efforts at other brokerage firms. 

The not-so-complimentary stuff. 

The AWC asserts that "This matter originated from FINRA's 2019 cycle examination of the firm." Supposedly, sometime in 2019, FINRA examiners waltzed into RBC and gave the firm what we should politely reference as a regulatory enema. In keeping with that less than lovely imagery, the cycle exam was likely no fun for any of the participants. That being sad, how the hell did FINRA conduct a 2019 examination and here we are, three years later in 2022, and it's only now that the violations are being settled? 

Yes, there are likely some fair explanations as to the three-year delay between the exam and the AWC, some of which might reference the 2020 - 2022 Covid Pandemic. On the other hand, geez, if the AWC asserts that it was only in February 2021 that RBC cleaned up its backlog, then you'd sort of think that sometime by February 2022 (an entire 12 months later) that FINRA would have put RBC's feet to the fire and have extracted either an AWC or moved forward with a Complaint. Keep in mind that it was only in late October 2022 that FINRA caught up to its own apparent back log with RBC's case. More than a bit of irony there, no? To some extent, FINRA is a victim of its own well-written AWC. The case set out in the October 2022 settlement agreement is compelling and specific, which prompts one to wonder as to why the resolution was so protracted and delayed after the 2019 exam (which had uncovered then-extant 2018 misconduct).

An opportunity to further educate the industry

One aspect of the AWC that I would encourage FINRA to follow up on via a Notice to Members of some extended commentary is the finding that the back-log at issue was "due to the manual nature of the paper statement review process, personnel turnover, and outdated technology systems . . . " Those are interesting observations by the regulator and warrant some further guidance. 

For example, is FINRA suggesting that a "manual" review of statements is inherently flawed or unreliable, and that RBC's oversight at issue should not have depended upon human beings but shifted to a computer? It would be interesting to understand FINRA's experience with the accuracy and reliability of human versus machine reviews of this nature. 

Another consideration is what (if any) leeway FINRA afforded to RBC "personnel turnover" during the Covid pandemic. If FINRA was particularly troubled by turnover in RBC's compliance department, I would appreciate some pointed reference to the actual staffing numbers and some indication as to when and where they fell to unacceptable levels. Also, if, in fact, staffing issues were prompted by Covid, did FINRA's sanctions reflect that? 

Finally, what exactly constituted the "outdated" nature of RBC's technology?  Again, such a practice pointer from FINRA might be of great assistance to arming compliance staff with a compelling argument in favor of increasing budgets and opting to incur the costs of an updated program. Also worth exploring, if the technology was not outdated, would that have indicated a more protracted supervisory problem -- and would that have induced FINRA to increase its sanctions?

FINRA Cites RBC Capital Market's Supervisory Review, Personnel Turnover, and Outdated Tech ( Blog)


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