HRO Securities Defense Blog

SEC Fines Broker Dealer $100,000 Under Reg S-P for Failing to Protect Customer Data by Requiring Reps to Have Anti-Virus Software

By Sven Collins, HRO. On September 29, the Securities and Exchange Commission (SEC) issued an administrative cease and desist order, under Sections 15(b) and 21C of the Securities Exchange Act of 1934, and Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, against Commonwealth Equity Services, LLP d/b/a Commonwealth Financial Network. See Release No. 34-60733 at www.sec.gov/litigation/admin.shtml. The SEC’s cease and desist order—to which Commonwealth consented without admitting any wrongdoing—found that Commonwealth Financial violated Regulation S-P by leaving its customer information “vulnerable to unauthorized access.” How did Commonwealth Financial do this? According to the SEC’s order, Commonwealth Financial did this by only recommending—but not requiring—that its registered representatives have anti-virus software on their computers used to access Commonwealth Financial’s intranet trading platform. Equally bad, according to the SEC, Commonwealth Financial also did not audit registered reps’ branch office computers to see if they had anti-virus software and did not put in place procedures to follow up on potential computer security issues uncovered during branch audits or when reps reported issues. The end result was that bad guys could potentially crack into Commonwealth Financial confidential customer information.

FINRA Proposes Permanent Disclosure of Disciplinary Proceedings Against Former Brokers

            For many years, FINRA’s Central Registration Depository (“CRD”), which also is known as “broker check,” has been a valuable source of information for investors wishing to learn about the background of their brokers, including whether they have a disciplinary history.   However, CRD data currently is unavailable for brokers whose FINRA registration expired more than two years ago.  This is a problem because brokers who are barred or fired, or who resign their positions, often take jobs in the insurance, real estate or financial planning industries.   The disciplinary history of these former brokers may be relevant to potential customers’ evaluation of their qualifications.

FINRA Seeks to Eject Firms from Membership for Failure to Supervise

          A little-noticed rule change allows FINRA to institute statutory disqualification proceedings firms found to have failed to supervise brokers or other associated persons.  The FINRA Rule 9520 Series sets forth eligibility proceedings under which FINRA may allow “persons,” including member firms, that are subject to a statutory disqualification under federal law to remain in the securities industry.  Effective June 15, 2009, FINRA adopted a revised definition of disqualification to conform to the SEC’s definition of statutory disqualification. As discussed in NTM 09-19, the FINRA thereby incorporated three additional categories of statutory disqualification applicable to member firms: including: (1) any “willful” violations of the federal securities laws or failure to supervise; (2) grounds for statutory disqualification that were enacted by the Sarbanes-Oxley Act, e.g., any fraud-based order or bar imposed by any state securities commission or banking regulator; and (3) being associated with brokers who are themselves subject to statutory disqualification pursuant to Exchange Act Sections 3(a)(39)(A) through (D) due to, among other things, an industry bar imposed by the SEC, the FINRA or any other self-regulatory organization.

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Inspector General Blasts SEC Over Failure to Detect Madoff Fraud

            Today, the IG’s Office released its long-awaited report on the SEC’s failure to detect the Madoff fraud. [1]  The IG stated that “the SEC received more than ample information in the form of detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and/or investigation of Bernard Madoff and [his firm] for operating a Ponzi scheme, and that despite three examinations and two investigations being conducted, a thorough and competent investigation or examination was never performed.  The IG went on to say that “between June 1992 and December 2008 when Madoff confessed, the SEC received six! substantive complaints that raised significant red flags concerning Madoffs hedge fund operations and should have led to questions about whether Madoff was actually engaged in trading.”