Ensuring compliance with securities laws and regulations is a fundamental aspect of operating within the financial industry. This was starkly highlighted by the recent $6.5 million fine imposed on Credit Suisse’s U.S.-based securities business by the U.S. Financial Industry Regulatory Authority (FINRA) and major exchanges. This penalty underscores the importance of establishing robust supervisory systems and adhering to market access rules.
The Fine and Its Implications
On December 24, 2019, FINRA, along with exchanges such as Cboe Global Markets, the Nasdaq Stock Market LLC, and the New York Stock Exchange, fined Credit Suisse Securities (USA) LLC for supervisory failings. These failings were primarily related to the bank’s inability to establish a supervisory system capable of effectively monitoring potential trading violations, including spoofing and layering, for clients offered direct market access between 2010 and 2014.
Key Compliance Failures
Credit Suisse’s compliance issues were multifaceted, with violations spanning several years. From 2011 to 2017, the firm repeatedly breached provisions of the market access rule. Key areas of non-compliance included:
- Prevention of Erroneous Orders: The firm failed to implement measures to prevent erroneous trading orders.
- Setting of Credit Limits: Adequate credit limits were not set, exposing the firm to undue financial risk.
- Annual Reviews: Credit Suisse did not conduct thorough annual reviews of its market access controls and supervisory procedures.
These lapses highlight the critical need for financial institutions to maintain vigilant and effective supervisory systems to manage financial and regulatory risks.
The Importance of a Robust Supervisory System
A supervisory system designed to monitor trading activities and ensure compliance with regulatory requirements is essential for any financial institution. This system should include:
- Real-Time Monitoring: Continuous oversight of trading activities to detect and prevent violations like spoofing and layering.
- Risk Management: Effective management of financial and regulatory risks associated with market access.
- Regular Audits and Reviews: Conducting comprehensive annual reviews to assess the effectiveness of market access controls and supervisory procedures.
Lessons for Financial Institutions
The case of Credit Suisse serves as a crucial reminder for financial institutions about the importance of compliance with securities laws and regulations. Key takeaways include:
- Investment in Compliance Infrastructure: Financial institutions must invest in robust compliance infrastructures that can adapt to evolving regulatory requirements.
- Regular Training: Employees should receive regular training on compliance best practices and regulatory updates.
- Proactive Risk Management: Institutions must proactively manage financial and regulatory risks through diligent monitoring and review processes.
Conclusion
The $6.5 million fine levied against Credit Suisse underscores the significant repercussions of failing to comply with securities laws and regulations. For financial institutions, this case serves as a stark reminder of the importance of maintaining a comprehensive and effective supervisory system. By investing in compliance infrastructure, training, and proactive risk management, firms can better navigate the complexities of the regulatory landscape and avoid similar pitfalls.
For more insights on compliance and regulatory matters, stay tuned to the Bakhtiari & Harrison website.