The SEC reviewed FINRA's disciplinary action against Gremo Investments, Inc. for its alleged "failure to comply with FINRA reporting requirements.  Gremo Investments, a $5,000 broker-dealer, filed the appeal with the SEC after FINRA found that the Firm filed an annual report that was audited by an accounting firm that was not registered with the Public Company Accounting Oversight Board ("PCAOB"). 

The SEC reports that the facts are largely undisputed.  Gremo Investments, a FINRA member since 10/1/04, is a registered B/D with a net capital requirement of $5,000;  it sells mutual funds and variable life insurance.  Edward Gremo is the firm's chief executive, FinOp, and CCO.  FINRA suspended the Firm until it filed a compliant annual report, imposed a $1,000 fine, and charged the firm $1,605 of hearing expenses.

    Requirements for Filing Annual Reports.   In a series of orders that were issued beginning in 2003, the SEC exempted non-public B/D's, such as the Gremo Investments, from the requirement that their annual financial statements be audited by a PCAOB-registered accounting firm.  Those exemptive orders expired in December 2008, and FINRA sent 2 InfoNotes to members in January and December 2009 notifying non-public B/D's that "[t]heir fiscal year 2009 and subsequent audits must . . . be conducted by a PCAOB-registered accounting firm."  And so, Gremo's 2009 Annual Report (9/30/09 year-end) was due on 11/30/09. 

    Gremo's Facts and Circumstances.   Gremo retained Apple Accounting Services ("Apple Accounting") to audit the financial statements and, on 11/27/09 - 3 days before its due date - Gremo requested a 30-day extension to file the 2009 Annual Report, explaining to FINRA that Apple Accounting's PCAOB registration application was pending.  FINRA granted the extension and informed Gremo that failure to timely file the report could result in the assessment of a fine of $100 per day for up to ten days and could result in other regulatory or disciplinary action. 

On 12/31/09, Gremo dutifully filed its 2009 Annual Report, however Apple Accounting was not yet registered with the PCAOB.

On 5/3/10, FINRA notified Gremo (the owner and the B/D) that the 2009 Annual Report was incomplete because it was audited by an accounting firm that was not PCAOB-registered.  FINRA stated that it deemed the report not filed and that it would suspend the Firm's membership as of 5/25/10 unless the B/D filed a compliant annual report.  Among other things, FINRA advised the Firm of its right to a hearing pursuant to FINRA Rules 9552 and 9559.   On 7/13/10, the PCAOB issued a public notice disapproving Apple Accounting's application for registration. 

The SEC notes in its report that Gremo admits he knew that the B/D was required to file an annual report that was audited by a PCAOB-registered accounting firm, and concedes that Apple Accounting was not PCAOB registered.  Gremo asserted, among other things that "the PCAOB board was ruled by the Supreme Court to be unconstitutional," and claims that the PCAOB has forced him to hire a PCAOB-registered accounting firm that "charge[s] 10 times more than [the Firm's] accountant."  Gremo seeks to have the 2009 Annual Report "stand as accepted," in part because "FINRA had a 4 day audit of [the Firm's] books and records" just one month before the 2009 Annual Report was due, and "everything was ok."  Gremo argues that the suspension and fine are unnecessary.

Finally, Gremo argues that he shouldn't have to pay costs of $1,605 because "it was never disclosed" to him when the B/D appealed to FINRA.  FINRA's 5/3/10 letter, however, advised the Firm of its right to a hearing and instructed the Firm to refer to FINRA Rules 9552 and 9559 for further information regarding relevant procedures.  Rule 9559(n) provides that FINRA may impose costs in an expedited proceeding, such as the one held here.  The SEC therefore rejects Gremo's argument.  In any event, an associated person is assumed to have read and to have knowledge of FINRA's rules.

The SEC concludes that the sanctions are neither excessive nor oppressive.  Case closed in favor of FINRA.     [SEC '34Act Release 64481, 5/12/11]