BE CAREFUL WHOM YOU TRUST
When one broker-dealer opened up its doors and invited in a new partner, it got more than it bargained for. After managing the firm alone for a lengthy period of time, the president of the small firm accepted a partner into the fold and permitted him to open his own office. Unfortunately, the firm did not, according to the SEC, put into place a mechanism by which to supervise the new partner. Apparently, this created an opportunity for the new partner to run amok, running a separate unregistered broker-dealer out of that office and selling all kinds of products on an undisclosed basis.
The offending partner was ultimately barred from the industry, but that wasn't enough to save the broker-dealer itself. After a lengthy and undoubtedly expensive enforcement action in which the firm hired an independent consultant and also agreed to a fine and censure, the firm's website indicates that it is closed. In November 2011, the firm applied for termination of its FINRA membership. The owner could not be reached for comment.
Bottom line: No one should be above suspicion. In this action the regulators spoke of how the compliance policies and procedures were not updated to reflect the changes at the firm. Further, the firm's alleged lack of follow-up on the outside business activity indicates that possibly there is expectation that firms have in place written protocols advising in concrete detail what steps should be in place when those "What is this?" situations arise.
Most firms do not deal with fraud on a routine basis and as such may not recognize it initially. While the regulators do provide red flags to help sensitize firms to the signs of fraud, the busy routine of life often gets in the way. That funny email or strange document often does not get the second look that it deserves.
What This Means For You
Pressure is on and regulators, both SEC and FINRA, are keeping the pressure on senior executives of firms. While high-profile enforcement actions against CEOs and chief compliance officers have not been commonplace in the past, expect that trend to change. And because these actions are rare, each such matter is discussed and dissected by the entire compliance community. Word spreads quickly, and if one compliance department makes a significant change, firms of similar size and model will typically follow suit.
Not only does compliance pressure put all employees and officers of a firm under an even more detailed microscope, it also makes operating a broker-dealer or RIA firm more expensive. Some firms will find they can't continue on alone. Tom Sboto, managing director of mergers and acquisitions at independent broker-dealer First Allied Securities in San Diego, says, "Many broker-dealers have been more open to discussing a possible merger or acquisition with First Allied because their margins are eroding and the cost of doing business is increasing."
Leaving aside the potential for more mergers and acquisitions, financial professionals can expect daily routines at work to change thanks to stricter compliance rules. Certainly registered representatives or advisors whose U4s contain any red flags should expect significant compliance and regulatory interest in everything they're doing.
Heightened oversight won't be limited just to the workplace, either. A financial professional's personal life could be fair game for review because of the monumental damage that can occur if he takes advantage of the trust that people place in him.
Only time will tell exactly how much the recent enforcement cases will reshape the compliance audit process. However, what's clear is that firms and financial professionals who don't have a good grasp of their compliance obligations are increasingly going to find themselves subject to disciplinary actions or even termination. And because regulators have demonstrated a willingness to hold top-level executives responsible for misdeeds committed by those they were supposed to be supervising, you can be sure heads of firms and of compliance are going to be watching everyone they work with closely - very closely - in the years to come.
Jennifer Woods Burke is a Jersey City, N.J., securities attorney and the founder of compliance consulting firm CompliGuide.
