FINRA Levies $1 Million Fine for Failing to Monitor Employee Accounts
FINRA fined a large broker-dealer $1 Million for an inadequate supervisory system that relied too heavily on employee self-reporting, which allowed one rep to conduct a Ponzi scheme. The BD used an automated system that monitored employee account activity. However, the system was based on social security numbers and relied on employees to manually input accounts into the system where the SSN was not the primary account identifier. As a result, FINRA alleges that the BD failed to monitor 40,000 employee accounts over a five-year period. FINRA imposed the fine even though the BD reimbursed all investors harmed by the Ponzi scheme.
OUR TAKE: All compliance and supervisory systems rely to a certain degree on employee reporting (e.g.. pre-clearance, insider trading, certifications). The challenge for firms and their compliance and supervisory personnel is when and how to verify information provided by employees.