featured in today's Securities Industry Commentator:
SEC Halts Penny Stock Scheme Targeting Seniors (SEC Release)FINRA Fines and Suspends Admin Asst for Copying Customer Signatures and Improper Notarizations. In the Matter of Rochelle Shoulders, Respondent (FINRA AWC 2017056393301)In the Matter of the Application of Thaddeus J. North for Review of Disciplinary Action Taken by FINRA (SEC Opinion)
raised $4.9 million from investors while making misrepresentations. The defendants allegedly represented that NIT was raising money to fund the company's efforts to develop its radiation protection products for medical and military applications, which would generate significant returns. In contrast, the SEC alleges that Smith misappropriated $1.25 million or 25% of total investor proceeds to pay for personal expenses, while NIT and Smith have paid 25% of proceeds as undisclosed commissions. The SEC's complaint further alleges that the defendants made baseless promises of NIT's future profitability, imminent initial public offering, and expectations to "double or triple" their investment. Defendants Ganton and Cleary, with Smith's knowledge, allegedly concealed their disciplinary histories and prior SEC actions and bars, including through Ganton's use of an alias when soliciting investors.
While associated with First Heartland, Shoulders was the administrative assistant for a registered representative. Her job responsibilities included assisting customers with completing forms, such as by obtaining appropriate signatures. Between April 2011 and October 2017, on 107 occasions, Shoulders used computer software to copy customer signatures from older forms to then affix them onto new forms, including for the transfer of funds and securities between a customer's accounts. Shoulders did this as an accommodation to the customers, who requested and authorized the transactions effectuated by the forms onto which Shoulders affixed signatures. Likewise, on multiple occasions, Shoulders, a notary public commissioned by the State of Missouri, notarized forms to transfer or open additional accounts without the customers who had signed the forms being present as an accommodation to those customers.FINRA Rule 2010 requires a registered person, in the conduct of her business, to observe high standards of commercial honor and just and equitable principles of trade. Copying signatures onto forms as an accommodation to customers violates Rule 2010. Likewise, notarizing documents or otherwise certifying to having witnessed a signature without having witnessed the signature is a violation of Rule 2010.Accordingly, Shoulders's copying of copying customer signatures to affix them to forms and notarizing documents without the signatory present constituted separate and distinct violations of FINRA Rule 2010.
(1) fined $10,000 and suspended for 30 business days in any principal capacity for failing to report a relationship with a statutorily disqualified person;(2) censured and fined $10,000 for failing to establish and maintain a reasonable supervisory system, including adequate written supervisory procedures; and(3) fined $20,000 and suspended for two months in all principal capacities for failing to adequately review electronic correspondence. . . .
While Chief Compliance Officer at a FINRA member firm, Respondent Thaddeus J. North failed to report to FINRA that Leslie L. King, an associated person at his firm, was involved in a variety of business activities with a statutorily disqualified person, Todd Cowle. North also engaged in supervisory failures pertaining to his review of the firm's electronic correspondence.Based on this conduct, the Department of Enforcement filed a Complaint against North. Enforcement alleged that North failed to report King's business relationship with Cowle given that North knew or should have known of the relationship, in violation of NASD Conduct Rule 3070(a)(9) and FINRA Rules 4530(a)(1)(H) and 2010. Enforcement also charged North with failing to (1) establish and maintain a supervisory system, including written supervisory procedures, that was appropriate for the review of electronic correspondence; (2) conduct an appropriate review of the firm's email and Bloomberg communications; and (3) institute a heightened review of King's firm email and Bloomberg communications to monitor King's and Cowle's business relationship, in violation of NASD Conduct Rule 3010, and FINRA Rule 2010, and a willful violation of MSRB Rules G-27 and G-17.North answered the Complaint, denying all charges and requesting a hearing. A hearing was held on April 13 and 14, 2015, in New York, New York. At the hearing, North asserted that for much of the time period at issue, he neither knew about, nor had reason to know about, King's relationship with Cowle. And, by the time he learned of it, he concluded that he was not obligated to report it because FINRA already knew about the relationship or at least was investigating it. Regarding the supervision charges, North argued that both his firm's written supervisory procedures ("WSPs") and his review of electronic correspondence were reasonable. The Hearing Panel rejects North's defenses, finds that with one exception, Enforcement proved the violations alleged, and imposes the sanctions set forth below.
