A large broker-dealer agreed to pay a $2.5 Million penalty and appoint an independent consultant because a computer coding error resulted in delivering incomplete data to the SEC during an investigation.  The SEC alleges that a code change to a back office data processing system omitted certain error accounts from blue sheet reporting over a 6-year period.  The SEC claims that the SEC staff discovered the error when reviewing information requests related to an investigation of an intruded account.  Although both the IT and Compliance departments had conducted testing, neither discovered the error.  The SEC charges violations of the Exchange Act’s recordkeeping rules.

OUR TAKE: This type of breakdown should worry all Chief Operating Officers.  The IT folks likely did not understand the compliance requirements, and the Compliance team likely had little understanding of how the technology systems worked.  The result is a $2.5 Million fine based on a breakdown discovered by SEC examiners investigating an unrelated issue.