[ by Howard Haykin ]

Comprehensive Heightened Supervision Checklist Nothing More Than 'Window Dressing'.

FINRA fined and suspended a Minnesota-based principal and Chief Compliance Officer over charges that the failed to adequately supervise a "hyperactive" Registered Rep who was under heightened supervision. 

Background of Respondent. James Arnold Potter entered the securities industry in June 1987.  From 8/1/03 through the present, he's been associated with FINRA broker-dealer The Oak Ridge Financial Services Group, Inc.;  he holds the following licenses:  Series 7 General Securities Representative;  Series 24 General-Securities Principal;  and, a Series 79 Investment Banking Representative.

FINRA Findings and Allegations.   CCO Potter was responsible for supervising an RR who engaged in excessive trading in customers’ accounts.  FINRA examiners found that Potter allegedly failed to:

• respond appropriately to red flags, including reports, and other information showing high turnover rates and cost-to-equity ratios.
• take any measures to prevent or limit the RR's excessive trading in the customers’ accounts. 

It's not as though Potter failed to conduct any supervision of the RR.  In fact, Potter's heightened supervision included, the following:

• quarterly letters sent to a sampling of the RR's customers,
• frequent discussions with RR about his customers and his personal financial situation,
• heightened review of RR's correspondence.
• reviewed and approved all transactions that the RR entered for his clients.
• reviewed daily trade blotters showing those transactions and also received monthly Active Account Reports showing accounts the RR serviced, in which trading activity exceeded one or more parameters.

Yet, it would almost seem as though Potter's heightened supervision was largely "window dressing."  That's because, he apparently or allegedly:

• never contacted any of the customers to discuss: (i) particular trades in their accounts, (ii) frequency of trading, or (iii) commissions charged to their accounts.
• never disapproved any of trades entered by RR on behalf of any of the customers. 
• Potter’s quarterly letters to the RR's customers did not ask customers about particular transactions or trading patterns.
• instead, Potter asked customers to contact him if they had any questions or concerns regarding their accounts.
• Other than sending these letters, Potter did not contact any of the RR's customers for a full year.

Yet, during this period, FINRA determined that the turnover and cost-to-equity figures Potter received monthly were red flags for excessive trading, and even after learning that the RR had been the subject of an excessive trading complaint at another broker-dealer, more searching inquiries and corrective action were necessary.  But Potter failed to respond adequately and preventable customer harm followed.

FINRA Sanctions. Potter agreed to a $5K fine and to a 20-day suspension in any principal.capacity. 

For further details, go to:  [FINRA AWC #2010020803401] and [FINRA Disicplinary Action for July 2012].