December 3, 2014
It would seem a fairly basic principle: A broker-dealer CCO should not allow the firm's suspended FINOP to work as . . . well, you know . . . as the firm's FINOP. I think that we all will agree to file that one under a big "DUH." On the other hand, what would compliance officers, regulators, and industry attorneys do for a living but for the fact that so many of Wall Street's "duhs" often seem an elusive concept for so many of the industry's men and women. Consider this recent settlement involving a CCO, FINOP, and an expelled FINRA member firm.
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, Michael Allen Stakes submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Michael Allen Stakes, Respondent (AWC #2013036030401, November 19, 2014).
In 1996, Stakes entered the securities industry with FINRA member firm Northgate Securities, Inc., where he eventually served as the firm's Chief Compliance Officer ("CCO"). On September 10, 2013, Northgate filed a Uniform Request for Broker-Dealer Withdrawal ("Form BDW") and in accordance with the proposed cessation of business, the firm also filed on behalf of Stakes a Uniform Termination Notice for Securities Industry Registration ("Form U5") .The AWC asserts that Stakes had no prior relevant disciplinary history.
The AWC alleges that during the period from November 20, 2012 to January 25, 2013, Stakes permitted an individual to act as Northgate's Financial and Operations Professional ("FINOP") during the period of time when she had been
- suspended in her FINOP; and
- ordered to requalify by examination prior to resuming any FINOP duties.
Notwithstanding the FINOP's suspension and her non-requalification, Stakes provided to her Northgate financial information, such as banks statements and expense invoices. During her period of disqualification, the FINOP nonetheless:
- calculated Net Capital;
- reconciled bank accounts; and
- prepared financial documents, such as Northgate's General Ledger. Balance Sheet, Profit and Loss Statement, Trial Balance, Haircut Computations, and Bank Reconciliations.
The AWC further asserts that the disqualified FINOP provided Stakes with information that Northgate needed to satisfy its heightened surveillance monthly compliance obligations. Further, she purportedly prepared and submitted the firm's quarterly FOCUS filings via FINRA's eFocus system.
SIDE BAR: Online FINRA records as of December 2, 2014, disclose that Northgate was expelled for failure to pay fines/costs pursuant to FINRA Rule 8320 on December 19, 2013. FINRA Case 2011025619001.
A Matter Of Responsibility
The AWC asserts that as Northgate's CCO, Stakes was responsible for ensuring that each of Northgate's associated persons were duly licensed and that he had failed in that regard when he misrepresented to FINRA that the disqualified FINOP would not conduct any of her customary duties during her suspension, and that Northgate's Chief Financial Officer would, in fact, perform many of those duties.
As a result of the foregoing conduct, Stakes violated NASD Membership and Registration Rule 1021 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Stakes a $15,000 fine and a three-month suspension from association with any FINRA member firm in a principal capacity only.
Bill Singer's Comment
What may get lost in this settlement is what was truly at issue; namely, that Stakes was Northgate's Chief Compliance Officer and either should have been or was aware that his firm's suspended Financial and Operations Principal was still doing Northgate's books and records when she was disqualified and had not yet satisfied her obligation to requalify in that role. Frankly, I'm not quite sure why FINRA felt that a mere three-month principal-only suspension fully addressed the serious lapses presented in this case.