Bates Research - 04-05-17

Private Client Enforcement Priorities Roundup

by Alex Russell, Director - Institutional & Complex Litigation

I had the pleasure of attending a great breakout panel at SIFMA’s 2017 Compliance and Legal Society Annual Seminar in San Diego called “Private Client Enforcement Priorities,” moderated by Caroline Hall.  The panel focused on how firms have responded to FINRA’s enforcement activity over the past year.  Providing their perspective and joining Caroline Hall (Raymond James Financial, Inc.) on the panel were Jeffrey Coverdell (Wells Fargo & Co.), Cece Mavico (LPL Financial LLC), Susan Merrill (Sidley Austin LLP), and Susan Schroeder (FINRA).  Some of the areas the panelists focused on were the UIT examination letters, AML and compliance personnel liability, and high-risk brokers.


The panel began by discussing all of the targeted examination letters issued by FINRA, and in particular the letter related to Unit Investment Trusts (UITs).  The UIT letter was called out in particular, as several panelists indicated that it felt more like an enforcement action than just a review, since it asked the financial institution to specifically name the top 25 producers in UITs.  Ms. Schroeder responded to this perception by noting that it was simply the agency’s way of limiting the scope of what needed to be provided, with the alternative being that FINRA would have had to request (and review) all UIT rollovers, rather than limiting their review to only those individuals most active in rolling UIT investments.


The discussion also covered actions related to AML, and specifically focused on charges FINRA has brought against compliance personnel in association with AML deficiencies.  The industry panelists expressed concern about this trend, and what it meant for compliance functions in general.  Ms. Schroder indicated that in most enforcement actions that named a CCO or AML supervisor, 1) the individual wore multiple hats within the organization, 2) the individual had failed to monitor or delegate responsibility to someone else to monitor specific activity, or 3) the issue was found to be a widespread systemic failure.  She reviewed FINRA’s actions for the panel, highlighting where the CCO (or AML supervisor) had failed to adequately perform specific duties that they had a responsibility for, or in some instances where they had failed to fulfill those duties at all.  She reiterated that holding individual compliance personnel responsible is not an agency goal. 

Even with these reassurances, the panel went on to discuss when, if ever, it is appropriate for compliance personnel at a high level to leave their job as a result of inaction by the firm.  The panel debated whether or not there was a threshold for compliance personnel, a point when–after having raised numerous warnings, spoken to individuals about being understaffed, or about a potential problem area, and documented those exchanges–that they would need to leave in order to guard against personal liability. (We’ve blogged about this issue before, including a recent three-part series: 1 2 3.)  There was no clear consensus on when this would be an appropriate step to take.

High-Risk Brokers

The panel ended with a great discussion of “recidivist” brokers. The panelists were quick to point out that even using the term “recidivist” is misleading, since by definition it indicates repeat criminal behavior by a convicted criminal, which is not necessarily a characteristic of the people this term is often used to refer to.  We’ve blogged before about FINRA’s priorities for this year, and specifically their priority in establishing a dedicated examination unit to deal with the issue of high-risk brokers.  The panelists were concerned about the confluence of FINRA’s use of big data to bring enforcement actions, and the fact that many marks that can appear on a CRD are not indicative of the type of red flag that indicates a broker may be defrauding clients.  Each of the panelists had great examples of individuals who had marks on their CRDs that were extraneous to activity in the financial industry, but which would "count" towards a data-driven test that simply looked at the amount of marks on the broker’s CRD in categorizing people as "high-risk."  Ms. Schroeder acknowledged that this was an area in which FINRA was allowing for a more qualitative review prior to bringing enforcement action, rather than trying to identify bright-line tests.  All members agreed that the goal of keeping those who would steal from, or otherwise harm investors, out of the industry was valuable, and that firms who employ those types of individuals should face greater scrutiny. 

The panel provided an engaging discussion around how the industry responds to FINRA and the difficulties in trying to determine how to best meet shared industry and regulator goals. 


Bates Group has assisted clients with responding to, or preparing for, examination letters related to UIT activity, as well as AML investigations and reviews (both look-back and business as usual investigations) and AML compliance solutions.  For more information on how we are helping our clients in those areas, please contact:

Scott Lucas
Managing Director, Regulatory and Internal Investigations
Geoff Winkler
Director, Fraud and Forensic Investigations

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