Bridging the Week by Gary DeWaal: May 16 - 20 and May 23, 2016 (AML; Compliance Officers; Whistleblowers; Golfer)

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Published Date: May 22, 2016

Two related broker-dealers agreed to pay the Financial Industry Regulatory Authority US $17 million to resolve charges that they did not implement and maintain an adequate anti-money laundering program. More significantly, the AML compliance officer of one of the broker-dealers also paid a fine and agreed to a temporary industry suspension for her alleged role in her firm’s violations. In addition, a famous professional golfer settled charges by the Securities and Exchange Commission for his role in a larger alleged insider-trader scandal but was not charged with insider trading himself. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Please note, because of the Memorial Day Holiday weekend in the United States, the next regularly scheduled edition of Bridging the Week will be on June 6, 2016.

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Two Related Broker-Dealers To Pay US $17 Million for Widespread AML Compliance Failures; Former AML Compliance Officer Also Sanctioned:

Raymond James & Associates, Inc. (RJA), Raymond James Financial Services, Inc. (RJFS) and Linda Busby, the anti-money laundering compliance officer for RJA agreed to settle charges by the Financial Industry Regulatory Authority that, from at least November 2011 through June 2014, both firms failed to implement and maintain an adequate AML program and that through February 2013, Ms. Busby was responsible, at least in part, for RJA’s violations.

During the relevant time, RJA and RJFS were Securities and Exchange Commission-registered broker-dealers and members of FINRA. RJA was a full-service broker-dealer, providing clearance, execution and custodial services, and also engaged in correspondent clearing services for other firms. Among those other firms was RJFS. Ms. Busby served as the designated AML compliance officer of RJA from 2002 through February 2013. FINRA said that, although RJA and RJFS each maintained separate AML departments, RJFS relied “heavily” on RJA as its clearing broker to support its AML program.

RJA agreed to pay a fine of US $8 million to resolve FINRA’s charges, while RJFSA agreed to pay a fine of US $9 million. Each firm also agreed to retain a consultant to review its AML program. Ms. Busby agreed to pay a fine of US $25,000 to resolve FINRA’s allegations and not to associate with any FINRA member in any capacity for three months.

According to FINRA, during the relevant times, the two firms experienced material growth but “…did not dedicate resources to match the firms’ growth with reasonable AML compliance systems and procedures.” This permitted, said FINRA, “…certain red flags of potentially suspicious activity to go undetected or [be] inadequately investigated.”

Among other things, said FINRA, RJA did not have “a single written procedures manual describing its AML procedures” while RJFS failed to establish and maintain an “adequate” Customer Identification Program as part of its AML program. (Under federal law and rules of the Financial Crimes Enforcement Network of the US Department of Treasury, broker-dealers, as well as certain other financial institutions, are required to obtain, verify and record certain information that identifies each person who opens an account; click here for more information.)

FINRA also alleged that both companies failed to develop and implement surveillance reports to help detect certain suspicious activities. For example, said FINRA, neither firm had written procedures or surveillance reports governing the monitoring of:

The firms and Ms. Busby also were deficient in investigating red flags, said FINRA, and assessing whether a suspicious activity report should be filed. (Under FinCEN rules, broker-dealers must monitor and file reports with FinCEN of transactions that raise suspicions of illegal activity; click here for more information.) According to FINRA, during the relevant time, the two firms:

…relied upon a patchwork of written procedures and systems across different departments to detect suspicious activity. These systems and procedures were not coordinated to allow the firms to link patterns and trends of suspicious conduct, leaving certain risk areas and certain red flags unchecked.

As a result, FINRA claimed that the firms failed to adequately investigate certain specific examples of suspicious conduct.

Previously, in March 2012, RJFS agreed to pay a fine of US $400,000 to FINRA to resolve charges that it failed to implement policies and procedures reasonably designed to identify and cause SAR reporting of transactions in the account of a customer that allegedly was operating a Ponzi scheme.

Compliance Weeds: Two weeks ago, FinCEN expanded its existing AML and CIP requirements for broker-dealers and other covered financial institutions by finalizing rules requiring them to identify the material beneficial owners of their legal entity customers based on tests of equity ownership and control. Currently such entities are mandatorily required to know the identity of each of their legal entity customers, but not necessarily their beneficial owners. Although the requirements of the new rules do not need to be implemented until May 11, 2018, FinCEN’s commentary in adopting the new rules (in the Federal Register release) provides helpful insight into FinCEN’s current understanding of industry practices. (Click here for an article describing these new rules, “FinCEN Finalizes Rules Requiring Banks, Broker-Dealers, FCMs, Mutual Funds and IBs to Help Verify Beneficial Owners of Certain Accounts” in the May 8, 2016 edition of Bridging the Week.) Banks, broker-dealers, futures commission merchants, introducing brokers and mutual funds should review this commentary to ensure they are adhering to current expectations, while potentially implementing the new requirements in advance of when required. Moreover, investment advisers, commodity pool operators and commodity trading advisors, which are not covered by FinCEN’s current or proposed requirements, should also consider adhering to FinCEN’s requirements as a best practice. Indeed, FinCEN has formally proposed that investment advisers be mandatorily subject to its AML requirements. (Click here for more information on FinCEN’s proposal in the article, “FinCEN Proposes AML and SAR Requirements for Investment Advisers” in the August 30, 2015 edition of Bridging the Week.)

