Internal Compliance Audits Will Be Tougher This Year

And things are going to get personal, real fast.

Jennifer Woods Burke predicts at Financial Planning that a series of past cases in which internal supervision failed miserably in small and medium sized financial firms will lead to increased compliance scrutiny and meticulous oversight at most firms. And this “leave-no-stone-unturned” attitude will almost certainly apply to an employee’s personal life, including personal e-mail account.

Woods Burke cites several cases that she claims will motivate this tightening of internal oversight. In these cases, the failure to catch the misdeeds of one employee led to the downfall of the entire company and black marks against the chief executives and chief compliance officers that failed to catch the crimes.

In the first example, an independent contractor for a small broker-dealer became a branch manager at a satellite office. Two audits conducted by the firms CEO (who was also the CCO) failed to discover the $1.5 mill that this manager had raised from his undisclosed side businesses (including sales of promissory notes and mining rights.)

Results: The branch manager was banned from the securities industry for life. “The firm was censured and fined, and the CEO was fined and suspended from association with any FINRA member firm for 30 days. Ultimately, the broker-dealer firm was sold,” according to Burke Woods.

In the second example, a broker-dealer hired a new partner and failed to supervise him, which left him free to “run a separate unregistered broker-dealer out of that office and sell all kinds of products on an undisclosed basis.”

Results: The partner was barred from the industry, and the firm applied for termination of its FINRA membership.

“While high-profile enforcement actions against CEOs and chief compliance officers have not been commonplace in the past, expect that trend to change,” writes Woods Burke. And that means stricter audits.

About Beth Connolly

Beth Connolly is Head Editor, Writer, and Marketing Coordinator at the Compliance Exchange and the Wall Street Job Report. She tweets @Bethconnolly and shares her love of the good writing life at her blog, When Nutmeg Met Basil. A graduate of Middlebury College in Vermont, she works in Manhattan and calls Astoria home.

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