The Securities and Exchange Commission upheld a determination by the Financial Industry Regulatory Authority to fine Edward Wedbush, the founder and president of Wedbush Securities, Inc., a registered broker-dealer, US $50,000, and to suspend him from acting in any principal capacities for 31 days for allegedly failing to supervise certain mandated regulatory filings. (Generally, under SEC and FINRA requirements, principals of a broker-dealer include officers and other management and supervisory personnel involved in the day-to-day management or operation of the firm that are obligated to take a special examination as part of their qualification, typically the Series 24.) According to the SEC, from January 2005 through July 2010, while Mr. Wedbush was president, Wedbush Securities filed 158 required reports with FINRA related to judgments and settlements; arbitrations, civil litigations or regulatory actions; employee terminations; and statistical information on customer complaints late, with inaccurate information, or not at all. During part of this time, Mr. Wedbush also served as the firm’s chief compliance officer and business conduct manager. It was the firm’s business conduct department (BCD) that was responsible for the firm’s compliance systems and all regulatory filings. In upholding FINRA’s sanctions against Mr. Wedbush, the SEC noted that because of various FINRA and other regulatory organization reviews of Wedbush Securities, the company was “put on notice” that it was failing to file regulatory reports as required. However, “despite this notice, the Firm failed effectively to modify its procedures (or the implementation of those procedures) to address its numerous regulatory reporting deficiencies.” Principal among the firm’s implementation deficiencies, observed the SEC, was that the BCD “had not ability or leverage to enforce compliance with [the firm’s] procedures” that required the firm’s managers and registered representatives to advise the BCD of reportable events. Mr. Wedbush, claimed the SEC, was expressly on notice of the firm’s regulatory reporting issues, but “took no meaningful action” to improve matters other than “to remind his staff of its regulatory responsibilities.” According to the SEC, “[r]eminding managers of their obligations, even if done repeatedly, was an inadequate response to systemic failures as recurrent and long-standing as those at the Firm.” The SEC also upheld FINRA’s fine of US $300,ooo against Wedbush Securities for its allegedly problematic filings and supervisory breakdowns. (Click here to access the 2014 decision of the FINRA National Adjudicatory Council regarding Mr. Wedbush and Wedbush Securities.)
Compliance Weeds: In this matter, the SEC appeared to acknowledge that Wedbush Securities’ written supervisory procedures appeared “reasonably designed” to achieve compliance with applicable securities laws and FINRA requirements. However, its implementation was lacking, claimed the SEC. Thus, said the Commission, its overall supervisory system was lacking. The SEC noted that, as president of Wedbush Securities, Mr. Wedbush had ultimate responsibility for the firm’s “compliance with all applicable requirements ‘unless and until he reasonably delegates particular functions to another person in that firm, and neither knows or has reason to know that such person’s performance is deficient.’” However, here, said the SEC, Mr. Wedbush was on notice, in part because he was himself in charge of the relevant department during part of the time, and took no material action to improve the situation. According to the SEC, “While Wedbush stressed the importance of regulatory reporting at periodic management meetings and instructed managers to cooperate in the reporting process, he knew that the filing violations had continued despite his instructions, and that his instructions had not resolved the Firm’s noncompliance.” Mr. Wedbush should have ensured the appointment of more qualified personnel in the business conduct department and perhaps authorized the BCD to penalize or even fire non-cooperating personnel, as examples of appropriate material action, suggested the SEC. This SEC decision suggests that the Commission expects that its registrants, to evidence an appropriate supervisory system, must – to paraphrase former US president Theodore Roosevelt – not only empower its managers to speak softly but to carry a big stick.