The control person of VPC Holdings, which owns and funds First Dunbar Securities, a MA-based broker-dealer, was permitted  by the chief compliance officer to actively participate in firm matters, including hiring, compensation, and other personnel decisions.  What's wrong with that?   

    Well, to begin with, NASD Rule 1021(b) defines a "Principal" as ... as a person who's a sole proprietor, officer, partner, OSJ manager, and/or corporate director, and is "actively engaged in the management of the [member firm’s] investment banking or securities business, including supervision, solicitation, conduct of business or the training of persons associated with a member.”  

Next, the SEC has held that persons not falling within any of the categories are nonetheless principals “where … the requirement of active engagement in the management of the member’s investment banking or securities business is satisfied.”  Furthermore, activities such as providing financial support, directing and hiring employees, involvement in firm finances, participation in management decisions, frequent communications, and leadership of personnel indicate active engagement in a firm’s securities business.

    Decision Rendered by FINRA's Office of Hearing Officers (OHO).   FINRA's OHO Panel concluded that Richard Bowers:  (i) permitted an unregistered person to act as a principal, in violation of NASD Rules 1021 and 2110, for which he was suspended two months in all principal capacities, fined $5,000, and required to requalify in all principal capacities;  (ii) failed to establish, maintain, and enforce a reasonable supervisory system and WSP's, in violation of NASD Rules 3010 and 2110, for which he was served an LOC, or Letter of Caution.

    Details of the Case - Ownership and Financial Dependency.  From September 2005 through January 2007, Bowers allegedly served as the Firm’s CCO, with responsibility for overall supervision of Firm activities, including the responsibility to ensure that VPC Holding's control person, Gary Laskowski, did not act as a principal of the Firm without being registered to do so.  Perhaps Mr. Laskowski got as involved in First Dunbar's business as he did because the firm, which had difficulty maintaining its minimum net capital, relied upon Laskowski - through VPC - to provide infusions of capital. 

With ownership and financial dependency as a backdrop, Laskowski was in frequent contact with Firm personnel, and he directed employees who readily responded to his direction.   Moreover, Laskowski was able to effectively assert his will, even when a Firm employee disagreed with his approach.  Laskowski also
attended Firm Board meetings and exchanged numerous e-mails with Firm personnel.  At no point did CCO Bowers try to stop Laskowski from parrticipating, nor did he require Laskowski to register.

e.g. - On 9/29/05, 3 weeks after becoming CCO, Bowers witnessed Laskowski’s active participation regarding a Firm employee’s compensation.  An individual, who had been hired to succeed the then Firm CEO, sent Laskowski an e-mail expressing frustration at Laskowski’s apparent change of heart and refusal to pay a co-founder and former owner, and then CCO of the Firm.   Bowers received the e-mail, and permitted Laskowski to make the final decision - McCarthy was not paid.  At the hearing, Bowers rationalized that Laskowski basically wrote the checks, so it was appropriate for him to make financial decisions.

Similarly, Bowers raised no questions when Laskowski issued directives to Firm personnel regarding broker recruitment.  On 3/20/06, Laskowski sent an e-mail to the then-Firm President, asking how for an an update and noting the firm had to "move out ASAP!"  Laskowski remained active during the recruitment process and interviewed candidates, where appropriate, was involved in setting specific compensation terms for prospective employees.

    Respondent's Defenses.   First, Bowers argued it would be unfair to charge him with a violation, since NASD Staff failed to note that Laskowski was engaged in principal activities in its 2006 examination.  The Panel responded that the regulator's failure to take early action neither operates as an estoppel against later action nor cures a violation.  Respondent also argued that Laskowski’s involvement was appropriate
because the Firm was dependent upon VPC for cash infusions. 

The Panel notes that, while "all issues regarding monies and expenditures between [VPC] and the Firm needed to be reviewed by [VPC]/Laskowski,"  in the end the reason for Laskowski’s active involvement with the Firm is irrelevant to the issue of whether he was required to be registered.  And based on the facts in the case, CCO Bowers permitted an unregistered person to act as principal without being registered  - in violation of NASD Rules 1021 and 2110.

To continue reading this case, click onto:   [ FINRA OHO Disciplinary Proceeding 2006003916901, 4/20/10 ]