This article by Patrina CEO Mark Opila was featured in The Active Investment Manager – the  National Association of Active Investment Managers Newsletter.

DO YOU CONSIDER THE FINES YOU PAY FOR rules violations just another associated cost of doing business? If you do, you are not alone.   

Lack of resources is no excuse

Whether intentionally or not, many firms opt to pay rather than prevent, partly because they may not have the manpower or compliance resources in place to best protect their bottom line. But lack of resources is no excuse, especially given the breadth of compliance technology solutions on the market.

Quite frankly, neither the Financial Industry Regulatory Authority (FINRA) or the Securities and Exchange Commission (SEC) will turn a blind eye to your misdeeds or lend a sympathetic ear to your tale of hardship. To the contrary, they will reprimand, and in many cases, fine you for your compliance shortcomings.

Is $225K or $725K chump change?

Earlier this year, Oppenheimer and Company submitted an Acceptance, Waiver, Consent (AWC) to the SEC in which the firm was censured and fined $225,000. Without admitting or denying the findings, Oppenheimer consented to the sanctions and to the entry of findings that it failed to reasonably supervise and to have an adequate supervisory system, including adequate Written Supervisory Procedures (WSPs).

While a $225,000 fine may be just a blip on the radar against Oppenheimer’s approximate $1 billion in revenue, it is a cost and a fine that could have easily been avoided. For a fraction of that fine, not to mention legal and human capital costs, Oppenheimer and Company could have had their WSPs reviewed, amended as needed, and archived on a platform that could have easily disseminated the information for employee acceptance.

Also this year, JP Morgan Securities submitted an AWC to FINRA, in which the firm was censured, fined $725,000, and required to revise its Written Supervisory Procedures.

JP Morgan Securities also was required to provide three written reports to FINRA on dates that are no more than three months, six months and nine months after the date of the Notice of Acceptance of the AWC. These reports would detail the implementation and effectiveness of the firm’s policies, systems and procedures (written and otherwise) and outline training to ensure that it addresses its supervisory inadequacies. Aside from the cost of the fine, one could argue that the loss of production associated with providing written reports to FINRA could bring the total cost of this misstep to over $1 million dollars.

While these fines may be smaller than those the firms incurred for more grievous wrongdoings, should they still be considered another business expense? Or, would it be more efficient and cost-effective to take the initiative to find a solution that assures these transgressions do not reoccur?

Poor oversight and weak compliance are an unnecessary cost

In both of the cases mentioned, weak supervisory procedures led to the payment of close to $1 million in combined fines, bad publicity, and a commensurately negative impact to each of the firm’s reputations.

While a $1 million in fines may not “break the bank”, these two are only two examples of the multiple fines handed out each these firms every year. Is nearly $1 million reason- able compared to the cost of updating systems?

Perhaps. However, one element that cannot be measured easily is reputational damage. For a fraction of the cost of the fines they incurred, both firms could have employed third party vendors to assist with their policies and procedures. And in doing so, they may have improved their bottom lines and protected their reputations.

Mark Opila (mopila@patrina.com) is the chief executive officer of Patrina Corporation (www.patrina.com), a software company offering a system with built-in workflows and management tools for non-trading compliance.

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