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Regulatory Sanctions

SEC Sanctions - Three on a Match, Times Three

July 11, 2018

by Howard Haykin


The SEC handed down 3 SANCTIONS for failure to supervise 3 BROKERS who committed at least 3 VIOLATIONS against firm customers.


The SEC recently charged NY-based broker-dealer Alexander Capital and 2 of its supervisors for failing to supervise three brokers who made (i) unsuitable recommendations to investors, (ii) “churned” accounts, and (iii) made unauthorized trades that resulted in substantial losses to the firm’s customers while generating large commissions for the brokers. Respondents agreed to the following terms to settle the SEC charges:


  • Alexander Capital will pay $411K in disgorgement, prejudgment interest and fines, and will hire an independent consultant to identify and revise deficient policies and procedures.
  • Supervisor A will pay a $20K fine and be barred permanently from serving in a supervisory capacity.
  • Supervisor B will pay a $15K fine and will not serve in a supervisory capacity for 5 years.


SEC FINDINGS.    The 3 cases essentially boil down to this: (i) Alexander Capital lacked reasonable supervisory policies and procedures and systems to implement them, and if these systems were in place, the firm likely would have prevented and detected the brokers’ wrongdoing; and, (ii) Supervisors A and B ignored red flags indicating excessive trading and commission charges, and failed to supervise brokers with a view to preventing and detecting their securities-law violations.


Those red flags were generated through the clearing firm’s online surveillance tool whenever turnover and commissions reached certain pre-set levels. In response to those alerts, supervisors could insert comments noting any follow-up investigations, determinations and actions taken. Supervisors also used the online program to record their review and approval of trades.


     Alexander CapitalFrom 2012 through 2014, the firm failed reasonably to implement certain policies and procedures and permitted a lax compliance environment in which brokers ("registered representatives" or “RRs”) were not reasonably monitored or disciplined, procedures were not followed, and indications of potential misconduct were not acted upon by the supervisors of the 3 RRs, Supervisor A and Supervisor B. As a result, the 3 RRs each violated the antifraud provisions of the federal securities laws in their handling of customer accounts without anyone at Alexander Capital preventing or detecting their violations.


     Supervisor A:   From January 2013 through July 2014, there were some 123 system alerts (62 turnover and 61 commission alerts) related to 5 customer accounts handled by 2 RRs. Supervisor A failed to review 79 of those alerts. Of the 41 alerts that were reviewed (21 turnover and 20 commission alerts), none of the review comments entered into the online surveillance tool indicated any discussion the supervisor may have had with either RR. None of the review comments indicated disciplinary actions against the 2 RRs.


     Supervisor B:    From May 2013 through August 2014, while serving as BOM of Alexander Capital’s Manhattan branch office and as direct supervisor for a particular RR whose activities generated multiple red flags, Supervisor B received 28 turnover or commission alerts for one customer's account - of which, only 20 were reviewed. Other than commission restrictions and some trade corrections, no action was taken to reasonably supervise the RR. And even when Supervisor B did attempt to limit the commissions in the impacted customer’s account to $100 per trade, those efforts were inconsistently applied.  


While we're at it, let's give credit to the SEC ... for clearly and appropriately dispensing sanctions in this case involving supervisory failures. All too often firm principals or compliance officers are the root cause of supervisory failure. Yet, it's not uncommon for FINRA to report on sanctions against broker-dealers with no mention or indication that associated persons have been sanctioned or are even under investigation.
BAD SUPERVISION may begin with a firm's deficient policies and procedures, but it ends with complicit or ineffectual individuals.



[For further details on the specific supervisory failures, click on: Supervisor A's SEC Complaint and/or Supervisor B's SEC Complaint]