In an action targeting compliance professionals individually, FINRA has suspended Vancouver-based Canaccord Genuity LLC’s former chief compliance officer and the former head of its trading compliance group, and fined them a combined $15,000 for alleged surveillance lapses.

The broker-dealer’s former chief compliance officer and anti-money-laundering (AML) officer Diane Daly allegedly failed to properly supervise the firm’s surveillance of securities transactions from February 2017 to December 2022. And FINRA said she failed to implement a sufficient AML compliance program in line with the requirements of the Bank Secrecy Act from October 2016 to December 2022.

In a related but separately filed letter of acceptance, waiver and consent, FINRA alleged that Nicholas Lorenzo, Canaccord’s general securities principal and former head of its trading compliance group, delegated the review of surveillance reports to his subordinates “without reasonably following through to confirm the reviews were being conducted,” from February 2017 through December 2022. He also allegedly failed to investigate red flags indicating that certain reviews weren’t being performed.

Fines and penalties

FINRA fined Daly $10,000 and suspended her for one year from all principal capacities and as anti-money-laundering compliance officer. Daly, who resigned from Canaccord in 2023 and is not currently registered or associated with a FINRA member firm (as per FINRA’s BrokerCheck logs), will have to requalify by exam before registering in any principal capacity after one year, according to her letter.

FINRA fined Lorenzo $5,000 and suspended him for nine months from all principal roles. He will have to requalify by exam in the future as well, should he wish to practice again.

Daly and Lorenzo did not admit or deny FINRA’s findings, and these charges were uncovered through the agency’s examination process.

Failures of oversight, training, due diligence

Daly

FINRA said that, on Daly’s recommendation, Canaccord hired junior staff to fill the vacancies left by the three most senior members of the trading compliance group, then promoted one of the recent hires to head the group in early 2017, despite that individual’s lack of management experience. (Daly’s letter does not name those individuals, but Lorenzo’s letter notes he was promoted to head of the trading compliance group in February 2017.)

The trading compliance group was tasked with escalating instances of potential market manipulation misconduct to Daly, but it only did so 20 times over a four-year period – twice in 2017, once in 2018, four times in 2019 and 13 times in 2020.

“In light of Canaccord’s high volume of trading in low-priced securities, the absence of escalations should have alerted Daly to the group’s failures to perform surveillance of Canaccord’s trading activities,” FINRA said.

Daly allegedly didn’t implement policies and procedures reasonably expected to detect and flag suspicious transactions, and FINRA said she delegated the design of Canaccord’s AML surveillance reports to staff who had no prior experience performing such surveillance. The regulator said most of Canaccord’s 11 types of daily AML reports went unreviewed for at least two years.

Among other things, FINRA said a report to review low-price market-making activity that was implemented for the first time in May 2019 “unreasonably excluded more than 99% of the firm’s low-priced securities transactions … to reduce the number of alerts that the trading compliance group would be required to review.

“Similarly, the report to review Canaccord’s institutional customers’ low-priced securities transactions excluded from review all trades of fewer than one million shares from the beginning of the relevant period to 2019 and all trades of fewer than 100,000 shares thereafter, even if the customer’s trading dominated the market,” FINRA alleged.

FINRA also said that Daly failed to implement reasonable AML testing, and risk-based procedures for ongoing customer due diligence and failed to require any ongoing and required staff training, among other things.

Lorenzo

According to the Lorenzo consent letter, he overlooked the fact that the group had neglected to review “a significant number” of assigned surveillance reports for extended periods of time over the course of more than four years.

“Lorenzo assigned each of the more than 100 surveillance report types to various individual group members for review without documenting those assignments in writing,” FINRA alleged. “As a result, over time, the firm was unable to determine which members of the group were responsible for reviewing particular reports.”

FINRA said Lorenzo failed to reasonably evaluate whether his staff understood how to review particular reports, and he failed to take reasonable steps to assess the quality of the reviews they performed, or even ensure they were performing reviews at all.

CCO personal liability

The risk of personal liability is a true concern to compliance professionals, with compliance membership groups, bar associations and high-ranking regulatory agency officials weighing in on this topic in the last several years.

CCOs are concerned that personal liability might be imposed on them when they have acted negligently rather than recklessly, relied on inaccurate data from another employee, and/or did not participate in the violations caused by the firm or other executives, one survey of compliance officers found. Compliance professionals laboring in an under-resourced department is also a major concern.

These compliance officer advocates, though, stress that they do not not seek to protect legal and compliance personnel who have affirmatively participated in the misconduct or misled regulators or failed in their duty to implement compliance programs or policies – their core responsibilities.

Reviewing the facts as they are alleged in these FINRA letters, Daly and Lorenzo seem to have avoided the most fundamental aspects of their jobs in terms of supervising and surveilling junior employees that they failed to train adequately and failing to detect obvious patterns of very low escalations and perform the due diligence needed to review surveillance reports.

Holding compliance department leaders personally liable for compliance violations of their firms, even when they were not involved in the misconduct, is one thing. Not performing the fundamental aspects of one’s oversight role is a separate and distinct analysis, though.

Note: Canaccord Genuity, a global firm offering a range of investment banking and brokerage services, was not charged with any rule violations at all in these matters.