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Regulatory Sanctions

Small FOCUS Errors Opens Pandora’s Box to Other Violations

July 6, 2018

[Image:  by infinitymultimediaproductions, LLC /]


by Howard Haykin


Or, to put it another way, “MIGHTY OAKS FROM LITTLE ACORNS GROW.” Of course, I apply this idiom to those relatively small, inconsequential violations that FINRA unearths during routine exams - which often sow suspicion in the minds of examiners as to the quality of that firm's other supervisory policies and procedures which, in turn, prompts them to drill deeper into that firm’s books and records. At that point, you never know what other violations and deficiencies may be lurking in the background. Read on …


A small and relatively financially-strapped broker-dealer agreed to pay a $7.5K fine to settle FINRA charges that it maintained inaccurate financial books and records, filed inaccurate FOCUS Report filings and failed to timely file notifications pursuant to Rule 17a-11 of the Securities Exchange Act of 1934 (Exchange Act). [A lower fine was imposed after considering the firm’s financial difficulties.]


Exchange Act Rule 17a-11, in relevant part, provides that … every broker or dealer whose net capital declines below the minimum amount required or is insolvent must give notice of such deficiency that same day to its DEA (“designated examining authority” – i.e., FINRA) or the SEC.


FINRA FINDINGS.    Between November 2013 and February 2015, the broker-dealer – a FINRA member since 2002 with only 4 brokers and one branch office - incorrectly classified certain assets as “allowable” and inaccurately treated liabilities and revenues. Those errors resulted from an inadequate expense-sharing agreement and the firm's failure to enforce its WSPs and apparently caused the firm’s net capital to fall below its required minimum amount - which was not reported to FINRA.


In all probability, FINRA developed concerns about what other 'skeletons might lurk in the firm’s closets’. Lo and behold, here’s what FINRA found:


  • Between March 2003 and February 2015, the firm failed to maintain and review certain of its FinOp’s business-related emails sent to and received from her 3rd party email account.
  • Consequently, those emails were not maintained in non-rewriteable, non-erasable (‘WORM’) format.
  • Thus FINRA concluded that the broker-dealer did not have in place an audit system to ensure that the emails were properly maintained and did not enforce its written supervisory procedures.


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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015043418701.