OCIE Finds Deficiencies in Implementation of Controls across Firms

The SEC Office of Compliance Inspections and Examinations (“OCIE”) examined ten branch offices of registered broker-dealers and found “significant deficiencies” in the supervision and control of structured securities products (“SSPs”). The SSPs were issued by affiliates in some cases and unaffiliated third parties in others. The OCIE stated that it “assessed these firms’ compliance with suitability and supervision requirements in the Securities Exchange Act” and “evaluated whether the firms effectively supervised and monitored activities and risks associated with sales of SSPs to retail investors.” The examinations revealed deficiencies across all ten firms, including:

(i) failures “to maintain and/or enforce adequate controls relating to determining the suitability of SSP recommendations”; and

(ii) failures “to conduct both compliance and supervisory reviews of registered representatives’ determinations of customer suitability in the SSPs, as required by their internal controls.”

OCIE staff cited all of the firms for failing to maintain and enforce appropriate supervisory policies relating to SSPs. Even where policies were in effect, the OCIE found numerous instances in which such controls were implemented inadequately or inconsistently. Other problems observed by the OCIE included significant volumes of sales to seniors, dense concentrations of investors in SSPs, and overrides of ordinary compliance limitations without sufficient explanation.

Lofchie Comment: This is about as negative a report as the SEC has produced on any topic. While it is possible that OCIE staff members were inclined to take a critical view of structured products, that is of limited import from the standpoint of firms that sell such products. The clear message from the OCIE is that firms’ procedures with respect to such products are significantly deficient, and that any failure to correct these deficiencies will result in sanctions.