My View: Once again a compliance officer—here the anti-money laundering compliance officer—has been named in a disciplinary or enforcement action by a regulator for his/her employer’s failure to implement and maintain an adequate compliance program of some type—here an AML program. (Click here for another example where a compliance officer has been named in a regulatory action in the article, “Investment Adviser Chief Compliance Officer Blamed in SEC Lawsuit for President’s Theft of Client Funds; SEC Commissioner Criticizes Enforcement Actions Against CCOs” in the June 21, 2015 edition of Bridging the Week.) Under the applicable FINRA rule, an AML compliance officer does not have to be registered in any capacity and a member of senior management (presumably registered in some capacity) must expressly approve a member’s AML program. Although his/her registration is not required, an AML compliance officer must be an associated person of a member and has the express responsibility under the relevant FINRA rule “for implementing and monitoring the day-to-day operations and internal controls of the [firm’s AML] program” (click here to access FINRA Rule 3310). It seems that this express obligation provided the hook, in FINRA’s view, to name RJA’s designated AML compliance officer in this disciplinary action. This case provides another uncomfortable reminder to compliance officers of their potential current personal liability for performing their role. FINRA likely will argue that the facts in this matter were especially egregious, but AML compliance officers and compliance officers generally will have a hard time understanding where the line of personal responsibility might be drawn in the future.


Legal Weeds: Fascinatingly, the SEC cited no statutory or rule basis for its charge in its complaint against Mr. Mickelson that he was unjustly enriched for receiving and trading on insider tips provided by Mr. Walters. Moreover, Mr. Mickelson was not charged in the related criminal action against Mr. Walters and Mr. Davis at all. This is clearly a fall-out from the 2014 Todd Newman decision where a federal appeals court in New York set aside Anthony Chiasson’s and Mr. Newman’s criminal conviction for insider trading on, among other grounds, the US government’s failure to demonstrate their knowledge that they were trading on impermissibly obtained confidential information. (Click here for a discussion of the Newman decision in the article, “Appeals Court Sets Aside Insider Trading Convictions Saying Traders Distance From Corporate Insiders Too Far” in the December 14, 2014 edition of Bridging the Week.)

Culture and Ethics: Both under applicable securities and commodities law, potential whistleblowers are incentivized to voluntarily provide tips of wrongdoing to the SEC and CFTC, respectively, in return for payments of between ten and 30 percent of any collected sanctions exceeding US $1 million. (Click here to access the relevant provision from the Securities Act of 1934 and here for the related SEC rules. Click here to access the relevant provision from the Commodity Exchange Act and here for the related CFTC rules.) Relevant law prohibits an employer from engaging in any retaliatory actions against a whistleblower. A federal cause of action exists for claims of retaliation with potential relief, including reinstatement, back pay and compensation for other expenses. It is obviously preferable for a company if an employee discloses possible wrongdoing internally, rather than to a government agency. Although no action may be taken by a company to prevent whistleblowing to the SEC or CFTC, action may be taken to encourage internal whistleblowing. This can happen through development of a culture of openness where employees are expected to disclose all suspicions of wrongdoing internally and without fear of retaliation of any kind. A firm should provide multiple avenues to report wrongdoing—not solely through the vertical chain of command of supervisors above an employee, but laterally through unrelated persons such as human resources or compliance personnel. Internally given cash rewards for whistleblowing should be considered. If employees feel comfortable reporting possible wrongdoing internally, they will feel less inclined to report it externally. But again, if they do, no retaliatory measures may be taken, directly or indirectly.

And more briefly:

For more information, see:

CME Group Amends Pre-Execution Communication MRAN for Interest Rate and FX Futures:

Famous Golfer, Professional Sports Gambler and Corporate Tipster All Named in SEC-Insider Trading Action; Criminal Charges Also Filed:
Criminal Charges:
SEC Action:

FINRA Conducting Mutual Fund Sweep at Broker-Dealers to Assess Possible Overcharges:

SEC To Award More Than US $5 Million to Whistleblower:

Two Related Broker-Dealers To Pay US $17 Million for Widespread AML Compliance Failures; Former AML Compliance Officer Also Sanctioned:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of May 21, 2016. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

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Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.

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