Even longtime members of the Financial Industry Regulatory Authority (FINRA) can run afoul of the regulator. HSBC, for one, has been a FINRA member since July 1987 and is headquartered in New York, NY. It is an indirect wholly-owned subsidiary of HSBC North America Holdings Inc., which itself is an indirect wholly-owned subsidiary of HSBC Holdings plc. HSBC employs approximately 3,050 individuals and does not have a disciplinary history relevant to this issue.
HSBC personnel screening shortfall
Federal securities laws require that FINRA member firms fingerprint most employees/members prior to joining or upon joining a firm. The goal is to incorporate fingerprint results as part of regular background checks to determine, among other things, whether a prospective member has ever engaged in misconduct that subjects him/her to a statutory disqualification.
However, between January 1, 2011 and March 25, 2019, HSBC failed to reasonably screen 2,191 non-registered members. HSBC did the requisite fingerprinting but failed to screen those members for potential statutory disqualification under the broader requirements of the Exchange Act.
How did HSBC’s screening shortfall happen?
The firm’s proper screening failure occurred because HSBC failed to maintain a reasonable supervisory system and procedures to identify and screen all individuals. Good news for HSBC is that it self-reported the matter to FINRA and launched a remedial review and screening process of non-registered members.
According to FINRA, between January 1, 2011 and March 25, 2019, “HSBC failed to establish and maintain a supervisory system or written supervisory procedures reasonably designed to screen 2,191 non-registered associated persons for statutory disqualification. Its written procedures only addressed fingerprinting and screening for statutory disqualification of registered individuals or those required to be registered.”
Although HSBC fingerprinted the 2,191 individuals, it did not screen them for statutory disqualification under the Exchange Act. Instead, it screened them under the narrower requirements of Section 19 of the Federal Deposit Insurance Act. Section 19 requires banks to obtain approval to hire or retain anyone who has been convicted of or entered a pretrial diversion or similar program related to any criminal offense involving dishonesty or a breach of trust or money laundering. The requirements under the Exchange Act are broader. They call for broker-dealers to obtain approval before associating with anyone convicted, within the past ten years of criminal offenses (including misdemeanors) similar to those specified in Section 19, as well as anyone convicted of any domestic felony or subject to specified findings or actions by certain financial regulators.
Once it identified the exposure, HSBC was able to fingerprint and screen 1,837 of the 2,191 individuals. HSBC did not identify any individuals subject to statutory disqualification. It did not fingerprint or screen 304 of the 2,191 individuals in question because they had already left the firm.
How did FINRA determine HSBC sanctions?
In determining appropriate fines and sanctions, FINRA Enforcement took into consideration the fact that the firm:
In return, HSBC agreed to the imposition of the following sanctions:
Where was HSBC compliance?
Despite the oversight, the firm did alert FINRA of its shortfall. Albeit a bit like locking the barn door after the horse is stolen? That’s why so many compliance professionals like you and your team rely on the cloud-based compliance solutions Patrina delivers. For more than 25 years, Patrina has been helping compliance professionals like you stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, comprehensive, 8-module compliance solution, compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.