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NEWSLETTERS & ALERTS
Broker-Dealer, CCO Tripped Up on Remote Supervision
September 24, 2020
[Photo: Falling Flat on My Face / seedbed.com]
by Howard Haykin
Remote supervision of brokers can be a challenge, especially when it's reported that a broker, who's serving a one-year suspension, is conducting a securities business with firm customers. In such an instance, action needs to be taken – if nothing more than to ascertain the accuracy of those reports.
Take, for example, Concorde Investment Services, a Livonia, MI-based broker-dealer, and its newly-hired Chief Compliance Officer (“CCO”) who settled FINRA charges they failed to reasonably supervise a registered rep (“JT”) who permitted her then-husband (“RC”) to conduct a securities business with Concorde customers while he was serving a one-year suspension imposed by FINRA.
- In January 2013, Concorde hired JT as a General Securities Representative, even though it was understood that she had never had any customers of her own.
- Then-husband RC was, in fact, personally involved in negotiations with Concorde over the hiring of JT, and RC explicitly told Concorde that he wanted JT to “tak[e] over the business” and service his customers while he was suspended - with the expectation that Concorde would hire him upon the conclusion of his suspension.
- Concorde was further aware that RC was about to begin serving a one-year suspension for violations committed at a prior broker-dealer – that included recommending unsuitable transactions involving complex products and sending customers misleading and unapproved account summaries.
- Working out of a Concorde branch office in New Jersey, JT ostensibly worked alone (except for an administrative assistant), and was remotely supervised by principals located in Concorde’s home office in Michigan.
- From the outset, some Concorde employees questioned JT’s competence.
A NEW CCO JOINS CONCORDE:
- In April 2013, shortly after joining Concorde, the newly-hired CCO learned about RC’s suspension, and was told by Concorde’s Chief Operating Officer and another employee that, based on interactions with JT, they did not feel she was competent to handle RC’s book of business.
- In May 2013, Concorde’s 3rd-party consultant recommended that the CCO schedule a surprise inspection of JT’s branch office to determine whether it was JT or RC who was acting as the registered rep for Concorde’s customers.
- In October 2013, the CCO finally scheduled a branch inspection of JT’s branch office, to be conducted by the consultant.
- The consultant was directed to use only Concorde’s standard branch inspection checklist.
- The consultant was not instructed to assess the possibility that RC was conducting a securities business while suspended. Such an assessment might have included … (i) asking JT’s customers who was servicing their accounts; and, (ii) reviewing emails, customer contact notes, or other documents to determine who was acting as the registered rep to Concorde’s customers.
WHAT CONCORDE AND THE CCO MISSED:
- During his one-year suspension, RC sent or received more than 1,700 emails through his business email address – many of which contained explicit securities recommendations to Concorde customers, and all of which were acquired and retained by Concorde through its email vendor.
- Numerous Concorde employees received emails from RC’s business email address during his suspension and mistakenly assumed that it was JT that was sending the emails.
- The CCO, herself, received at least 5 emails from RC’s business email address during his suspension, but failed to take reasonable steps to determine whether RC was acting in a registered capacity during his suspension.
- Concorde ignored other red flags regarding RC’s activities - such as when it was notified that its clearing broker had rejected a check from a customer that was made out to Concorde’s clearing firm and RC; no one investigated why a customer would have written RC’s name on the check.
- Throughout the year, Concorde customers were unaware that RC had been suspended and, instead, believed that RC continued to be their broker, while JT was his assistant.
[For further details on the above case, click on … FINRA Case #2018060577602.]