The Securities and Exchange Commission has upheld the sanctioning of the CCO of 15-rep broker-dealer Ocean Cross Capital Markets in a case that illustrates the perils facing compliance officers of small firms. But the relatively small $5,000 fine also shows that regulators can be sympathetic to the multiple demands those supervisors face.
CCO Thaddeus North failed to reasonably enforce the Westport, Connecticut firm’s written supervisory procedures governing the review of electronic correspondence, the Commission held. The November 27 opinion upholds an earlier ruling of liability by the National Adjudicatory Council.
The commission acknowledged that disciplinary action against a CCO should not be brought where a decision is based on a good faith judgment that proves to be problematic in hindsight. But that, in its opinion, was not the case with North.
“[W]e find that North had direct responsibility for reviewing Ocean Cross’s electronic communications yet failed to conduct a meaningful review,” the SEC held.
Constance J Miller, a Falls Church, Virginia-based attorney for North, said an appeal to the US Court of Appeals for the District of Columbia Circuit is planned. The hope is that the case will be consolidated with an appeal filed last year of a separate SEC decision sustaining FINRA disciplinary action against North that occurred while he was CCO of Southridge Investment Group.
In the Southridge matter, North was suspended and fined a total of $40,000, also for supervisory lapses in connection with the review of electronic correspondence, as well as for failing to report a relationship with a statutorily disqualified person.
“One concern that will be part of the appeal is that both of the firms…were out of business when the claims were brought against the individuals,” Miller said. Ocean Cross’s registration was terminated by FINRA in 2013 for failing to pay fees.
Ocean Cross’s WSPs specified that the “president or designated principal,” rather than the CCO, would conduct the required review of the firm’s electronic communications.
North asserted that responsibility for reviewing the communications belonged to Ocean Cross’s CEO, William Schloth. But he also acknowledged knowing that Schloth was not conducting the reviews and had not designated another principal to do so. North and Schloth were the firm’s only registered principals.
The SEC found that the record was consistent with North being the responsible person, based on testimony by FINRA investigators and a FINRA examiner, and the fact that North had reviewed some emails, though far less frequently than the daily review required by the firm’s WSPs.
Infrequent reviews cited
North testified that he reviewed Ocean Cross’s electronic communications “at least once a week” and “quite often” during the relevant period between September 8, 2011 and April 30, 2012.
But the SEC said a review of data in the email management system Ocean Cross used proved otherwise. According to the opinion, North did not log into the management system to review emails until December 2011, some three months after they first became available. His next review came in January 2012 during a FINRA onsite examination of Ocean Cross when he reviewed just one of 91 available e-mails. North then reviewed emails on 10 days in February 2012, seven days in March 2012 and two days in April 2012, the SEC found.
The SEC said North reviewed the firm’s instant messaging chats even less frequently – a total of eight times during the relevant period and none in the first three months they were available. According to the SEC, he began reviewing the IMs only after FINRA started its onsite exam of the firm.
The $5,000 fine was at the lowest end of FINRA’s Sanction Guidelines, which the NAC reasoned fairly reflected other demands North had on his time including starting up a new firm. The SEC agreed.
North and Schloth, who had worked together at Southridge, formed Ocean Cross in 2011. Among North’s tasks was helping migrate client accounts from Southridge.
“We have recognized previously that other demands on a CCO’s time may be a mitigating factor and think it was appropriate for FINRA to consider competing demands on North’s time a mitigating factor here,” the Commission held.
“We also agree with the NAC that, ‘[n]onetheless, the quality of North’s enforcement of the WSPs related to electronic correspondence was insufficient and reflects his inattention to his responsibilities in this regard,’” the commission stated. “The $5,000 fine imposed for North’s misconduct here will protect the public by encouraging North to take his responsibility for the tasks he is required to perform more seriously in the future.”