North failed to report a relationship with a statutorily disqualified person, willfully failed to establish and maintain a reasonable supervisory system for the review of electronic correspondence, and willfully failed to adequately review electronic correspondence. For his collective misconduct, we fine North $40,000, impose a 30-business-day suspension in all principal and supervisory capacities followed by a two-month suspension in all principal and supervisory capacities. We also order that North pay hearing costs of $4,404.51 plus appeal costs of $1,536.89. As the result of his willful violations of MSRB rules, North is statutorily disqualified.
[I]n general, good faith judgments of CCOs made after reasonable inquiry and analysis should not be second guessed. In addition, indicia of good faith or lack of good faith are important factors in assessing reasonableness, fairness and equity in the application of CCO liability.While matters involving the determination of CCO liability are facts and circumstances specific, there are matter types where determinations of individual liability generally are straightforward. For example, absent unusual mitigating circumstances, when a CCO engages in wrongdoing, attempts to cover up wrongdoing, crosses a clearly established line, or fails meaningfully to implement compliance programs, policies, and procedures for which he or she has direct responsibility, we would expect liability to attach. In contrast, disciplinary action against individuals generally should not be based on an isolated circumstance where a CCO, using good faith judgment makes a decision, after reasonable inquiry, that with hindsight, proves to be problematic. When the facts and circumstances of matters fall outside these relatively clear examples of where liability should or should not attach, liability determinations will require matter-specific analysis and informed judgment.With that perspective, in this instance, on the record before us, it is clear that North failed to make reasonable efforts to fulfill the responsibilities of his position. It is the evidence of North's actions and failures to act that is the basis for his liability. North's failure to fulfill his own responsibilities was egregious. Here, North ignored red flags and repeatedly failed to perform compliance functions for which he was directly responsible. Under these facts and circumstances, FINRA's disciplinary action was clearly appropriate.In reaching this conclusion, we recognize that North was not the only person at Southridge whose performance may have been deficient with respect to the written supervisory procedures and review of electronic communications. The Commission has held repeatedly that the "chief executive officer of a brokerage firm is responsible for compliance with all of the requirements imposed on his firm 'unless and until he reasonably delegates particular functions to another person in the firm and neither knows nor has reason to know' that a problem has arisen." Although Schloth may have delegated the compliance functions with respect to establishing and maintaining adequate written procedures and reviewing electronic correspondence to North, that did not end his responsibilities. "It is not sufficient for the person with overarching supervisory responsibilities to delegate supervisory responsibility to a subordinate, even a capable one, and then simply wash his hands of the matter until a problem is brought to his attention. . . . Implicit is the additional duty to follow-up and review that delegated authority to ensure that it is being properly exercised." The record does not indicate what actions Schloth took to monitor whether North was reviewing electronic communications, and we are troubled by the possibility that North could have abdicated his own responsibilities to review those communications without Schloth knowing.Finally, it is not clear from the record why FINRA did not charge Southridge, although we take official notice of the fact that Southridge terminated or withdrew its registration over a year prior to FINRA instituting its action here. "A firm . . . can act only through its agents, and is accountable for the actions of its responsible officers." We think it important to make it clear to firms-by holding them responsible when there are problems-that it is in their interest to have effective, diligent compliance officers to help them remain in compliance with their obligations. Further, as we have said previously, "broker-dealers must provide effective staffing, sufficient resources and a system of follow-up and review to determine that any responsibility to supervise delegated to compliance officers, branch managers and other personnel is being diligently exercised." Indeed, in some cases it may be more appropriate to hold the firm liable rather than the compliance officer. In this case, we agree with FINRA that its disciplinary action against North was warranted.
[N]orth's violations resulted from negligence, not intentional or reckless misconduct. There is no evidence in the record that North was attempting to circumvent FINRA rules or conceal his misconduct. Rather, North was dealing with the hectic environment in establishing Ocean Cross as a new firm. See Strong, 2008 SEC LEXIS 467, at *45-48. At the time, in addition to being the firm's CCO and anti-money laundering compliance officer, North was handling the firm's "operational functions." North testified that during the first three months at Ocean Cross, he was "overwhelmed" with FINRA Rule 8210 requests for information concerning his former employer firm while also handling compliance and some back office duties for Ocean Cross. He was also migrating "hundreds and hundreds of accounts from one firm to another." North recalled that the firm also was examined by the State of Connecticut and the SEC at that time.
