Bridging the Week by Gary DeWaal

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

AML and Bribery    Bridging the Week    Compliance Weeds    Culture and Ethics    Insider Trading    Legal Weeds    My View    Trade Practices (including Disruptive Trading)    Whistleblowing   
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:

  • Two Related Broker-Dealers To Pay US $17 Million for Widespread AML Compliance Failures; Former AML Compliance Officer Also Sanctioned (includes Compliance Weeds and My View);
  • Famous Golfer, Professional Sports Gambler and Corporate Tipster All Named in SEC-Insider Trading Action; Criminal Charges Also Filed (includes Legal Weeds);
  • SEC To Award More Than US $5 Million to Whistleblower (includes Culture and Ethics); and more.

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:

  • fund transfers to unrelated accounts where there was no apparent business purpose;
  • securities and cash journaling between unrelated accounts where there was no apparent business purpose, “particularly internal transfers of cash from customer accounts to employee or employee-related accounts;” and
  • fund movements from multiple accounts to the same third party account.

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.


  • Famous Golfer, Professional Sports Gambler and Corporate Tipster All Named in SEC-Insider Trading Action; Criminal Charges Also Filed: The Securities and Exchange Commission settled charges against Phil Mickelson, a professional golfer, for trading and making profits on non-public information regarding a publicly traded company he received from an individual to whom he owed money at the time. The individual, William Walters, is a professional sports gambler, said the SEC. According to the agency, on multiple occasions from 2008 through 2012, Mr. Walters received “highly-confidential” non-public information regarding Dean Foods, a publicly traded company, from Thomas Davis, a director of the company. During the relevant time, Mr. Davis also provided Mr. Walters confidential information he obtained about another publicly traded company, Darden Restaurants, Inc., too. The SEC claimed that, during the relevant time, Mr. Davis had significant financial problems. The SEC charged that Mr. Walters helped Mr. Davis with his financial problems, by providing him almost US $1 million, in return for the insider-trading tips. Mr. Walters passed along to Mr. Mickelson some of the trading tips on Dean Foods, claimed the SEC. While the SEC charged Mr. Walters and Mr. Davis with illegal insider trading under applicable law and SEC rule, Mr. Michelson solely was charged with being “unjustly enriched” for trading on the insider tips he received from Mr. Walters. To resolve his charges by the SEC, Mr. Mickelson, without admitting or denying any of the SEC’s allegations, agreed to disgorge almost US $932,000—his trading profits from the insider tips—and interest. The SEC seeks disgorgement of profits, a fine and other relief against Mr. Walters and Mr. Davis. Separately, the US Attorneys’ Office in New York City filed criminal charges emanating from the same alleged facts against Mr. Walters and Mr. Davis. Mr. Davis pled guilty and admitted to his participation in the alleged illegal scheme.

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.)

  • SEC To Award More Than US $5 Million to Whistleblower: An unnamed whistleblower will receive an award of between US $5 and $6 million because of information voluntarily provided to the Securities and Exchange Commission that led to a successful enforcement action. According to the SEC, the claimant was “…a former company insider whose detailed tip led the agency to uncover securities violations that would have been nearly impossible for it to detect but for the whistleblower’s information." In the SEC’s order regarding this matter, the Commission redacted the name of the claimant and the covered action, but indicated that the final amount received by the whistleblower will be a percentage of the ultimate amount collected as a result of the enforcement action. This is the SEC’s third largest award to a whistleblower. Previously, the SEC has granted awards as high as US $30 million and US $14 million. Recently, the Commodity Futures Trading Commission announced a US $10 million award to a whistleblower under its equivalent process.

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:

  • FINRA Conducting Mutual Fund Sweep at Broker-Dealers to Assess Possible Overcharges: The Financial Industry Regulatory Authority publicized that it is conducting a sweep of broker-dealers to assess whether they are passing along mutual fund sales charge waivers to eligible accounts. Recently, FINRA has brought and settled a number of disciplinary actions against broker-dealers for overcharging retirement accounts and charities mutual fund sales fees when the entities were eligible for discounts and were not provided them. (Click here to access the article, “Five Broker-Dealers to Pay Back More Than US $30 Million to Retirement Accounts and Charities Charged Too Much for Mutual Funds” in the July 12, 2015 edition of Bridging the Week.)
  • CME Group Amends Pre-Execution Communication MRAN for Interest Rate and FX Futures: CME Group amended its industry guidance regarding pre-execution communications to extend the “committed cross protocol” as an additional crossing protocol for interest rate futures and swaps and FX futures. Pre-execution communications are permitted at all times for most CME Group futures and options traded on Globex (with exceptions for some Chicago Board of Trade products) but never for open outcry transactions, with the exception of Chicago Mercantile Exchange S&P futures transactions. However, different products have different permitted processes for execution following such pre-execution discussions. The new guidance is effective June 6. (Click here for details regarding the different CME Group protocols in the article, “CME Group Updates Its Pre-Execution Communication Rule to Reflect New Committed Crosses” in the January 31, 2016 edition of Bridging the Week.)

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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