Broker-Dealer Fined for Reg BI Compliance Failures
Commentary by Jeff Ziesman
A broker-dealer settled SEC charges for Regulation Best Interest violations concerning structured note recommendations.
According to the Order, the firm failed to resolve known compliance system deficiencies related to a merger with another broker-dealer. The SEC found that the firm's systems did not have accurate customer investment profile and customer holdings information for the acquired accounts. The SEC said that thousands of customer accounts were migrated without properly transferring investment profile data, such as risk tolerance and investment time horizon. As a result, the SEC found that firm representatives were unable to verify whether new structured note recommendations were suitable for these clients. The SEC also concluded that the firm (i) failed to generate or clear exception reports on structured note transactions in a timely manner, (ii) processed recommendations without sufficient customer information and (iii) approved non-compliant transactions.
The SEC determined that the broker-dealer violated Exchange Act Rules 15l-1(a)(1) ("Regulation Best Interest").
To settle the charges, the broker-dealer agreed to (i) cease and desist from further violations, (ii) a censure and (iii) pay a civil penalty of $325,000.
Commentary
The SEC continues to bring Regulation Best Interest ("Reg BI") cases for failing to meet the compliance date obligations of that Rule. In this matter, the SEC imposed a $325,000 financial penalty on the broker-dealer for failing to comply with Reg BI. This level of financial penalty seems punitive relative to the alleged misconduct contained in the SEC Order and the size of the firm.
In this case, the broker-dealer recommended and sold structured notes to customers. Also, during the Relevant Period, the broker-dealer merged with another broker-dealer; as a part of the process that broker-dealer's customers came over to the adviser's platform and the merged firm's registered representatives became the firm's representatives. The SEC found that the broker-dealer was aware several months prior to the integration that certain customer investment profile information would not map properly from the merging broker-dealer's clearing firm to the adviser's clearing firm, purportedly because of differing profile fields and other information that did not transfer at all. This caused the broker-dealer to have inadequate information regarding these new customers to the firm, in order to make reasonable and appropriate recommendations and sales. Finally, the SEC found that the broker-dealer failed to create appropriate exception reports for some of these transactions during the Relevant Period.