North does not contest that he failed to conduct a daily review of the firm's electronic communications as required by the Ocean Cross WSPs. Disciplinary action was appropriate here because North had direct responsibility for enforcing Ocean Cross's WSPs for electronic communications yet failed to meaningfully do so.North argues that he was not responsible for enforcing the firm's WSPs regarding electronic correspondence because the WSPs did not expressly name him as being responsible. Although North testified at the hearing that Schloth was responsible for reviewing Ocean Cross's electronic communications, this assertion contradicted his on-the-record testimony during FINRA's investigation. In addition to his statement in his on-the-record testimony that it was always his responsibility to review Ocean Cross's electronic communications, North acknowledged in his hearing testimony that he knew Schloth did not review the firm's electronic communications. North also testified that, because he "knew that [Schloth] wasn't [reviewing electronic communications]," North accepted that it was his [North's] role to "step in and do it." And FINRA's examiner testified that both Schloth and North told him that North was responsible for reviewing Ocean Cross's electronic communications and that neither Schloth nor North ever told him that Schloth was responsible for email review at Ocean Cross. We find that the preponderance of the evidence establishes that North was responsible for reviewing Ocean Cross's electronic communications under the WSPs.North also argues that he should not be liable for failing to review Ocean Cross's electronic communications based on "the condition of the Email . . . in FINRA's production files." According to North, the "condition of the Email" in FINRA's production files demonstrates that "Enforcement procured Smarsh to assist in intercepting and delivering the Email to Enforcement without the knowledge or permission of the brokers sending and receiving those communications." As discussed more fully below, however, North's various claims about Smarsh, Enforcement, and the underlying emails are irrelevant. The underlying emails are not the basis for North's liability. North's liability stems from his failure to review electronic correspondence-including a three-month period in which he conducted no reviews-in accordance with the WSPs for email review that he established and was responsible for enforcing.
did not review the electronic correspondence for substantial periods of time. This was unreasonable and inconsistent with the provisions of the WSPs. North's conduct represents an unreasonable departure from the WSPs and is a sufficient basis for his liability. Based on these facts, we find that North failed to reasonably enforce the firm's WSPs regarding electronic correspondence in violation of NASD Rule 3010(b) and FINRA Rule 2010.
In sustaining FINRA's disciplinary action, we recognize that North was not the only person at Ocean Cross whose performance may have been deficient with respect to enforcing the firm's WSPs regarding electronic communications. We have held repeatedly that the "chief executive officer of a brokerage firm is responsible for compliance with all of the requirements imposed on his firm ‘unless and until he reasonably delegates particular functions to another person in the firm and neither knows nor has reason to know' that a problem has arisen."21 "It is not sufficient for the person with overarching supervisory responsibilities to delegate supervisory responsibility to a subordinate, even a capable one, and then simply wash his hands of the matter until a problem is brought to his attention. . . . Implicit is the additional duty to follow-up and review that delegated authority to ensure that it is being properly exercised." The record does not indicate what actions Schloth took to monitor North's review of electronic communications nor whether Schloth knew North was not reviewing those communications.Finally, it is not clear from the record why FINRA did not charge Ocean Cross, although we take official notice of the fact that Ocean Cross terminated or withdrew its registration approximately two months prior to FINRA instituting its action here. "A firm . . . can act only through its agents, and is accountable for the actions of its responsible officers." We think it important to make it clear to firms-by holding them responsible when there are compliance failures-that it is in their interest to have effective, diligent compliance officers to help them remain in compliance with their obligations. Further, as we have said previously, "brokerdealers must provide effective staffing, sufficient resources and a system of follow-up and review to determine that any responsibility to supervise delegated to compliance officers, branch managers and other personnel is being diligently exercised." Indeed, the Commission has previously stated that in some cases it may be more appropriate to hold the firm liable rather than the compliance officer. In this case, we agree with FINRA that its disciplinary action against North was warranted.