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FINRA Fines Firm When Unregistered Principal Acted Presidential
January 17, 2018
It would seem a fairly basic premise of FINRA regulation that you can't act as the President of a broker-dealer unless you're registered as a principal. Of course, stuff happens and, you know, sometimes a member firm didn't realize that someone was taking on a senior role requiring principal registration, and, other times, someone thought that the guy was registered or that they put the gal's U4 through but, oh well, our bad. In a recent FINRA regulatory settlement, the self-regulator goes about its business in exemplary manner and I've got nothing to say in defense of the respondent firm. Clearly, not the crime of the century and FINRA's moderate sanctions underscore that point. On the other hand, what the hell is with the Corrective Action Statement? Why not just take your lumps quietly, pay the fine, and get on with your business?
Case In Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Triton Pacific LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Triton Pacific LLC, Respondent (AWC 2017052171901, January 11, 2018).
The AWC asserts that Triton Pacific has been a FINRA member firm since May 2006, does not have any retail customers, and has 15 registered representatives and does not have retail customers. The AWC states that the "firm has no relevant disciplinary history."
A Matter of Principal
The AWC asserts that for the relevant period between July 2015 and July 2017, Triton Pacific permitted an individual to function as a principal of the firm even though that individual did not hold any principal registrations, in violation of NASD Rule 1021 and FINRA Rule 2010.
SIDE BAR: FINRA Conduct Rule 1021: Registration Requirements(a) All Principals Must Be RegisteredAll persons engaged or to be engaged in the investment banking or securities business of a member who are to function as principals shall be registered as such with NASD in the category of registration appropriate to the function to be performed as specified in Rule 1022. Before their registration can become effective, they shall pass a Qualification Examination for Principals appropriate to the category of registration as specified by the Board of Governors. A member shall not maintain a principal registration with NASD for any person (1) who is no longer active in the member's investment banking or securities business, (2) who is no longer functioning as a principal, or (3) where the sole purpose is to avoid the examination requirement prescribed in paragraph (c). A member shall not make application for the registration of any person as principal where there is no intent to employ such person in the member's investment banking or securities business. A member may, however, maintain or make application for the registration as a principal of a person who performs legal, compliance, internal audit, back-office operations, or similar responsibilities for the member or a person engaged in the investment banking or securities business of a foreign securities affiliate or subsidiary of the member.(b) Definition of PrincipalPersons associated with a member, enumerated in subparagraphs (1) through (5) hereafter, who are actively engaged in the management of the member's investment banking or securities business, including supervision, solicitation, conduct of business or the training of persons associated with a member for any of these functions are designated as principals. Such persons shall include:(1) Sole Proprietors(2) Officers(3) Partners(4) Managers of Offices of Supervisory Jurisdiction, and(5) Directors of Corporations.(c) Requirements for Examination on Lapse of RegistrationAny person whose registration has been revoked pursuant to Rule 8310 or whose most recent registration as a principal has been terminated for a period of two or more years immediately preceding the date of receipt by the Association of a new application shall be required to pass a Qualification Examination for Principals appropriate to the category of registration as specified in Rule 1022 hereof.(d) Application for Principal Status(1) Any person associated with a member as a Registered Representative whose duties are changed by the member so as to require registration in any principal classification shall be allowed a period of 90 calendar days following the change in his duties during which to pass the appropriate Qualification Examination for Principals. Upon elevation, the member shall submit to NASD an amended "Uniform Application for Securities Industry Registration or Transfer" and the applicable fees. In no event may a person function as a Principal beyond the initial 90 calendar day period following the change in his duties without having successfully passed the appropriate Qualification Examination.(2) Any person not presently associated with a member as a Registered Representative seeking registration as a Principal shall submit the appropriate application for registration and the required registration and examination fees. Such person shall be allowed a period of ninety days after all applicable prerequisites are fulfilled to pass the appropriate Qualification Examination for Principals. In no event may a person previously unregistered in any capacity applying for principal status function as a Principal until fully qualified.(e) Requirement of Two Registered Principals for Members(1) An NASD member, except a sole proprietorship, shall have at least two officers or partners who are registered as principals with respect to each aspect of the member's investment banking and securities business pursuant to the applicable provisions of Rule 1022. This requirement applies to persons seeking admission as members and existing members.(2) Pursuant to the Rule 9600 Series, The Association may waive the provisions of subparagraph (1) in situations that indicate conclusively that only one person associated with an applicant for membership should be required to register as a principal.(3) In addition to the provisions of subparagraph (1) above, an applicant for membership, if the nature of its business so requires, shall have at least one person qualified for registration pursuant to Rule 1022(b), (c) and (f).
Very Presidential
As set forth in part in the AWC:
[W]ith the firm's knowledge, the general securities representative functioned as a principal by, among other things. identifying himself as the firm's president, being involved in decisions regarding the employment status of other registered representatives at the firm, and being involved in the distribution of sales bonuses to two registered representatives . . .
Sanctions
In accordance with the terms of the AWC, FINRA imposed upon Triton Pacific a Censure and $10,000 fine.
Bill Singer's Comment
The Triton Pacific AWC includes a provision under "III. OTHER MATTERS" that states:
Triton Pacific may attach a Corrective Action Statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct. Triton Pacific understands that it may not deny the charges or make any statement that is inconsistent with the AWC in this Statement This Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.
