Unfortunately, employees in the securities lending department were much more imaginative than their supervisors, resulting in a whopping fine to the firm.  As reported in this month's Disciplinary Actions, NY-based KDC Merger Arbitrage Fund, LP, will pay a $350K fine to settle FINRA charges that employees in its securities lending department knowingly made false entries into the firm’s system indicating that finders had been used to locate securities or counterparties when in fact the finders had performed no legitimate services.  The firm paid the purported finders who, in turn, shared their "profits" with the scheming firm employees - all but one of the abetting employees pled guilty to charges of conspiracy to commit wire fraud. 

    Written Supervisory Procedures.   Somewhere it is written that WSP's should spell out "Who, What, Where, When, How (and How)" for each supervisory procedure - who is responsible for conducting the review;  what exception or finding should the reviewer be looking for;  where does go for the information (i.e., a report or document);  when, or how often, should the review be conducted;  how¹ should the supervisor proceed with flagged items (i.e., investigate, resolve, and/or elevate);  and how² should the supervisor evidence the review.

KDC's WSP required daily supervisory reviews of securities lending transactions, but it didn't provide the necessary guidance.  As FINRA notes, the procedures didn't instruct stock loan supervisors: 

• what to look for when reviewing transaction reports; 
  
• how to determine what stock loan activity, including rates, was to be flagged as suspicious; 
  
• how they were to review documents; 
  
• how they should evidence their reviews;  or, 
  
• how they were to follow up on any suspicious activity they discovered.

    Further Compliance Practice Deficiencies.   FINRA further found that: 

• the firm kept insufficient documentary evidence to establish that a supervisor adequately reviewed the firm’s securities lending activities;
• the firm had no written procedures requiring supervisory review of e-communications or how employees’ communications with other employees, counterparties or finders should be reviewed;  and,
  
• the firm created and maintained books and records that inaccurately reflected that finders had participated in stock loan transactions and were paid for services rendered when, in certain instances, finders had not performed any function relating to the transactions and had not rendered services to justify the payments;
• the firm failed to retain, as required, email sent and received via its primary corporate email system and an additional email system, and failed to retain, as required, e-communications using an IM system.