## Facts

- Thaddeus J. North served as Chief Compliance Officer (CCO) of a FINRA member broker-dealer from July 2009 to August 2011 and was assigned responsibility for the firm’s supervisory procedures and review of electronic correspondence.
- The firm operated with roughly 50 registered representatives across multiple offices.
- The firm’s written supervisory procedures (WSPs) governing electronic communications during much of the period were generic and lacked meaningful review criteria (e.g., sampling parameters, risk-based terms, and documentation requirements).
- North did not revise the WSPs to add concrete review standards despite being tasked with maintaining and modifying procedures as needed.
- North’s actual review of electronic communications was sporadic, with extended periods of no email review; he did not review Bloomberg messages at all.
- A registered representative maintained business relationships with an individual who was statutorily disqualified.
- FINRA and the SEC concluded North knew or should have known of that relationship but did not report it to FINRA as required.
- FINRA disciplinary proceedings resulted in findings of rule violations and sanctions, which were largely affirmed by FINRA’s appellate body; North sought SEC review.

## Issues

1. Whether substantial evidence supported findings that North failed to (a) establish and maintain a reasonable supervisory system and adequate WSPs for electronic correspondence, (b) reasonably review electronic correspondence, and (c) report a representative’s relationship with a statutorily disqualified individual.
2. Whether the conduct violated applicable FINRA/NASD/MSRB rules and FINRA Rule 2010 (just and equitable principles of trade).
3. Whether the sanctions were excessive or oppressive, including in light of North’s CCO role and fairness considerations in imposing CCO liability.

## Decision

- The SEC sustained FINRA’s findings that North failed to establish a reasonable supervisory system and failed to reasonably review electronic correspondence.
- The SEC sustained FINRA’s finding that North failed to report a relationship involving a statutorily disqualified person as required by applicable reporting rules.
- The SEC sustained the determination that the misconduct also violated FINRA Rule 2010.
- The SEC upheld sanctions: censure; $40,000 fine; a two-month suspension in all principal and supervisory capacities plus a consecutive 30-business-day suspension in any principal capacity; and assessment of hearing and appeal costs.

## Legal Principles

- A CCO who is assigned supervisory authority is subject to ordinary supervisory standards; liability is not avoided by characterizing the role as merely advisory when the record shows designated supervisory responsibility.
- A reasonable supervisory system for electronic communications requires both adequate, tailored WSPs and actual implementation reasonably designed to detect and prevent violations.
- Written procedures that lack concrete, risk-based criteria and documentation expectations may be unreasonable, particularly when coupled with prolonged failures to conduct meaningful review.
- Supervisory obligations include ensuring follow-through; sporadic or nonexistent review of major communication channels (including firm messaging platforms) is inconsistent with reasonable supervision.
- Reporting rules requiring notice of relationships involving statutorily disqualified persons apply when the responsible supervisor knew or should have known of the relationship.
- In reviewing sanctions, the SEC considers investor protection, the public interest, and fairness and equity; sanctions consistent with FINRA guidelines are sustained when misconduct is serious, extended, and insufficiently mitigated.

## Conclusion

The SEC affirmed FINRA’s disciplinary action against a broker-dealer CCO who was assigned supervisory responsibility and failed to implement and execute a reasonable electronic-communications review program and failed to report a representative’s relationship with a statutorily disqualified individual; the SEC sustained FINRA’s findings and the suspensions, fine, censure, and costs as not excessive or oppressive.


In re Application of Thaddeus J. North, Exchange Act Release No. 84500 (Oct. 29, 2018)