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NASD Sanction Against Chief Compliance Officer Upheld

Robert E. Strong, Exchange Act Release 57426

Time from appeal to decision - 11 months, 12 days.
Time from final brief to decision - 7 months, 3 days.
Pages - 33
Footnotes - 51


Strong was formerly the Chief Compliance Officer of a small firm with about 40 registered representatives.  The NASD found that he failed to: supervise the personal trading of an analyst at the firm; enforce NASD disclosure requirements for research reports; and failed to file reports with the NASD.  He was fined $10,000 and charged with costs of $3,723.  

NASD Rule 2711 imposes restrictions on personal trading by research analysts and requires that research reports contain various disclosures.  Strong was specifically hired by the firm to be responsible for compliance with the rule.   Among other things, the rule prohibits analysts from trading in a security they follow for 30 days before and five days after the publication of a report.  Strong was required to pre-approve any analyst trades and to retain evidence of the review.  He admitted that he did not do so.   In addition he did not request that the trading desk monitor activity in analyst's accounts.  In addition, there was evidence that Strong had disciplinary authority, but it was not clear that he had the ability to fire anyone.

The analyst in question here prepared ten research reports that were sent to four to five clients.  The analyst made 112 trades in stocks he followed during a 13 month period, including 41 buys of stocks that he had made buy recommendations.  Four of those buys were within 30 days of a research report on the stock.  He earned $116,000 in profits.

Strong claimed he was not responsible for supervising the trader because he did not have the authority to cancel improper trades and he was not the line supervisor of the analyst.  Here, Strong had clear supervisory responsibility over the analyst.  He in fact did have authority to cancel trades.  Further, after consultation with the president of the firm, he had authority to discipline persons for violations of compliance procedures.  The fact that the president of the firm shared supervisory duties with Strong does not exonerate him according the the Commission.  See, Steven P. Sanders, 53 SEC 889, 904 (1998) ("[E]ven where supervisory responsibility is shared between firm executives, each can be held liable for supervisory failures.").  

Strong also ignored at least one red flag of irregularity.  After the analyst liquidated his entire position in a stock he was publicly recommending, Strong did not heighten his supervision of the analyst's trading activities.  Further, for many months, Strong did not follow the requirement that the analyst's trades be pre-approved.

Rule 2711 requires research reports to disclose whether or not: the analyst owns a financial interest in the stock that is subject to the recommendation; and whether the firm makes a market in the stock.  Eight of the research reports failed to include these or three other mandatory disclosures required by the rule.  Strong claimed he was not responsible for these violations because he relied on the firm's president to monitor the reports for compliance with the rule.  The Commission rejected this argument, noting that the firm's procedures required Strong to review all research reports for the purpose of ensuring compliance with Rule 2711.

Strong also failed to file a required attestation with the NASD that the firm had in place written procedures to ensure compliance with Rule 2711.

Exchange Act Section 19(e) requires that the SEC sustain the NASD sanctions unless it finds the sanctions to be excessive, oppressive, or impose an unnecessary burden on competition.  

The Commission upheld the sanctions, noting that NASD sanction guidelines call for a fine of between $5,000 and $50,000 and a suspension.  


This case is of some note because it reiterates the obligation of supervisors even when that supervisor shares responsibility with others.  

The Commission found supervisory liability where the supervisor had the ability to, in consultation with others, impose disciplinary sanctions and where it was not explicit that the supervisor had the ability to fire.

However, the Commission continues to move at a glacial pace.  One has to wonder why it permitted four months for briefing and took seven months to issue a decision.  This was a routine matter that involved no difficult factual or legal issues.