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A FINRA Settlement Asks How Long Is Too Long? When Is Enough Enough?
January 3, 2017For entities and individuals in a regulated industry, there is often the sense that their regulators are hypocrites, who impose unfair regulations. Such complaints are heard from virtually all those who are subject to regulation, no matter the industry or the profession. In a sense, this distrust is the inevitable byproduct of most regulatory systems, be it the securities industry, the liquor business, power companies, the pharmaceutical industry, etc.
Can anything be done to truly erase the tension between the regulated and regulator -- and perhaps just as profound a question: Aren't we best served when such tension exists? Alas, that is far too difficult a topic to tackle here. That being said, those who regulate should at least strive to maintain the integrity of the regulatory scheme and ensure that they are not engaged in gotcha regulation. The perception of speed traps on the regulatory highway is a troubling problem. The fine. The suspension. The Bar. Those are the potent arrows in the regulatory quiver. At times, however, it seems that the ability to inflict pain is too quick a remedy for noncompliance. There are times when the reason for a regulatory failure is inadvertent error or good-faith misunderstanding. There are times, however, when the fault is negligence or intentional misconduct. I do not pretend that it is an easy task do discern when misconduct is caused by somewhat benign misadventure or bad intent. During my career as an industry regulator, as an industry defense lawyer, and as a public customer lawyer, I know that regulators often fail to provide timely notice of noncompliance coupled with an opportunity to cure any deficiencies. Not every misstep requires a fine, suspension, or Bar. Similarly, effective regulation must impose a fine, suspension, or Bar when warranted. There is a delicate balance between cultivating sound regulatory/compliance practices versus punishing misconduct. Let's face it, those who regulate are human beings beset by the same human frailties as the rest of us. Sometimes regulators drop the ball. Sometimes they are unfair. Sometimes they are petty and vindictive. Among the worst conduct we see emanating from any regulatory community arises when regulatory staff falls asleep on the job, awakens to find that they have promoted deficient conduct by not timely responding to red flags, and, as a result, fostered a protracted period of misconduct during which the regulated entity or individual thought everything was okay. When the slumbering regulator finally awakens and takes action, tempers flare. Now you tell me? But we've done it this way for years and you never said anything before? Consider today's BrokeAndBroker.com Blog in which we are forced to wonder how long is too long for a regulator and at what point was enough enough for a regulated individual? 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, Daryl Eugene Allison submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Daryl Eugene Allison Respondent (AWC 2014039096601, December 19, 2016). (the "2016 AWC").On November 7, 2011, FINRA issued a Letter of Acceptance, Waiver and Consent (No. 2009017068502) in which Allison was fined $6,000 and suspended in a principal capacity for 10 business days for violations of FINRA Rule 2010 and NASD Rules 2110 and 3010 by failing to reasonably supervise two registered representatives, and failing to enforce WSPs. On October 8, 2009, the Texas State Securities Board ("TSSB") (Case No. IC09-SUS-23) suspended Allison in all capacities in the state of Texas for 21 days for: (1) failing to enforce WSPs; (2) allowing a representative who was not registered in Texas to offer and sales securities in Texas; (3) failing to timely provide information to TSSB staff; (4) failing to disclosed required information on a registered representative's Form U4; and (5) failing to maintain customer account statements. On July 8, 1997, FINRA issued a Letter of Acceptance, Waiver and Consent (No. C06970013) in which Allison was censured and fined $7,500 jointly and severally with a FINRA member firm. Allison was also required to requalify by examination as a general securities principal, and the member firm was required to retain an independent consultant to review its deficient WSPs. Allison failed to enforce the member firm's deficient WSPs. On June 9, 1988, FINRA accepted an Offer of Settlement (Complaint No. TEX-589) in which Allison was censure [sic] and fined $3,000 jointly and severally with a FINRA member firm for violations of Sections 10(b) and 15(c) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-9 and 15c2-4 thereunder by failing to return investor funds received in connection with a contingent securities offering, when the offering failed to raise the minimum contingency amount. Allison and the member firm also failed to properly escrow customer funds from the offering.Failure to Supervise Reps and Enforce WSPs
- failed to conduct and/or to adequately document inspections of Caprock's branch offices;
- routinely inspected one of Caprock's three branch offices, but failed to adequately document the inspections; and
- completely failed to conduct inspections of two non-OSJ branch offices.
mere checklists that did not contained any information regarding testing and verification of Caprock's policies and procedures and did not address all of the areas required by NASD Rule 3010(c)(2) such as the validation of changes in customer account information and customer address changes.FINRA deemed Allison's above-cited branch oversight as constituting violations of NASD Rule 3010(c) and FINRA Rule 2010. Recordkeeping The 2016 AWC alleges that during the relevant period from November 2012 to July 2014, Allison, acting on behalf of Caprock, failed to establish and implement an adequate supervisory system for the capture, review and/or retention of the firm's email correspondence. As specified in the 2016 AWC, Allison allegedly failed to ensure that Caprock:
- maintained records to evidence supervisory reviews of email correspondence,
- captured, reviewed and retained the email correspondence of registered representatives located in one of Caprock's branch offices; and
- accurately reflected the registered representative of record on all customer account and transaction records .
- In 1988, FINRA (in the form of its predecessor NASD) accepted an AWC from Allison pertaining to his alleged failure to return investors funds and to properly escrow said funds in a contingency offering;
- In 1997, FINRA (again, the old NASD) accepted another AWC in which Allison failed to enforce his firm's deficient WSPs;
- In 2009, Allison is suspended by the State of Texas for yet again failing to enforce WSPs (although, this time a regulator did not deem the WSPs as deficient, so there seems to have been some progress in the 12 years from 1997). Texas also complained that Allison was not disclosing information on a U4; not maintaining customer account statements; and allowing an unregistered rep "to offer and sales securities in Texas." To offer and sales securities? Not sure how you "sales securities" but that's the usage in the 2016 AWC, deficient as FINRA's grammar may be; and
- In 2011, FINRA accepts another AWC citing Allison for failing to reasonably supervise two registered representatives, and failing to enforce WSPs.