A FINRA Settlement Asks How Long Is Too Long? When Is Enough Enough?

January 3, 2017

For 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").

The AWC asserts that Allison first entered the securities industry in 1970, and from June 1979 to November 2015, he was registered with FINRA member firm Caprock Securities, Inc., where he served during the times relevant to this AWC as that firm's President and Chief Compliance Officer ("CCO"). The AWC asserts that Caprock's FINRA membership was cancelled on November 10, 2015, due to its failure to pay fees owed to  FINRA.

A Bit of History

As set forth in the AWC under the heading of "RELEVANT DISCIPLINARY HISTORY," are the following [Ed: "WSPs" are "Written Supervisory Procedures"]:

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

The 2016 AWC asserts that during the relevant period from November 2012 to July 2014, Allison, acting on behalf of Caprock, failed to supervise two registered representatives's offers and sales of Closed-End Mutual Funds ("CEFs") to nine customers. The 2016 AWC characterizes Allison's alleged failure to supervise as ignoring or failing to detect numerous red flags indicating "possibly unsuitable" CEF transactions. Also, the 2016 AWC asserts that Allison failed to enforce Caprock's WSPs regarding the review of exception reports to detect problematic trading activity in customer accounts. FINRA deemed Allison's failure to supervise and to enforce WSPs as set forth above as constituting violations of NASD Rule 3010(a) and (b) and FINRA Rule 2010.

Branch Inspections

The 2016 AWC alleges that during the relevant period from June 2011 to July 2014, Allison:

  • 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.
The 2016 AWC pejoratively describes Allison's inspection reports as:

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.


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 .

FINRA deemed the above recordkeeping lapses by Allison as constituting violations of NASD Rules 3010(a), (b) and (d), NASD Rule 3110 (for conduct on or before December 4, 2011), FINRA Rule 4511 (for conduct on or after December 5, 2011) and FTNRA Rule 2010.


In accordance with the terms of the 2016 AWC, FINRA imposed upon Allison a $10,000 fine and a Bar from association with any FINRA member firm in any Principal capacity.

Bill Singer's Comment

Allison had some 46 years in the biz. What kind of a record did he manage to put together during something shy of half a century?

  • 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.

For purposes of discussing the 2016 AWC, I'm giving Allison a freebie of sorts with his 1988 AWC because it deals with a contingency offer and not solely with WSPs or what I perceive to be issues solely involving the role of a compliance officer. Let's just say it's that one free bite of the apple.

Deficient WSPs

Which brings me to 1997, when FINRA characterizes the WSPs at Allison's firm as "deficient." As if what?  These WSPs suddenly became deficient in 1997? At what point from 1988 through FINRA's investigation did the WSP morph from efficient to deficient? I raise this because given the full history of Allison's alleged failure to maintain adequate WSPs, I find it more than a tad hypocritical for a regulator to fail to discern the existence of deficient WSPs at a member firm where that same self-regulator is supposed to be conducting annual regulatory oversight and review.

Seems to me that if you're going to charge a member firm's WSP as being deficient then FINRA should at least indicate the year when that status occurred. If FINRA's investigative staff missed calling the alleged deficient state to a member firm's attention for more than a year, that should be disclosed. Otherwise, we're left to draw an uncomfortable inference that FINRA engages in gotcha regulation. Look at it this way: If a member firm's WSPs are deficient for, say, three years and FINRA conducted three annual on-site examinations that failed to raise the purported deficiencies in the WSPs, why is it fair or appropriate to charge that firm and/or its CCO with maintaining deficient WSPs? I'm not saying that FINRA missed the metamorphosis of the WSPs at issue. What I am saying is that FINRA should at least disclose how long it determined a given set of WSPs were deficient so that it is clear that the self-regulator was not complicit in failing to spot the shortcomings on a more timely basis and to put the member firm and its CCO on notice.

Relevant Disciplinary History

From the four events listed under "Relevant Disciplinary History" in the 2016 AWC, I can't imagine that too many regulators and compliance professionals were too shocked to learn that Allison was again being charged with WSP violations in 2016. Three of the four historical items make it clear that Allison had a blind spot with WSP compliance. Which prompts you to wonder what, if anything, FINRA staff did during its 2012, 2013, and 2014 member firm examinations in order to ascertain whether Allison was WSP compliant.

Without coming off as too holier-than-thou, would you please allow me to simply ask why Allison was even permitted to function as a CCO in 2016. If you carefully read the allegations against Allison in the 2016 AWC, you should note that his alleged misconduct purportedly occurred in 2012, 2013, and 2014, all of which post-dated the four items in the Relevant Disciplinary History. The 2016 AWC characterizes Allison's alleged failure to supervise as ignoring or failing to detect numerous red flags indicating "possibly unsuitable" CEF transactions. It would seem, in all fairness, that the same 2016 AWC also presents FINRA's alleged failure to regulate because the self-regulatory organization appears to have ignored or failed to detect numerous red flags indicating that Allison was possibly unsuitable to serve as a member firm's CCO.