BD Fined $2 Million for Under-Resourcing Compliance Monitoring
FINRA fined a large broker-dealer $2 Million for under-resourcing its compliance function, thereby allowing unlawful short-selling. As the firm’s trading activity increased, the firm continued to rely on a primarily manual system to monitor compliance with Regulation SHO’s requirements. The handful of employees tasked with monitoring trading requested more resources as their 12-hour workdays could not adequately surveil the activity of 700 registered representatives. FINRA alleges that the firm routinely violated Regulation SHO by failing to timely close-out positions, illegally routing orders, and failing to issue required notices. As part of the settlement, the broker-dealer also agreed to hire an independent compliance consultant.
OUR TAKE: Firms need to track business activity to ensure that compliance and operations infrastructure keep up with the business. A good metric is whether the firm spends at least 5% of revenues on compliance infrastructure including people and technology.