Firm Settles Charges for Failures in Monitoring Employee Securities Accounts
Commentary by Glen Barrentine
A firm settled FINRA charges for failing to adequately "supervise the outside securities accounts disclosed to the firm by its associated persons."
According to the AWC, the firm required "employees to disclose outside securities accounts, obtain compliance approval to trade in those accounts, and, if approved, make arrangements for these account statements to be provided to [the firm] for review on at least a quarterly basis." FINRA found that the firm's written supervisory procedures ("WSPs") failed to specify how the firm would document its review of statements of outside securities accounts or track that those reviews had been completed. FINRA found that certain trades in 25 employees' brokerage accounts went unreviewed and that the firm failed to review, on a quarterly basis, approximately 84 outside securities accounts belonging to 35 employees.
As a result, FINRA found that the firm violated FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision").
To settle the charges, the firm agreed to (i) a censure and (ii) a $30,000 fine. FINRA noted that the firm updated its WSPs and updated its system for supervision of employees' outside security accounts.
Commentary
In this matter, the firm appears to have made at least three mistakes. First, its WSPs did not specify how the firm would document its review of employees' outside securities account statements. Second, the WSPs did not specify how the firm would track completed reviews. Third, the firm, for an almost two-year period, failed to conduct required quarterly reviews, including failing to review 14 employee accounts entirely during this time, it seems likely that the last of these was the substantive issue that led FINRA to impose the $30,000 fine.
While it is important to get WSPs right, which means that the WSPs should specify how a review should be documented and its completion tracked, it is also important to complete the required reviews in a timely manner. For this reason, firms should have yet another procedure in place to ensure that the firm has a supervisory process to ensure that required reviews are being completed on a timely basis. This process can be simple, e.g., requiring each supervisor to provide monthly or quarterly reports attesting to the status of each required review. The important point is that a firm's CCO should have a way of knowing if reviews are not being made on a timely basis. Such a report will allow the firm to address review shortfalls in a timely manner before they get out of hand.