After reading FINRA's account of the capital markets compliance officer at Robert W. Baird & Co., who got seriously lost in the thicket of Regulation SHO requirements, and led stock loan personnel and prop traders astray, we're left with one giant unanswered question:  Why didn't anyone at Robert W. Baird & Co. recognize the problems and difficulties this compliance officer was having? Susan Labant entered the securities industry in April 1999.  During her entire time in the industry, Labant had one employer - Robert W. Baird & Co. Inc., a FINRA-regulated broker-dealer headquartered in Milwaukee, Wisconsin.  Ms. Labant started out as a Compliance trainee and by January 2000 was promoted to Compliance Officer.  One year later, in January 2001, she became the Capital Markets Compliance Manager;  on or about 2003-2004, she was made Assistant Compliance Director.  During the period, January 2005 through the fall of 2009, Labant was the person responsible for, among other things, Capital Markets' Reg SHO compliance. As FINRA documents the case, Ms. Labant seemingly 'failed every which way' to implement, maintain and enforce compliance with the requirements of Regulation SHO.  As FINRA notes, Labant failed to establish, maintain and enforce a supervisory system, including WSPs, with respect to the requirements of Reg SHO. How did she fail?  Let us count the ways...   FINRA found that the pols and procedures written and/or reviewed by Labant and implemented by the firm were not reasonably designed to achieve compliance with certain requirements of Reg SHO.

• She failed to review and/or coordinate the Reg SHO-related pols and procedures instituted in different areas of the firm.
• Under her supervision, the firm implemented a patchwork of systems, pols and procedures that contained multiple gaps and, in certain instances, contained incorrect instructions for compliance with Reg SHO.
• The WSPs she established or reviewed in connection with Reg SHO:
  • didn't require proprietary traders to obtain locates for short sales,
  • didn't require Stock Loan to grant and document all locates,
  • didn't require adequate reviews of short sales to detect short sales entered without a locate, and/or without an exception to the locate requirement,
  • didn't require market makers engaged in non-bona fide market-making transactions to obtain locates for short sales (where no locate exception was applicable).

Coordination of Stock Loan's Role. Ms. Labant failed to coordinate Stock Loan’s role in the firm’s Reg SHO compliance and the firm’s Stock Loan employees were not adequately trained in connection with Reg SHO, including the locate requirement for prop short sales and the importance of documenting all locate requests and approvals.  FINRA's specific findings included:

• As a result of this inadequate training, Stock Loan's compliance with Reg SHO reqs was insufficient and the firm completely failed to document locates for its prop orders.
• Although Ms. Labant informed Stock Loan employees that they were required to provide locates for prop traders, Stock Loan employees subsequently told prop traders they didn't  need to contact Stock Loan for a locate on certain ETFs.
• Labant’s attempt to inform Stock Loan personnel about the need to provide locates was inadequate and ineffectual.
• Beyond that, in some instances, Stock Loan personnel failed to document locates that prop traders requested and obtained; in the majority of instances, locates were not obtained at all and the firm’s prop traders entered an indeterminable number of unexecuted short sale orders for which no locates were obtained or documented.
• The systems and procedures Labant established for supervision and review of Reg SHO compliance were unreasonable in design such that the firm was unable to detect the Reg SHO violations that occurred.
• Labant established an ineffective procedure for the review of prop short sales to ensure that valid locates had been obtained, when required.
• Among other deficiencies, the procedure Labant established failed to require supervisory personnel to compare the locate information entered into the order entry systems against records of locates Stock Loan granted - which prevented supervisory personnel from being able to to determine if a locate had been obtained for a sufficient number of shares, or had actually been obtained at all.

Because of these systemic deficiencies, ... the firm had little or no way of knowing that locates had not been obtained and/or documented in connection with a significant majority of prop short sales, as well as the deficiencies in the Stock Loan documentation of locates. FINRA found that Labant was aware that the firm’s procedures also required Stock Loan to review whether firm short sales had been executed without locates, but the report that Stock Loan personnel reviewed omitted all short sales in prop accounts - which rendered such reviews impossible. FINRA also learned that Labant had been informed of deficiencies by NYSE examiners - included certain aspects of the firm’s Reg SHO compliance.  However, she failed to act on this information and did not identify their root causes.  FINRA further found that Labant assumed that the primary causes of the NYSE’s findings was that prop traders failed to request locates as required - i.e., she failed to recognize her own deficiencies in the WSPs. Not surprisingly, she also failed to recognize that the review of prop short sales for locates was ineffective by design, and/or that Stock Loan was not performing a locate review with respect to prop short sales.  As a result, the procedural changes Labant implemented in response to the NYSE exam were inadequate to redress all of the underlying issues that caused the firm’s violations. Finally, Labant failed to establish reasonable pols and procedures, or a system of follow-up and review, to determine that Stock Loan personnel were complying with all of the reqs of Reg SHO.  For this reason, the firm’s compliance department was unaware for months that Stock Loan had obtained and used an unauthorized easy-to-borrow list to grant locates. FINRA Sanctions. Susan Margaret Labant was fined $10,000, received a 9-month 'principal' suspension, and ordered to requalify as a principal before acting in any principal capacity.   For further details, go to:   [FINRA AWC #2008013127802].    [Disciplinary Actions for October 2011] Postscript. Ms. Labant left the Compliance Department in or around November 2009, but she's still with the firm - in a non-compliance and non-supervisory position.