Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) recently sanctioned Sigma Financial Corporation (Sigma Financial) alleging from April 25, 2011, through June 24, 2012, supervisory deficiencies existed at Sigma in specific areas of Sigma’s supervisory systems and procedures including the firm’s supervision of registered representatives, the firm’s suitability processes and procedures, some of the firm’s implemented procedures relating to customer information, and also concerning branch office registration for trade execution.
Sigma Financial has been a FINRA member since 1983, and currently has a total of 685 registered representatives operating from 436 branch office locations. Sigma conducts a general securities business.
FINRA found that Sigma Financial’s supervisory and compliance functions were conducted by B/D OPS, LLC (BD OPS) from a central location in Ann Arbor, Michigan. FINRA found that BD OPS also provided supervisory and compliance services for Sigma Financial’s affiliated investment advisor and another broker-dealer. As a result, FINRA determined that a mere 35 supervisory personnel working for BD OPS were responsible for supervising a total of 1,274 registered representatives and 854 branch offices. FINRA found that Sigma Financial’s reliance upon BD OPS to remotely conduct all of the supervisory and compliance functions for Sigma Financial’s independent contractors and branch offices was not reasonable.
FINRA pointed to the fact that during all of 2011 and much of 2012, BD OPS had only three full-time staff serving as field auditors. Thus, these three individuals needed to conduct approximately 5-10 branch inspections per week in order to keep up with their obligations to inspect offices. In addition, FINRA also noted that email review for all Sigma Financial representatives, and the other broker-dealer, were handled by BD OPS on an indeterminate basis with no specific individuals assigned to conduct the reviews.
In addition, FINRA found that Sigma Financial’s system for reviewing emails was not reasonably designed. Specifically, FINRA found that Sigma Financial employed an email review system that used only a limited number of search terms to filter emails for possible review and then only reviewed 10% of the identified subset of emails. FINRA found fault with both of these limitations in Sigma Financial’s review because first the initial identification of emails utilized a limited number of search terms and did not include any ”boolean” search capability that would capture variations of those words such as “complain,” instead of just “complaint.” However, FINRA found that even emails identified for review were only subject to review, on a random basis, of only 10% of the subset of emails identified for review even where the identified emails contained red-flag words such as “complaint”, “promise”, or “guarantee.” FINRA found these limitations unreasonable and resulted in inadequate supervision of the firm’s email communications.
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