I am back from Spring Break — spent here, in my home, of course — and I hope that you all had a nice Easter or Passover, or whatever.  Good to be back. – Alan

Sometimes, the numbers that FINRA cites in its settlements with big broker-dealers are so ridiculously large that it’s nearly impossible to compare these cases with those brought against small firms for similar rule violations.  See, for instance, my recent blogs about LPL and Goldman Sachs and their respective failures to have done the necessary reviews to determine whether thousands of RRs were statutorily disqualified.

Today, for instance, I came across a two-day old AWC with Credit Suisse involving that firm’s supervisory failures relating to its reps’ outside brokerage accounts.  We are not talking one or two such failures.  No, this was a failure on a much grander scale.

According to the AWC, the firm has about 2,500 registered reps.  Like registered reps everywhere, they are required by Rule 3210 to obtain the prior written consent of their employer firm before opening or establishing a brokerage account at another member firm.  Assuming that Credit Suisse approves an outside account, then the firm is supposed to “monitor” the trading there, looking for insider trading and conflicts of interest, among other nasty things.

In another example of the Seinfeld notion that it is not enough merely to take the rental car reservation, it is more important to keep the reservation, Credit Suisse created a nifty-sounding system to comply with Rule 3210.  As one would expect, it appears that the firm dutifully required its RRs to disclose their outside accounts when they joined the firm. At that point, assuming the account was approved, it was entered into the firm’s Global Personal Account Trading system (GPAT).  The AWC recites that “the GPAT system periodically ingested trade data from the brokerage firm at which the employee account was located and matched trade and account data to specific employee accounts.”  In addition, Credit Suisse also established a team – the Personal Account Trading (PAT) team – that was responsible for approving the accounts and monitoring trades for pre-clearance and holding period violations.

On paper, this all looks pretty good.  You have a system, and you have the team to operate it.

Sadly, as seems to happen too often, in actuality, things did not go as planned.

Turns out that not all new hires at Credit Suisse were forthcoming about disclosing their outside brokerage accounts.  And, because (1) the firm had no automated system for tracking whether these new hires actually made the required disclosures, and (2) firm employees were not required to certify on an annual basis that they had disclosed all of their outside brokerage accounts, it meant that the PAT team “often worked from incomplete or inaccurate information with which to conduct its surveillance.”

Even worse, when the GPAT system did produce trade data for the PAT team to review, “GPAT was also often unable to match trade data received from the brokerage firm feeds to a specific employee.”  So, even when the system identified a trade exception that required review (which, theoretically, is the whole point behind Rule 3210), Credit Suisse was unable to match the trade to any particular employee.  As of September 2017, the firm had a backlog of approximately 8,000 accounts (and approximately 52,000 trades associated with those accounts) – these are the ridiculously large numbers to which I referred at the outset of this post – that could not be matched to a specific employee.  In other words, Credit Suisse couldn’t determine who the rep was who may or may not, as an example, have been trading on inside information, or whose trades were creating a conflict of interest.

Two years later, in 2019, the firm addressed one of its supervisory problems by implementing a requirement that its employees certify on an annual basis that they’d disclosed all their outside brokerage accounts.  As a result of this exercise, Credit Suisse learned that there were a whopping 2,700 previously undisclosed accounts.  Another 400 such accounts were discovered during the firm’s effort to reconcile its account exceptions, yielding a total of about 3,100 accounts that were never input into the GPAT system…meaning that none of the trades in these accounts were being monitored, as required.

For this, Credit Suisse got slapped with a $345,000 fine, maybe not too bad under the circumstances.  And, of course, no individual was named as a respondent for the supervisory failure, and none of the reps who failed to disclose the accounts was named, either.

By now you all likely sick to death of hearing me whine about the disparate treatment that big firms receive at the hands of FINRA.  Yes, $345,000 is a big check to write, but for Credit Suisse?  I don’t think so.  As a percentage of this firm’s revenue, this was a big nothing burger.  And perhaps more important, what about the lack of any action being taken against individuals?  I am defending a FINRA matter on behalf of a registered rep at another firm who allegedly failed to disclose a single outside brokerage account, and FINRA is all in a tizzy about it.  One broker, one account vs. thousands of accounts and who knows how many reps.

Whining aside, I suggest that this AWC provides a few nuggets of guidance worth remembering:

• Investing your money in systems and manpower to provide supervision is, alone, not enough; you actually have to ensure that the system achieves whatever it is designed to do.
• Do not let FINRA be the one to discover that your fancy schmancy system isn’t working. Here, Credit Suisse only came to learn about its problems during a FINRA exam, and it certainly paid the price for that.
• Get it in writing, including from your own reps. Part of Credit Suisse’s problem is that it failed to require its reps to certify annually that they had disclosed all their outside brokerage accounts.  Even the firm had done that, it might’ve discovered sooner – and on its own – that it had a problem.