Branch managers are on the regulatory hot seat. SEC enforcement staffers are warning that both the liability for broker misconduct and the sanctions have been ratcheted up.
"The SEC has no comfort that supervisors are taking their job as seriously as they should," said Carmen Lawrence, SEC Northeast regional enforcement director, to attorneys attending a broker/dealer enforcement conference March 18 sponsored by the Practising Law Institute (PLI) in New York City.
Defense attorneys and regulators debated the implications of the SEC's new policy, announced lastfall, to suspend managers found guilty of failure to supervise not only from supervision, but from the securities industry.
In an Oct. 9, 1997, speech before the National Society of Compliance Professionals in Washington, D.C., SEC Commissioner Isaac Hunt Jr. said, "The commission now disfavors settlement offers in failure-to-supervise cases that do not include 'time out' from the securities industry for at least some period of time." Hunt noted several cases in which a settlement offer was made after the supervisor had moved back solely into production or into a non-supervisory position. At small firms, "It is hard to see how, as a practical matter, a supervisor ... could be walled off from all supervisory responsibilities," Hunt said.
Attorneys on the PLI conference panel pressed SEC panelists on whether the new policy would be strictly applied to large-firm branch managers. "It depends on the facts of a case and the magnitude of the lapse of supervision," responded SEC Deputy Enforcement Director Colleen Mahoney. "If you look at the cases we've brought, you see a branch manager had warning of bad conduct but let it continue. We don't bring cases for a single lapse in judgment. We don't assume branch managers are guarantors of their sales force. We'll hopefully apply this new policy with some degree of rationality."
Attorney panelists disputed Mahoney's assertion that branch managers are only at risk of an industry suspension for "egregious" violations. "In my dealings with SEC staff, the staff believes it's policy for them to seek a bar from the industry in all failure-to-supervise cases," said Harry Weiss, an attorney with Wilmer Cutler & Pickering.
SEC enforcement staff offered managers even less comfort in their comments on what constitutes a red flag. "Will the SEC expect heightened supervision if a firm hires a broker from a boiler room, even if the broker's CRD is clean?" asked Robert Romano, an attorney with Morgan Lewis & Bockius.
"You should expect us to knock on your door," said Lawrence.
Replied Romano: "We're risking higher scrutiny just for hiring someone?"
Said Lawrence: "Exactly right."
Regulators are pursuing cases in which a branch manager could only have acted in hindsight to prevent a problem, claimed Barry Mandel, Merrill Lynch assistant general counsel of compliance and regulatory litigation. "You'll have a long-term broker with a clean CRD, and the manager will see no need for the same level of supervision as he would with another broker. Then that long-term broker turns up with a problem, and a regulator will ask why the manager didn't have the same level of supervision. What should have alerted the manager to be looking for a problem?"
Branch managers also better keep close track of brokers' outside activities--even when they don't involve clients, SEC enforcement staff affirmed. "Many times a broker has been using the firm's name as an aura of legitimacy," said Lawrence.
Added Mahoney: "Many times someone uses their client list as an entree for activity for an outside business." The broker may not be soliciting clients, but using client names to approach others.
While SEC Commissioner Hunt in his October speech commended firms that had sought to prevent failure-to-supervise charges by creating committees to make broker hiring decisions, Mandel contended that committees aren't protecting branch managers from being held personally liable when they make decisions on broker misconduct.
"In one case, a state brought charges against a manager because he didn't fire the broker," said Mandel. "Merrill argued the decision not to fire was a committee decision, but was unsuccessful in persuading the state to drop charges against the manager." All branch manager recommendations to discipline or terminate a broker at Merrill Lynch must go before a committee of legal and compliance executives, who make the final decision, Mandel said.
Neither the NYSE nor the NASD have made policy decisions to pursue suspensions in failure-to-supervise cases. But Robert Marchman, NYSE enforcement vice president, told conference attendees he doesn't believe the exchange "would be adverse to adding a bar from the business."
Barry Goldsmith, NASDR enforcement director was more hesitant. "Those kinds of sanctions are fitting in cases where investors have been hurt by the failure to supervise," he said.
