FINRA Fines Firm for Unregistered Control Person
Commentary by Glen Barrentine
A firm and its "unregistered indirect owner" ("associated person") settled FINRA charges over the associated person's involvement in a principal capacity for the firm.
According to the AWC, the associated person formed and participated in a management committee that had explicit control over firm management decisions. FINRA found that the associated person exerted control over the committee's finances and operating budget as well as the firm's personnel decisions. FINRA said the associated person further "directed key aspects of the firm's securities business" including "collection efforts on outstanding accounts" and "key operating decisions made by the firm, such as how to comply with Regulation Best Interest and how to exit the retail brokerage business." According to FINRA, the firm knew he was not registered, but allowed him to "actively engage in the management of the firm's securities business."
In addition, FINRA found that the firm permitted another individual to associate with the firm "while the person was barred by FINRA from associating with a member firm in any capacity and, therefore, statutorily disqualified."
FINRA determined that the firm and the associated person violated FINRA Rules 1210 ("Registration Requirements"), 8311 ("Effect of a Suspension, Revocation, Cancellation, Bar or Other Disqualification") and 2010 ("Standards of Commercial Honor and Principles of Trade") as well as Article III, Section 3(b) of FINRA's By-Laws ("Ineligibility of Certain Persons for Membership or Association").
To settle the charges, the firm agreed to (i) a censure, (ii) pay a $70,000 fine and (iii) an undertaking that that the firm currently has no unregistered individuals acting in a capacity that requires registration and no statutorily disqualified persons associating with the firm; and the associated agreed to (i) a 24-month suspension from associating with any FINRA member in all capacities and (ii) pay a $50,000 fine.
Commentary
FINRA Rule 1220(a)(2)(A) requires principal registration of persons "actively engaged in the management of the member's investment banking or securities business." Drawing lines between activities by owners that trigger registration and those that do not, however, can often be difficult. That is not the case here, where the breadth of the indirect owner's involvement clearly pointed towards the need for principal registration.
While unregistered owners can dictate their firm's direction and strategy, absent registration, they should be careful not to involve themselves in the firms' day-to-day operations. Implementation of the firm's direction and strategy should be left to appropriately registered senior management. Unregistered owners should also pay attention to appearance and act in a manner similar to an outside director. Generally, this means that they should take formal action on a periodic basis and, in connection with such actions, should solicit advice and information from the firm's senior management.