BD CEO Fined and Barred for Failing to Stop Boss from Making Illegal Margin Loans
The CEO of a clearing broker-dealer was fined and suspended from supervising because he failed to stop his boss, the CEO of the parent company, from arranging unlawful margin loans to an affiliated entity. According to the SEC, the firm made margin loans to an affiliate that were collateralized by worthless bonds. The firm failed to liquidate the account because the client owed the firm too much money and a liquidation would have caused the firm to fail (which it ultimately did anyway). The respondent broker-dealer CEO pressured his boss to cease making loans and close the accounts, but the firm did not take action. Although the broker-dealer CEO voiced concerns, the SEC faults him for failing “to take additional measures that reasonably would be expected to prevent and detect [his boss’s] actions resulting in [the firm] extending credit in contravention of Regulation T, and resulting in [its] failure to accurately record losses in its ledgers and to file its financial statements in conformity with GAAP.”
OUR TAKE: Just highlighting issues and complaining about them won’t protect you from liability if you have supervisory responsibility. You actually have to take action to stop wrongdoing.