A Cautionary Tale For Broker-Dealers
FINRA Charges Firm for Supervisory Failures
In October, ViewTrade Securities, a broker-dealer, found itself facing regulatory action by FINRA, worth $40,000 in fines, for failing to adequately supervise the outside brokerage accounts of its registered representatives. Starting in early 2020, FINRA found that the firm had not established, maintained, or enforced a supervisory system designed to oversee these accounts. This case sheds light on the critical importance of building and maintaining an employee compliance program in preventing regulatory missteps, while prompting a proactive and comprehensive approach to adhering to regulatory oversight.
FINRA’s actions highlight several issues in the firm’s supervisory procedures under Rule 3110(d), which mandates that firms adhere to certain processes for reviewing securities transactions. These processes are designed to:
- Detect trades that might violate the Exchange Act and associated rules
- Comply with FINRA’s own insider trading and anti-manipulation rules
Enlisting the help of regulatory technology software can assist firms in managing and maintaining a holistic view of employees whose trading activities need to be supervised. By leveraging advanced compliance tools for managing employee conflicts of interest, organizations can address gaps in oversight that may stem from longstanding regulatory requirements, not just new mandates. This proactive approach helps reduce risks, ensures adherence to established rules, and supports comprehensive regulatory compliance.
What Lessons Are Learned
FINRA requires that registered representatives obtain written consent from their employer before opening securities accounts and that the employing firm receive duplicate account statements for monitoring purposes.
While the compliance department at this firm had written and manual procedures to oversee these accounts, including reviewing data to identify violations including insider trading, FINRA discovered a list of flaws in implementation including:
- Verification of Statement Receipt: The firm’s procedures failed to define how it would confirm receipt and review of duplicate statements for disclosed outside accounts.
- Guidance on Securities Violations: The procedures lacked clear direction on how potential securities violations would be identified and investigated.
- Timeliness of Reviews: Reviews were not conducted promptly, with some accounts going unreviewed for more than six months.
Proactive Employee Compliance with StarCompliance
This enforcement action illustrates the challenges firms face in maintaining compliance with FINRA’s rules and the high costs of inadequate manual procedures. At StarCompliance (Star), the complexities of supervising personal trading, including monitoring outside brokerage accounts, can easily be maintained through its Employee Conflicts of Interest solution by:
- Automating the gathering and reviewing of account activity and duplicate statements
- Detecting patterns of potentially risky behavior through advanced data analytics
- Ensuring timely and thorough investigations of potential violations
- Maintaining a clear audit trail to demonstrate compliance to regulators
Star helps firms detect and resolve issues before they escalate, safeguarding the company’s trust, pricey regulatory penalties, as well as the livelihood of the employee base. To learn more about Star and its SaaS-based employee compliance software, schedule a personalized demo here.
Best Practices Guide: Detecting Insider Trading
