Deutsche Bank Securities, Inc. (“Deutsche Bank”) will pay $3.7 M to the U.S. Securities and Exchange Commission (SEC) for failure to adequately supervise traders and salespersons pursuant the settlement agreement reached with the SEC on February 12, 2018.

In its findings, the SEC specifically pointed to several communications made over Bloomberg message and other electronic communication channels like instant message. In the communications at issue, traders and salespeople misrepresented the bid and offer prices on one or both sides of the transaction, where the information was important to the customer’s buying decision. The Bank’s communication surveillance did not sufficiently incorporate search terms unique to market securities fraud, or misconduct risks. The result was Deutsche Bank’s failure to detect and prevent the violations of antifraud provisions of federal securities law in connection with the Bank’s secondary market transactions in non-agency commercial mortgage-backed securities.

The SEC specifically pointed out several damaging communications in its Order, including the following:

“In another transaction, on September 27, 2011, Trader B bought a bond for DBSI’s account at a 735 spread.3 Later that day, Salesperson X offered the bonds to a customer but falsely stated that he was intermediating the trade with another customer who held the bond. After some negotiation with the customer, Salesperson X consulted with Trader B, who instructed him to tell the customer that “the account is being sticky at [715],” i.e., that the fictitious other customer refuses to move from its 715 offer. Trader B then acknowledged to Salesperson X, “This is just a lie, right?” Salesperson X replied, “Well, I don’t care.”

The SEC concluded that Deutsche Bank would have prevented and detected a number of false and misleading statements (1) had its supervisory systems and procedures been reasonably designed and implemented to detect and prevent employees making such statements to customers, and (2) had it implemented a trade surveillance system to flag suspicious communications. Because it did not do so, Deutsche Bank “failed reasonably to supervise the traders on the CMBS Desk and the CMBS salespeople.”

Deutsche Bank also failed to train traders and salespeople on the specific risks associated with their job. The SEC noted that Deutsche Bank had codes of conduct and policies in place that instructed “communications be ‘balanced, fair, clear, and accurate’ and that they ‘always act in an open and honest manner.”  However, Deutsche Bank did not provide training specific to the heightened compliance risk associated with secondary markets or making false or misleading statements.

Both the SEC and FINRA have increased disciplinary actions against firms and individuals for failure to comply with supervision rules.  Already in 2018, FINRA fined several firms for failure to establish reasonable supervision programs to supervise the activities of their brokers. Regulated firms must review their policies and procedures to ensure they have a system that allows the firm to conduct reasonably designed, risk-based reviews of communications from the firm’s broker dealers or registered investment advisors. The risk-based review needs to be tailored to the specific job or financial product the individual provides. Moreover, firms need to take the time to review Written Supervisory Procedures to ensure their policies comply with all regulatory requirements.

Effective training and ongoing education for employees is a critical foundation for an adequate supervisory process. Firms must train their reviewers on specific issues to inform and make certain those reviewers are aware of what constitutes prohibited practices and misleading statements.  Risk-based reviews, annual training and annual WSP reviews should be necessary components of all regulated firm’s compliance program
To read the SEC’s full order, visit https://www.sec.gov/litigation/admin/2018/34-82686.pdf.

For information on how Smarsh can help your company comply with supervision requirements, please visit http://www.smarsh.com/financial-services-compliance.