FINRA Sanctions Owner of Broker-Dealer for Acting as Unregistered Principal
Commentary by Steven Lofchie and Nihal Patel
FINRA suspended and fined a broker-dealer, and barred from associating with any FINRA member firm the CEO of the broker-dealer's parent corporation, for engaging in fraudulent activity in the sales of securities to prospective investors.
FINRA found that CSSC Brokerage Services, Inc. ("CSSC") and Eric S. Smith (collectively, the "Respondents") made material misstatements and omissions in connection with an offering of securities.
FINRA also found that Mr. Smith, the majority owner of the firm and the CEO of the firm's parent company, engaged in the direct management of CSSC's securities business without being properly registered as a principal. FINRA concluded that by ordering the payment of CSSC's expenses, hiring its representatives and managers, and supervising certain representatives, Mr. Smith "exercised control and management" of CSSC, and effectively acted in the role of a principal to the broker-dealer.
As a result of the misconduct, FINRA ordered Mr. Smith to be barred from associating with any FINRA member firm in any capacity. Separately, CSSC is suspended for one year and must pay a monetary penalty of $120,000. Further, FINRA ordered the Respondents to pay roughly $12,000 for the proceeding.
Commentary
The FINRA disciplinary action against the firm's owner is a reminder that a supervisor cannot insulate himself from liability by failing to register.
Commentary
While the facts of the case are not especially compelling for the brokerage firm and the individual, the broad use of FINRA Rule 2010 is instructive. The FINRA charges largely relate to conduct regulated under the Securities Act of 1933.* FINRA ties these violations to its jurisdiction through FINRA Rule 2010, which requires members to observe "high standards of commercial honor and just and equitable principles of trade." By design, the full scope of this rule is unclear. In theory, nearly any violation of law could be captured by the rule. As to the '33 Act, FINRA has succeeded before in pursuing violations under Rule 2010. A little over two years ago, the Court of Appeals for the Fourth Circuit found FINRA's interpretation that it could ground a Securities Act violation in Rule 2010 was "plausible" and permitted an action to move forward on that basis.
*The case also involves conduct regulated under the Exchange Act and the FINRA action also alleges violations of other FINRA rules.