Firm and Principal Sanctioned for Failing to Supervise Independent Contractor
The SEC sanctioned a broker-dealer and its principal for failing to supervise an independent contractor that was perpetrating a Ponzi scheme. The SEC charges that a properly implemented supervisory system would have uncovered the fraud. According to the SEC, the firm did not provide previous compliance audit reports to subsequent auditors and did not perform unannounced audits. As a result, the firm failed to identify the repâ€™s continuing pattern to mislead clients about his operations and affiliation with the firm. The SEC also charges that the firm should have investigated rapidly declining commissions. Citing the Royal Alliance case (1997), the SEC said that the firm had a heightened supervisory obligation because it operated through independent contractors that utilized â€œDBAâ€ names and offices.
OUR TAKE: Through the recent recession, we have seen the resurrection of the independent contractor model because firms are less willing to commit resources. Firms should note the heightened supervisory obligations.