NASD has fined USAllianz Securities USD5 million for widespread deficiencies in its supervisory system and for record-keeping violations. As part of the settlement, USAllianz Securities may not open a new office for 30 calendar days, and may not hire new registered representatives for seven days.
USAllianz was also ordered to retain an independent consultant to verify that it has fully implemented recommended modifications and additions to its supervisory system and procedures.
NASD found that for almost five years, USAllianz failed to establish and maintain a reasonable supervisory system and written procedures designed to oversee the firm’s registered representatives and their activities. Resulting deficiencies included, among other things: Supervising principals who, in some instances, did not know which registered representatives they were responsible for supervising and in other instances registered representatives could not identify their supervising principals, both resulting in supervisory lapses.
Supervisors who were not qualified to carry out their supervisory responsibilities because they lacked experience, education and training; and, in other instances, supervisory principals inappropriately delegating their day-to-day supervisory responsibilities to other, less experienced principals, often without notifying the firm.
Inadequate staffing resources dedicated to compliance given the size and location of the firm’s sales force.
An internal office inspection program that failed to provide adequate oversight, training and guidance, leading to substantial failures to properly identify deficiencies. On 12 Oct 2006, following the period of the conduct found by NASD, USAllianz was integrated with and assumed the name of Questar Capital Corporation.
“The severity of the sanctions in this case reflects the magnitude of USAllianz’s supervisory failures,” says James S. Shorris, the Executive Vice President and Head of Enforcement at NASD. “Firms must ensure that they have adequate systems in place, and well-trained and qualified supervisors, to conduct meaningful supervision of their sales staff. The failures of supervision at USAllianz’s individual offices were compounded by its wholly inadequate internal inspection program.”
Specifically, NASD found that from April 2001 through March 2006, USAllianz did not have an adequate system in place to ensure that principals with supervisory responsibilities knew which registered representatives they were responsible for supervising. Further, some representatives could not identify their supervising principal. As a result, for certain representatives, activities commonly associated with daily supervision such as trade blotter and correspondence review did not take place. During that period, the number of Allianz representatives ranged from as many as 3,000 to between 800 and 900.
NASD also found that many supervisors were not qualified to carry out their supervisory responsibilities because of a lack of experience, education and training. Further, some supervisory principals delegated their day-to-day responsibilities to other, less experienced principals, often without notifying the firm. In one particular office, a principal with supervisory responsibilities for about 150 registered representatives delegated supervisory responsibilities to an individual who had no principal training and no previous experience as a supervisor, and failed to conduct appropriate follow-up.
NASD also found that USAllianz’s compliance department was understaffed. For much of 2001 and 2002, it had just two compliance officers for a large field sales force that were working in numerous offices throughout the United States. Although the size of the firm’s sales force declined in 2004, the firm was still inadequately staffed with only four compliance officers.
Additionally, NASD found that USAllianz failed to provide adequate oversight, training and guidance in its internal office inspection program. USAllianz did not provide inspectors with any objective standards for finding deficiencies or potential rule violations, which led to numerous instances where deficiencies were not appropriately identified. For instance, an inspector could determine that an entire office was fully compliant in an area simply because a single registered representative did not exhibit any deficiencies in that area. The firm failed to offer an adequate training program for inspectors and did not ensure that they had an appropriate level of experience before conducting inspections.
Finally, prior to March 2005, USAllianz did not have any system in place to capture, preserve and maintain e-mail communications. The firm implemented an interim system in March 2005, but that system was not successful. The firm did not have an effective system in place to capture and retain all e-mails to and from its sales force until mid-December 2005.
In settling with NASD, USAllianz neither admitted nor denied the findings, but consented to NASD’s findings.