Are you supervising your “hoots” and “squawks?”
Nooooooo…This NOT is a cautionary tale about how broker-dealers, RIAs, FSAs and others in financial services spent the summer on the farm?
It’s a cautionary tale about what happens when one fails to oversee how and what information is disseminated throughout your organization and then to your customers. Early this month Deutsche Bank Securities Inc. learned that failure to supervise “hoots” or “squawks” would cost it $12.5 million in fines.
Welcome to the not-so-funny farm!
The Financial Industry Regulatory Authority (FINRA) issued the fines for significant supervisory failures related to research and trading-related information Deutsche Bank Securities disseminated to its employees, colloquially referred to as ‘hoots’ or ‘squawks,’ over internal speakers commonly known as ‘squawk boxes.’ Despite multiple red flags regarding the potential dissemination of confidential information, FINRA charged that Deutsche Bank failed to establish adequate supervision over registered representatives’ access to hoots or their communications with customers regarding hoots.
Worse yet, FINRA found that Deutsche Bank was aware for some time that its hoots involving research and trading might contain confidential, price-sensitive information, and that non-public information might be communicated. For several years, the Authority noted, Deutsche Bank repeatedly ignored red flags that its supervision was inadequate – even from its internal compliance team. These included internal audit findings and recommendations, multiple internal warnings from members of the firm’s compliance department, and internal risk assessments.
Deutsche Bank Securities also persisted in failing to implement reasonable written policies, procedures and systems governing who should have access to the hoot information, how the employees should handle hoot information, and how supervisors should supervise employees to ensure compliance, and protection of confidential and material nonpublic information potentially communicated over the hoots.
Punished for disregarding the warning signs
According to Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, “Recognizing and responding to red flags is the hallmark of proper supervision, particularly in areas involving confidential information. Deutsche Bank’s disregard of years of red flags including internal audit findings, risk assessments, and compliance recommendations was particularly egregious given the risk that material nonpublic information could be communicated over squawk boxes.”
As part of the settlement, Deutsche Bank agreed to provide written certification that it has adopted and implemented supervisory systems and written procedures concerning hoots that are reasonably designed to achieve compliance with FINRA rules and federal securities laws.
Battling inertia with oversight
Even when a compliance team is doing the right thing, a firm must have a strategy in place – a compliance infrastructure that keeps up with the regulators and the real world. Regardless of whether your organization hoots, squawks, oinks, or clucks, the regulators, in this case, FINRA expects you to have a system of written policies and procedures to pre-empt and address compliance breaches.
If your compliance function is under pressure to do more with less, what are the options?