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by Howard Haykin

When a broker-dealer has failed to develop and implement adequate policies and supervisory procedures (“WSPs”), should that firm’s Chief Compliance Officer (“CCO”) be faulted for having failed to anticipate business or regulatory risks associated with specific types of transactions and activities?

That’s the question was raised in the Financialish article, “Revere Securities and Ex-BOM Settle FINRA Microcap/AML Charges,” where FINRA fined the firm for not having adequate policies and procedures in place for dealing with suspicious activity related to microcap stocks – specifically, the deposit and liquidation of millions of shares of microcap stocks (FINRA AWC #2014039396101).

The ex-branch manager (“BOM”) got a $5K fine and a 2-month principal suspension for having approved customers’ microcap activities without recognizing the attendant risks and then elevating them to the firm’s AML Compliance Officer ("AMLCO").

I set out to determine if Revere’s CCO was or should have also been sanctioned by FINRA, but was stymied because FINRA made no mention of the CCO and because Revere’s current CCO wasn’t around in 2013-2014, the relevant period of this case. So, I worked with the facts and circumstances provided in FINRA’s findings. And, based on that information, I concluded that the CCO should be excused in this case.

While I firmly believe that most firms should have standing policies and procedures for penny or microcap stocks – and their attendant business and (SEC and AML) regulatory risks, it appears that the Revere had dealt with microcap stocks prior to the arrival of a Registered Rep in April 2013. However, while the then-BOM knew from the outset that his new broker’s customers “regularly engaged in microcap stock transactions,” he apparently never shared that knowledge with compliance personnel.

Accordingly, one might only conclude that Revere’s CCO and/or AMLCO were “slow on the trigger” by not reacting to the microcap stock activities when they began hitting the firm’s records. However, before assigning fault, one would have to learn more about the personnel and hierarchical structures at Revere Securities - and, I don't have that information.

Be that as it may, responsible supervisory personnel – including BOMs, CCOs, and AMLCOs - should be alert to transactions and activities that potentially elevate regulatory risks at their firms. Failure to do so can and possibly should result in significant sanctions.

This case addressed in this article was reported in FINRA Disciplinary Actions for November 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2014039396101.