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NEWSLETTERS & ALERTS
CCO May Have Cracked Under Pressure When He Failed Annual Certification Obligations
by Howard Haykin
Enrique Mercado, Jr. agreed to a $15K fine and a 12-month suspension (in all capacities) to settle FINRA charges that he submitted a false and backdated FINRA Rule 3130 certification to FINRA in response to a FINRA Rule 8210 request.
FINRA Rule 3130 (Annual Certification of Compliance and Supervisory Processes) requires a firm to designate and identify to FINRA on Schedule A of Form BD one or more principals to serve as a CCO. The rule also requires the firm's CEO(s) to certify annually that the firm has in place processes to establish, maintain, review, test and modify policies and procedures reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules.
► A firm's processes must be evidenced in a report that must be submitted to the firm's board of directors and audit committee (or equivalent bodies).
► CEO(s) must further certify to having met with the CCO(s) in the preceding 12 months to discuss the firm's processes and other specified matters.
► The intent of Rule 3130 is to increase attention to firms' compliance programs by requiring substantial and purposeful interaction between business managers and compliance officers throughout the firm.
FINRA Rule 8210 (Provision of Information and Testimony and Inspection and Copying of Books) grants FINRA staff and adjudicators authority to inspect and copy the books, records and accounts of member firms, associated persons and other persons over whom FINRA has jurisdiction relating to investigations, complaints, examinations or proceedings.
MERCADO BACKGROUND. Mercado, a resident of Miami, FL, first became registered in 1994, and worked in a registered capacity until 1998. He reregistered his Series 7 license in 2009, and in 2010 obtained the following principal licenses - General Securities Principal Series 24,, Series 4 Options Principal, and Muni Securities Principal Series 53. Mercado used these registrations in his capacity as CCO with Tradewire Securities from 2010 until 2013 – until and shortly after the firm withdrew from FINRA membership. From 2013 until 2015, he worked for other broker-dealers, but currently is not registered or associated with a FINRA member.
TRADEWIRE SECURITIES BACKGROUND. This Miami-based securities broker-dealer provided global brokerage services to institutions and individual investors directly and through a global network of partners. Tradewire serviced a wide range of customers, including hedge funds, pension funds, broker-dealers and banks located in Latin America, Caribbean, North America and Europe.
On 10/2/12, a press release announced that Tradewire Securities had agreed to transfer its institutional accounts to Int'l FCStone Securities. Tradewire Securities terminated or withdrew its registration on or as of 1/31/13, according to BrokerCheck.
FINRA FINDINGS. On 4/26/13, Enrique Mercado, Jr. provided a false and backdated FINRA Rule 3130 certification to FINRA's Department of Enforcement. The certification, backdated to 3/29/13, falsely stated that former FINRA member firm Tradewire Securities had processes in place to review and test its supervisory procedures on a periodic basis, and that these processes were evidenced in a written report. The backdating gave the appearance that the certification had been executed by the required deadline. Mercado did not sign the certification submitted, but he later acknowledged in testimony that the certification he provided to FINRA contained false statements and was backdated. Such actions would violate FINRA Rules 8210 and 2010.
Related Facts and Circumstances, per FINRA:
- Because Tradewire's previous Rule 3130 certification was made on or before 3/30/12, Tradewire was required to make its next certification on or before 3/30/13.
- For the annual period ending 3/30/13, Tradewire did not test its supervisory procedures as required by FINRA Rule 3130 and NASD Rule 3012.
- For the annual period ending 3/30/13, Tradewire did not prepare the reports required by FINRA Rule 3130 and NASD Rule 3012.
- ln June 2012, Tradewire cancelled the onsite audit by a 3rd-party consulting firm that it had retained to: (i) conduct the annual review and assessment of Tradewire's regulatory compliance and supervisory controls; and, (ii) prepare the firm's Annual Certification of Compliance and Supervisory Processes. Mercado disagreed with Tradewire's decision to cancel the audit by the 3rd-party consulting firm.
FINANCIALISH TAKE AWAYS. The outcome of this case is somewhat peculiar, given the fact that Tradewire had terminated or withdrawn its registration on or as of 1/31/13. For instance, …
- Why did Enrique Mercado, in his role as CCO, scramble around in March and April 2013 trying to complete and submit the certification when Tradewire Securities was no longer a registered B/D?
- Why would a certification still be required after the effective date of the firm’s termination?
- Why did the firm bother to pay in full to FINRA, in December 2012, a $125,000 fine pertaining to various alleged violations of FINRA, BSA and SEC rules?
One thought comes to mind: Prior to transfering its business to Int'l FCStone, Tradewire needed to clean up all regulatory issues - including the submission of its annual certification. Whatever the case, it would appear from the FINRA's findings that Mercado faced significant pushback in his efforts to fulfill his responsibilities and obligations as Tradewire’s CCO and COO. Not knowing relevant facts and circumstances, we can’t determine whether it would have been appropriate for Mercado to resign from Tradewire Securities and/or report to FINRA that the broker-dealer was sinking.
That said, once Mercado consciously made the decision to personally cross the line by submitting a falsified annual certification, he no longer was a so-called “innocent victim” of circumstances.
This case was reported in FINRA Disciplinary Actions for June 2017.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2012033767402.