Large BD Charged with Conflicted Compliance and Supervisory Controls
FINRA has commenced disciplinary proceedings against a large clearing firm for a wide range of compliance and supervisory failures related to its market access business. FINRA alleges that the firm did not (i) monitor accounts for manipulative practices such as high frequency trading, spoofing, and layering, (ii) implement reasonable anti-money laundering procedures, and (iii) adopt written supervisory procedures reasonably designed to prevent violations of the securities laws. FINRA alleges that the compliance personnel responsible for reviewing the trading activity had a serious conflict of interest because a substantial portion of their compensation depended upon the profits from the accounts they were charged with reviewing. FINRA asserts that the firm had more than adequate notice of the applicable regulatory issues through industry-wide notices such as the Exam Priorities Letter and published disciplinary proceedings.
OUR TAKE: This is the first enforcement proceeding (to our knowledge) that a regulatory agency has specifically raised the issue of an unlawful conflict of interest where a compliance officer’s compensation is based on firm profits. Should firms re-assess incentive compensation structures including those based on firm performance or assets under management? Doesn’t all compensation (including salary) ultimately depend on firm profitability? Can internal employees ever be truly independent?