As more fully explained in a 1998 NASD (FINRA's predecessor) document: "Regulatory Short Takes: NASD Clarifies Policy On Corrective Action And Mitigation Statements": http://finra.complinet.com/en/display/viewall_plain.html?rbid=1189&element_id=1159005107
Respondents in a settled disciplinary action may submit a Corrective Action Statement and/or a Mitigation Statement to NASD Regulation. This article clarifies the NASD policies regarding such Statements.A Letter of Acceptance, Waiver and Consent (AWC) permits a respondent in an NASD Regulation disciplinary action to settle the matter prior to the filing of a formal complaint. A Corrective Action Statement may be attached to the AWC, which is filed with the SEC and available to the public, provided such statement is: (1) limited to demonstrable steps taken to correct a problem associated with the disciplinary action; (2) generally no longer than 2-3 pages; and (3) contains the following legend:
This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by NASD Regulation, Inc., nor does it reflect the views of NASD Regulation, Inc., or its staff.
Separately, respondents may submit a Mitigation Statement for consideration by NASD Regulation and the National Adjudicatory Council. Generally, such Statements are used to describe mitigating circumstances surrounding the violation for the decision maker to consider in its review of the terms of a settlement. Unlike Corrective Action Statements, Mitigation Statements are not attached to the AWC or public order.Respondents may also settle a matter after the complaint is filed by submitting an Offer of Settlement. While both Corrective Action and Mitigation Statements may be submitted to NASD Regulation in connection with Offers of Settlements, these Statements are not attached to the final Order Accepting the Offer of Settlement, which is filed with the SEC and available to the public.NASD Regulation will not accept Corrective Action or Mitigation Statements that deny the allegations or are inconsistent with the findings in the settlement. . .
FINRA AWCs permit the attachment of a Corrective Action Statement to demonstrate the steps taken by a respondent to prevent future misconduct subject to the understanding that such an attachment may not deny the charges or make any statement that is inconsistent with the AWC. Further the Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.
I am no fan of Corrective Action Statements and rarely, if ever, advocate their use. Given that the premise of an AWC is a settlement made without admitting or denying the findings, I don't understand why anyone would voluntarily submit a statement that typically make admissions of facts and findings; promises to correct situations that have not necessarily been acknowledged or admitted to; and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statement, then ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal. If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it.
Some think that a Corrective Action Statement gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. As with any post-game analysis, it's just not going to change the score. Moreover, if during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in your statement, or, it is alleged that you failed to implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission.
I notice that some settling Respondents submit a Corrective Action Statement that details a proposed or in-place supervisory scheme at a current FINRA member firm -- which takes on the trappings of a proposed scheme of enhanced supervision of a statutorily disqualified individual attendant to the filing of a FINRA Membership Continuance Application (the "Form MC-400") http://brokeandbroker.com/PDF/MC400.pdf. I find this written proposal an ill-advised practice because most AWC Respondents are merely suspended and fined and are not subjected to any further regulatory constraints after their time is served and the dollars paid. If FINRA wants to impose specific supervisory conditions upon a settling Respondent or require the submission of an undertaking by the registered rep or member firm, then so be it. On the other hand, why any member firm would draft an extensive list of compliance Do's and Don'ts to which a suspended rep would be subjected upon his or her return to production baffles me. Frankly, I'm old school: Don't volunteer anything and don't answer questions that weren't asked.
I appreciate that some employer members think that memorializing an enhanced scheme of oversight for a settling registered person gives the firm some hedge against future misconduct but I don't agree with that premise. If a firm harbors such concerns about a particular associated person that the member feels compelled to memorialize in a FINRA settlement agreement an extensive, proposed supervisory protocol, then maybe that firm should terminate the individual. You think that's harsh? Just imagine what some customer's lawyer will do with that published list of proposed corrective actions if the stockbroker engages in disputed conduct. A savvy claimant's lawyer will cite all that voluntary language attached to an AWC about strict supervision as proof that the employer brokerage firm knew that the stockbroker was a compliance nightmare requiring enhanced oversight, which, it will be argued, did not occur in violation of the specific representations to a self-regulatory-organization as part of a disciplinary settlement. Yeah, I know, when I put it like that, it doesn't sound so good. Trust me, it will be put like just like that. Notwithstanding my opinions, Triton Pacific apparently determined that it was advisable to submit this Corrective Action Statement:Corrective Action Statement:
So . . . lemme see if I got this. Triton Securities LLC's voluntary Corrective Action Statement asserts (now as a matter of written record) that the registration mess was the former compliance officer's fault and a similar miscue will likely not happen again because the replacement compliance officer is more informed. Okay . . . y'all better hope that this doesn't happen again or in similar fashion because you've sort of assured FINRA that you figured out what went wrong and have fixed it. As to the lovely comment about how the unregistered individual got his principal registration after being removed as the firm's President, frankly, that's like running over someone with your car, killing them as a result, and then hoping that by backing up over the dead body you can undo the damage.STATEMENT OF CORRECTIVE ACTIONOF TRITON PACIFIC SECURITIES, LLC
SUBMITTED TO FINRAThis Corrective Action Statement is submitted by Triton Pacific Securities, LLC ("TPS" or "the firm") in connection with the Letter of Acceptance, Waiver and Consent ("AWC"). The AWC alleges, among other things, that TPS permitted an individual registered through the firm as a general securities representative to function as a principal of the firm even though the individual did not hold any principal registrations. As a corrective measure, TPS terminated its relationship with its former compliance officer and has hired a new compliance officer that it believes will be more informed with respect to the various rules and regulations governing the conduct of the firm's business, to avoid issues such as those raised in the AWC. Additionally, the individual in question obtained his principal registration shortly after being removed as president and relieved of his responsibilities that gave rise to the allegations in the AWC.This Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA, or its staff.
For those of you wondering what could possibly go wrong with blaming someone in a voluntary statement added to an AWC, consider: "FINRA Statement Of Corrective Action Defamation Lawsuit Slams Brokerage Firm" (BrokeAndBroker.com Blog, February 5, 2016)