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Regulatory Sanctions

A FinOp’s Intentions Come into Question

June 6, 2018

by Howard Haykin


In this case, a FinOp’s errors led to gross overstatements of a broker-dealer’s net capital and to the filing of no fewer than 9 inaccurate FOCUS reports. Yet, FINRA's sanctions left the FinOp relatively unscathed – particularly when and if one views the FinOp’s errors as being intentionally-motivated.


The Financial and Operations Principal (“FinOp”) of Merriman Capital agreed to pay a $5K fine and to not serve in a FinOp capacity for 20 days to settle FINRA charges that she permitted her member firm to conduct a securities business while below its net capital requirement. Under the settlement, the FinOp also must requalify by examination for the Series 27 license before again acting in a FinOp capacity.


FINRA FINDINGS.    This respondent, who has 30 years’ experience with 7 firms, first obtained her Series 27 license in 2011.  Between October 2015 and June 2016 (the "relevant period"), she was employed as FinOp of Merriman Capital, a now-defunct firm. As FinOp, the individual was responsible for, among other things, calculating Merriman's net capital and maintaining the accuracy of the firm's general ledger, trial balance, and balance sheet. She also was responsible for filing the firm's FOCUS reports.


During the relevant period, the FinOp: (i) failed to accurately compute its net capital by including non-allowable assets in the firm’s net capital calculation; (ii) failed to apply blockage charges to positions that were in excess of the most recent 4-week trading volume; and, (iii) failed to take collateral deficiency deductions for 2 secured demand note contracts.


As a result of these errors, Merriman’s net capital was overstated by $368,000 to $750,000 and, throughout the relevant period, the firm operated with a net capital deficiency – when its minimum net capital requirement was $250,000. During this period, the FinOp signed and filed 9 inaccurate FOCUS reports on the firm’s behalf.


FINRA Rule 4110(b)(1) provides that a member shall suspend all business operations during any period in which it is not in compliance with applicable net capital requirements set forth in Rule 15c3-1 promulgated under the Securities Exchange Act of 1934.


FINANCIALISH TAKE AWAYS.   FINRA apparently saw nothing underhanded or intentional in the FinOp’s actions (and errors) - my observation based on the relatively light sanctions that were handed down. Yet, it could be argued that the FinOp's errors (cited in this case) were deliberate in nature - so as to enable Merriman to continue operating and raising funds for its parent company. This accusation, in part, is based on Merriman Capital’s prolonged financial difficulties (cited in this case) along with a documented pattern of prior compliance violations (see below discussion).


[Of course, a more in-depth study would be necessary to flush out this theory. And, one would need to ask, "Where were Merriman’s public auditors during this timeframe?"]


Consider the following:


  • In December 2013, Merriman agreed to settle various FINRA charges by paying a $120K fine and employing the services of an independent consultant to conduct a comprehensive review of its WSPs. The charges included, among other things:

►   For over 4 years, Merriman failed to reasonably designed WSPs.

►   Merriman’s supervisory procedures failed to address several lines of its business.
►   Merriman’s WSPs failed to address private placements even though selling such securities was a substantial portion of the firm’s business and the firm raised more than $16 million for its parent company through several private offerings.
►   Yet, even after revising its WSPs for deficiencies identified by FINRA, and then being told by FINRA that the WSPs were still insufficient, Merriman placed $10 million of its parent’s securities while continuing to use the deficient WSPs.

  • In October 2012, Merriman settled charges that it appointed a registered rep as the firm’s CEO, and he remained in that position for almost a year, even though he never registered as a principal.
  • In September 2016, Merriman’s membership with FINRA was canceled for failure to pay outstanding fees.
  • By January 2017, Merriman was expelled.


This case was reported in FINRA Disciplinary Actions for May 2018.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015044865502.