A broker-dealer entered into settlements (see here and here) with the state of Massachusetts for, among other compliance-related charges, state registration, and supervisory violations. The enforcement action garnered public attention because the firm had employed Keith Gill, better known as "Roaring Kitty," the primary proponent of buying GameStop.
One Consent Order concerned the firm's failure to register with the state all of its representatives who made securities sales within the state and the supervisors of those representatives. The number of representatives who were not registered was substantial (304), as was the number of supervisors of those representatives (164), some of whom were not themselves registered in the state. The amount of improper commissions received was less than $15,000 for the representatives and approximately $425,000 for the unregistered supervisors. The Consent Order noted that the firm failed to include in its procedures manual a requirement that the supervisor of a representative required to be registered in a state also be registered in that state.
The second Consent Order (pertaining to Gill) noted that his day job was working in the firm's marketing department creating educational materials. He did not service customers himself. The Consent Order states that Gill was registered as broker-dealer agent because "he was so closely involved with" the firm's registered agent. The supervisor responsible for supervising Gill "testified that he never once had a one-on-one interaction or conversation with Gill" and that he was ultimately responsible for the supervision of approximately 500 other agents. The firm's most significant supervisory failures with respect to Gill were that it (i) was unaware that "Gill ran rampant on his personal social media," (ii) "failed to reasonably monitor internal communications between and among its registered persons," particularly as to conversations between Gill and another employee with regard to GameStop, (iii) did not discipline Gill for 11 days after it learned of his use of social media, and (iv) did not reasonably enforce its employee trading policies with respect to Gill, notwithstanding both the very significant number of his trades and the size of them.
In settlement of the action for failure to register, the firm was required to register its agents, revise its supervisory procedures, and pay a fine to the state of Massachusetts for $750,000. For its failure to supervise Gill, the firm was required to hire a third-party consultant to supervise the firm's practices as to employee trading and the use of social media, and to pay a fine of $4 million.
Commentary
Given the very large number of representatives who did business in Massachusetts without registering and the very small amount of improper commissions that appears to have been collected, it seems that the firm was failing to prevent sporadic violations of the registration requirement, as opposed to ignoring substantial violations. It is also notable that Massachusetts criticized the firm for failing to register in Massachusetts the supervisors of all agents who were registered in the state. The registration departments of firms are well advised to review their own procedures in this regard.
The consent order as to Gill is a mix of routine compliance and a suggestion that firms may need to supplement the monitoring of their employees' online activities. As to the routine compliance failures, the firm did not seem to enforce its own trading compliance procedures as to Gill. On the other hand, it is not surprising that Gill's supervisor did not meet with him, given how many others the supervisor was responsible for and the fact that Gill's day job did not actually require him to be supervised. The more difficult questions are (i) should the firm have been more active in monitoring the online conduct of its employees, (ii) should the firm have been more aggressive in monitoring conversations between registered representatives and (iii) was the firm unduly slow in waiting 11 days to take action against Gill once his social media activities were discovered?
It is not obvious that the firm was legally deficient or materially off-market in regard to the three questions above. That said, in light of the notoriety of the matter, it is not surprising that the firm was subject to a reasonably significant enforcement action. Now, other firms must decide whether there are lessons to be learned.
Primary Sources
- Massachusetts Securities Division Consent Order: MML Investors Services, LLC
- Massachusetts Securities Division Consent Order: MML Investors Services, LLC
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