There is no question in my mind that the quality of FINRA examiners is a bit uneven. Some are smart and insightful and helpful; others are, well, not. Most of the time, they do know what they’re talking about. That means the opportunity to make legitimate arguments against exam findings can, at least sometimes, be limited. Often, firms find themselves in the position of acknowledging the issue, outlining the steps already taken (or that will be taken) to address the problem, and pointing out whatever mitigating circumstances may exist. What a firm cannot do, however, is what Barclays apparently did, as described in this recent AWC, which was to simply ignore concerns raised by FINRA examiners. Bad idea.
Apparently, Barclays – which seems to have a sketchy disciplinary history when it comes to systemic supervisory lapses, as evidenced by, among things, this 2013 AWC with a $3.75 million fine for “systemic failures to preserve electronic records and certain emails and instant messages in the manner required for a period of at least 10 years,” or this 2015 AWC with a $3.75 million fine for having “supervisory systems [that] were not sufficient to prevent unsuitable switching or to meet certain of the firm’s obligations regarding the sale of mutual funds to retail brokerage customers,” which, remarkably, are just two of 41 AWCs dating back to 2007 – had yet another issue, this time relating to its trade confirmations. According to the AWC, starting in 2008 and continuing “through the present, Barclays sent its customers approximately 270 million confirmations that inaccurately disclosed the firm’s execution capacity, the customer’s price, the market center of execution, or whether the trade was executed at an average price.”
Let’s put aside the opportunity to criticize FINRA staff for the fact that it appears, somehow, to have taken them 15 years to address this particular misconduct, even though from the sheer number of AWCs that the firm entered into with FINRA over essentially that same time period it necessarily means that Barclays was on the receiving end of considerable regulatory scrutiny. Instead, let’s focus on Barclays, and on what it knew about its supervisory issues and when, and how it came to know about them.
The AWC recites that “[b]eginning in at least November 2008, Barclays also had no supervisory system to review whether its confirmations complied with applicable SEC and FINRA requirements.” Well, that’s bad, but it gets worse – and this is the point of this post: “By mid-2017, because of two FINRA examinations, Barclays knew about several of the systemic confirmation accuracy issues described above and that it had no written supervisory procedures related to confirmations. The firm failed, however, to implement a reasonable supervisory system.”
There you go. You can take this lesson to the bank: it is NEVER good to learn for the first time about a supervisory issue, particularly a longstanding, systemic supervisory issue, from the examiner who is conducting a routine exam. Doesn’t matter how many exams preceded this one, or how many FINRA examiners had, during those exams, looked at your confirms and said nothing. You get no credit for that, partial or otherwise. That will always be your problem, not the examiners’, and whining about the fact that you were operating under the misapprehension that you were doing things correctly is a waste of energy.
Lesson two is equally ironclad: when an examiner points out a longstanding, systemic supervisory issue, address it, like, NOW. Barclays did not do that. Instead, according to the findings in the AWC, it waited “almost a full year later” before it did something. And, even then, its remedial efforts fell woefully short, as it “established a system and procedures to monitor only whether confirmations were delivered but not whether they were accurate.”
So, Lesson three: if you are going to do address a serious exam finding, not only do it NOW, but do it RIGHT.
Finally, it is also worth noting that even after all this, Barclays still failed to get it. The AWC states that “[i]n May 2019, FINRA, following another examination, notified Barclays that its written supervisory procedures failed to include a review of the accuracy of its confirmations. Nonetheless, it took until April 2020 for the firm to establish a supervisory system and written supervisory procedures to review the accuracy of its confirmations.” And even then, FINRA points out that this “system, which remains in place at Barclays today, . . . does not reasonably assess its compliance with confirmation requirements.” In other words, even after FINRA informed Barclays of its problems for a SECOND time, the firm still failed to act NOW and still failed to do it RIGHT.
And that’s why Barclays agreed to pay another hefty fine, this time, $2.8 million. I am happy for Barclays that it can afford to keep writing these big checks to FINRA, and that it continues to manage to avoid having its principals named in any of these Enforcement actions. But not every firm has the financial luxury that Barclays does to submit AWC after AWC after AWC. (Only two so far this year, which may seem like a lot, given that we’re only half way done with 2022, but, to keep it in perspective, it’s way off the pace the firm established in 2015, when it submitted a total of 11 AWCs.)
Most firms cannot afford to do this. Certainly small firms can’t. What small firms generally do is grit their teeth, muster up a smile for the examiner who delivers the findings, thank them for having done such a thorough exam, promise to address the problems, and then scramble to do just that. At least most of the time. Sometimes, the examiners are wrong, and sometimes there’s no choice but to draw your line in the sand and dare FINRA to put its money where its mouth is and file an Enforcement complaint. But, when FINRA has got the goods on you, that’s the time to act, and act quickly and decisively. Dilly-dallying or half-assing it will not, as Barclays learned, pay off in the long run.