Regulators tag team RIAs, Broker-Dealers, and FCMs

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Regulators tag team RIAs, Broker-Dealers, and FCMs

Being tag-teamed in a game of touch football is one thing. A compliance pile on by multiple financial service regulatory bodies is another. Writing about last week’s Securities Industry and Financial Markets Association (SIFMA) compliance and legal seminar, Investment News Reporter Mark Schoeff, Jr. noted that industry members, frustrated about being hit with multiple regulatory penalties by multiple agencies for the same violation, finally cried “foul!”

Double jeopardy?

It’s “not just double jeopardy,” said Stephen Cutler, vice chairman of J.P. Morgan Chase & Co., “but multiple jeopardy.”  Cutler was commenting on overlap and duplication in enforcement and rulemaking in cases, for example, where both the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and then, state regulators file actions and levy fines.

Likening the “pile-on” to cascading dominoes, Ira Hammerman, SIFMA’s executive vice president and general counsel said it starts with one regulator who files the complaint and settles for a $100 million fine. Then a second regulator sees the action, revises the charge of violation, levy’s another big fine and also settles for $100 million. Then other regulators or state agencies weigh in and before you know it, for the same single violation, you’ve paid $400 million.

Reporter Schoeff cited such examples of double-dipping as:

  • a 2014 SEC case against Scottrade over the accuracy of its trading data that resulted in a $2.5 million settlement, which was followed by a similar 2015 FINRA case against Scottrade over data integrity that settled for $2.5 million;
  • Over the course of 2014 and 2015, the SEC and FINRA again tag teamed Success Trade Inc., levying penalties for a Ponzi scheme involving current and former professional athletes; and
  • More recently, the SEC barred broker William Bucci after FINRA had already barred him in 2013.

Blood in the water / Money on the table

If one regulatory body smells fraud or issues, it’s likely that others will start sniffing around you too. Moreover, each regulatory agency has its own mouths to feed and coffers to fill. It’s not that they are proceeding with mal intent, said speakers at the SIFMA conference, it’s more a matter of failure interagency coordination and cooperation with respect to inquiries and penalties.

Part of the issue is regulatory agency duplication of effort. The right hand just isn’t aware of what the left hand is doing. But your firm’s compliance and legal team is left holding the bag with the attendant costs of defending multiple proceedings for the same conduct. According to SIFMA’s Hammerman, there oftentimes is also overlap in rulemaking and compliance guidance. Citing cybersecurity as an example, he noted there are up to 10 different regulators are exploring the same cyber issue.

Who will stand down?

Faced with a race to “make their mark first” in a case, who (which regulator) will stand down? In reality, likely no one. Although FINRA President and Chief Executive Robert Cook did acknowledge that regulators should be cognizant of the fact they are not the only regulator in the space and consider leading by “standing down.” In the meantime…

…the best defense is…

…a good defense. Be prepared. Protect your stuff. Protect yourself. When the regulators come sniffing around, and they will, you’re only at risk when they find something amiss. So don’t give them grist for the mill. Give them what they want when they want it.  Compliance.

Noncompliance can be costly — we talk about fines and jail sentences in this blog all the time. But, compliance doesn’t have to break the bank. Not when companies like Patrina are offering comprehensive compliance solutions and compliant data capture, file storage, and records archiving specifically designed for the financial services community.

Let’s talk (212-233-1155). Don’t get tag-teamed. Be safe, secure, compliant instead.