A broker-dealer (the “Dealer”) entered into a cease-and-desist order with the Securities and Exchange Commission for failing to maintain and enforce written policies and procedures reasonably designed to achieve compliance with the Compliance Obligation of Regulation Best Interest (“Reg BI”), thus willfully violating the General Obligation of Reg BI.
The Dealer had written policies in place to ensure compliance with Reg BI with respect to offers and sales of structured notes. However, there was a breakdown in compliance with these procedures, which occurred over several years. Pursuant to the written procedures, registered representatives were required to determine that an investor’s investment profile met the Dealer’s requirements for sales of structured notes, and that concentration limits in the investor’s account were not exceeded. Investors were required to sign forms acknowledging that they received the prospectus describing the fees, understood the Dealer’s fees and that structured products are buy-and-hold investments involving principal risk, among other acknowledgments. The Dealer had a review function to ensure that Reg BI’s requirements were met. The review function reviewed the customer’s documents, and would flag a recommendation that was not compliant with Reg BI. Non-compliant trades caused an exception report, which had to be resolved within a specified period (often, after the transaction had occurred). Consequently, several hundred transactions occurred for which the exception report was not timely cleared or a customer acknowledgment of understanding a recommendation to sell one structured note and replace it with another was not reviewed.
The Dealer acquired another broker-dealer (the “Acquired Dealer”). Recommendations of structured notes by the registered representatives of the Acquired Dealer did not mesh with Dealer’s compliance system, causing exception reports generated from sales by the Acquired Dealer not to be flagged for a significant period. The Dealer’s failure to resolve known compliance system deficiencies related to the acquisition of the Acquired Dealer and to maintain and enforce its Reg BI compliance procedures were found to be a violation of the Reg BI General Obligation.
Read the SEC’s cease-and-desist order and press release.