SEC Charges AXA Advisors with Failure to Supervise

The SEC has brought two failure-to-supervise cases in the last several days.  I’ll cover both in the order of their release.

The first of this duo was against AXA Advisors, which failed to supervise a registered representative with the comically villainous name of Leo T. Buggy. Buggy operated out of a single-representative office in Rock Springs, Wyoming, while his supervisors were in Salt Lake City, Utah.  Between 2005 and 2008, Buggy fraudulently induced seven customers to redeem variable annuities and mutual fund holdings under the false representation that the proceeds from those redemptions would be invested in other securities through AXA Advisors. To collect the money, Buggy induced his customers to wire funds or write checks to “Equitable Life,” which he then deposited in an account at a local bank that Buggy controlled for his own benefit. This account was titled in the name – convenient for his purposes – of “Leo T. Buggy – Equitable Life Agency,” a name similar to an AXA Advisors affiliate.  Buggy collected $1.2 million from this scheme, and subsequently pled guilty to mail fraud, wire fraud, and money laundering in federal court in Wyoming.

AXA Advisors failed to supervise Buggy in two primary ways. First, AXA failed to implement adequate procedures regarding the review of its customers’ redemptions of variable annuities. The broker-dealer had procedures in place requiring supervisory review of securities transactions, but those procedures did not extend to review of redemptions of variable annuities. Second, AXA failed to establish reasonable procedures to supervise registered representatives who were on leave for extended periods, including absences due to disability.  As it happened, Buggy himself was certified as disabled and on extended leave for part of the relevant period. During this time, AXA Advisors assigned some of his customer accounts to other registered representatives who were subject to the firm’s supervision, but others were left under Buggy’s control. The Commission found that but for either failure, AXA Advisors would likely have caught and prevented Buggy’s fraud.

AXA did make its customers financially whole, but that was not the end of its trouble. For its violations of Section 15(b)(4)(E) of the Exchange Act, the Commission compelled the firm to:

• pay a civil penalty of $100,000

• create a report providing for supervisory review of customer redemptions of variable annuities;

• create and implement an automated system for reviewing redemptions; and

• hire an independent consultant to evaluate and recommend enhancements to its supervisory and compliance practices for circumstances where registered representatives
  are on extended leave.

Broker-dealers can draw two general lessons from this case.  First, cover all of your bases. If you have general policies covering securities transactions, be sure all of the securities are covered. Don’t leave gaps like the variable annuities in this matter. Along the same lines, do not allow representatives’ extended leaves to obscure the supervision responsibilities before you.  All of your representatives have to be supervised for all of their customer accounts at all times. Second, allowing representatives to operate in isolated shops, at significant geographic remove from supervising officers, only complicates your task. Consider whether the profit is worth the risk of that business model, because it may not be.