Annual Compliance Testing Should Re-Calibrate WSPs

As 2015 ended, FINRA fined Barclays Capital $13.75 million for mutual-fund switching and breakpoint supervisory failures that might have been avoided if that part of Barclay's WSPs had been properly calibrated and/or part of their annual compliance testing. The lapses stemmed in part from an inaccurate definition of switching in Barclay's WSPs and those undetected problems mounted over the years. A five-year look back review uncovered over 6100 unsuitable switches with customer harm of about $8.63 million; a similar six-month look back revealed 1,723 unsuitable mutual-fund trades and 98 breakpoint violations. FINRA Rule 3120 requires each broker-dealer to conduct annual testing of its supervisory controls and Rule 3130 requires its CEO certify annually that "the member has in place processes to establish, maintain, review, test and modify written compliance policies and written supervisory procedures reasonably designed to achieve compliance with applicable FINRA rules, MSRB rules and federal securities laws and regulations." Although a broker-dealer's annual reviews and supervisory systems are primarily risk-based, it is prudent to routinely review a rotating portion of the firm's written supervisory procedures ("WSPs") during each review period to ensure they are properly calibrated and functioning. As part of that periodic re-review, firms also should ensure that the WSPs under review are properly calibrated to match the firm's present business and risk profiles. Had Barclay's subjected its mutual-fund supervisory policies to even a three-year review cycle, it would have spotted the errors earlier and diminished the resulting harm and fines. The FINRA release announcing the neither-admit-nor-deny resolution is here.

Thomas K. Potter, III ( is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 29 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2016 by Thomas K. Potter, III (all rights reserved).

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