Massachusetts authorities recently imposed a $500,000 penalty on Webull, an online brokerage, citing inadequate compliance mechanisms that couldn't keep up with its rapidly expanding customer base.
Since its inception in 2018, Webull witnessed a meteoric rise, amassing over six million accounts, of which over 100,000 are in Massachusetts. This surge in users, marked by a 182% increase in 2019 and a 443% spike in brokerage accounts the following year, outpaced the firm's compliance capabilities.
Initially, Webull's compliance responsibilities were shouldered by a sole officer, overwhelmed by escalating customer and regulatory queries. This situation was highlighted in a consent order, where Massachusetts' Securities Division pointed out Webull's failure to scale its supervisory structure proportionally to its growth, thus falling short of state and federal securities law compliance.
Webull acknowledged the facts presented in the consent order but did not concede to any legal violations. The firm remained silent on requests for comments. In an effort to bolster compliance, Webull expanded its team in February 2021, hiring a new officer who later ascended to Chief Compliance Officer (CCO) and recruited additional staff.
However, Massachusetts criticized Webull for over-reliance on external compliance consultants and counsel, using them as a makeshift for a robust in-house compliance department. These external parties reportedly produced erroneous compliance documents and procedures inapplicable to Webull's operations.
William Galvin, head of Massachusetts' Securities Division, known for his stringent regulatory approach in the financial sector, had previously confronted another prominent online brokerage, Robinhood. Under his leadership, Massachusetts pursued Robinhood for targeting novice investors with risky trading practices, which led to legal battles and challenges to the state's fiduciary rule, ultimately upheld by the highest state court.
Galvin's office characterized Webull's compliance efforts as insufficient, particularly in employee training and customer service. Before settling with the Financial Industry Regulatory Authority (FINRA) in March 2023 over these issues, Webull had already initiated significant enhancements to its compliance program.
As part of the settlement with Massachusetts, Webull agreed to appoint an independent consultant to conduct an exhaustive review of its compliance framework and submit a comprehensive report.
Alongside the hefty fine, Webull also accepted an official censure. This situation underscores the critical need for growing financial firms to proactively expand and adapt their compliance structures to match their evolving scale and complexity.
