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March 08, 2010 |
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Complying As Your Brother's Keeper |
(Dow Jones) A key consideration in the review—and rare
reversal—of longstanding sanctions against two brokers involved this
question: Can one family member adequately supervise another?
The answer from an appellate panel of the Financial Industry
Regulatory Authority: Yes, when a brokerage has proper procedures in
place.
The panel on Thursday dismissed charges that Kenneth
Pasternak, former chief executive of Knight Securities L.P., and John
Leighton, former head of the firm's institutional sales desk, were
responsible for supervisory failures that led to allegedly fraudulent
sales to customers. Pasternak had received a two-year suspension from
supervisory roles as a result of the 2005 case. Leighton was barred
from supervisory roles. Each man also was fined $100,000.
A key issue in the case was whether Pasternak and John
Leighton adequately supervised Joseph Leighton, who was then Knight's
leading institutional sales trader—and also John Leighton's brother.
Regulators alleged that Joseph Leighton overpriced securities to
institutional customers and raked in excessive profits for himself.
Pasternak and John Leighton didn't take reasonable steps to
ensure that Joseph Leighton, the top trader, adhered to industry
standards, according to the National Association of Securities Dealers,
or NASD, which merged with the regulatory arm of the New York Stock
Exchange to form Finra in 2007. Joseph Leighton was barred in 2005 as a
result of settlements with the Securities and Exchange Commission and
NASD.
The National Adjudicatory Council, Finra's appellate body,
disagreed with the lower Finra panel's ruling against the supervisors,
saying Finra didn't adequately prove its case. The council also found
that Finra didn't establish that Joseph Leighton, the trader, violated
market or regulatory standards. Institutional customers testified
during the proceedings that the pricing was fair, according to Howard
Schiffman, Pasternak's Washington, D.C.-based lawyer.
The reversal was just the latest victory for the pair, who
had similar charges by the Securities and Exchange Commission thrown
out by a federal judge in June 2008. A spokeswoman for Knight Capital
Group Inc. in Jersey City, N.J., said the company wasn't a party
to this case and considered its involvement to be resolved long ago.
Schiffman said a robust compliance program that recognized
the Leighton brothers' relationship was a basis for the National
Adjudicatory Council's decision, which found that there was no inherent
conflict.
"The unrebutted evidence shows that Joseph Leighton received
no special treatment from his brother," and was required to follow all
supervisory and compliance procedures in place for everyone else,
according to a 68-page opinion.
John Leighton also actively enforced Knight's compliance
procedures and interacted frequently with his staff, according to the
council. The opinion notes that a "team captain" acted as a liaison
between the institutional sales department and Knight's compliance and
legal department. That person reviewed any concerns raised by Knight's
compliance department about trading by the desk.
Joel Davidson, a lawyer in Orangeburg, N.Y., who represented
John Leighton, said it was clear that the strength of the compliance
program influenced the council's decision.
Situations in which one family member supervises another are
"rife with conflict," said Mark Egert, chief compliance officer at
Cowen & Co. in New York. The practice isn't prohibited on its face,
however, and is common, particularly at smaller brokerages, he said.
"Sometimes, by necessity, it's the only choice you have," said Egert.
An independent third party, such as a consultant or
unrelated employee, should review the supervision and its effectiveness
periodically to alleviate potential concerns of regulators, said Egert.
The practice also conveys to other employees that family members have
to follow the same rules, he said.
An effective supervisory relationship between family
members, however, often comes down to integrity. The answer to one
simple question, said Egert, can measure that quality: Is a supervisor
willing to put the firm and his clients above blood?
Copyright (c) 2010, Dow Jones. For more information about Dow Jones' services for advisors, please click here.
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CONFERENCES
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