Large BD/IA Fined $5 Million for Failing to Detect Rep’s Insider Trading

A large retail broker-dealer/adviser agreed to pay $5 Million to settle charges that its compliance policies and procedures were inadequate to detect and properly investigate insider trading by one of its 18,900 registered representatives.  The SEC claims that the firm failed to follow up on red flags from several different functional areas, but the firm lacked the necessary coordination and internal communication.  A group within the Compliance function investigated large positions in the subject security but closed the investigation with “no findings.”  The SEC also faulted the Compliance function for failing to follow procedures and ignoring required follow-ups.

OUR TAKE:  This case shows the continuing trend by the regulators toward a strict liability standard for compliance breakdowns.  This firm had policies and procedures which included testing.  However, the firm missed detecting illegal conduct by one Rep among its nearly 19,000 registered representatives and advisory persons.