I typically advise my clients to undertake a serious “cold review” of all previously cited problem areas and deficiencies when preparing for their next regulatory exam. Frankly, you'd think that's just common sense, right? After all, the first thing that an examiner is likely to do when preparing to audit a firm is to see how much of a mess things were during the last go-round. Unfortunately, in-house compliance staff may have a vested interest in hiding their failures to follow up and may not be receptive to the fresh eyes of an outside consultant.
It's one thing to fail the white-glove test of an SEC, FINRA, or state examiner for something that was never a problem before — hey, it happens to everyone. On the other hand, you really don't want to have been given a prior warning and then get caught with the regulatory equivalent of your pants down around your ankles.
Case in point: Patrick Walker and Parker Financial Corp.
Without admitting or denying FINRA findings, and for the purpose of settling proposed regulatory charges, this year Walker submitted a settlement offer in the form of a Letter of Acceptance, Waiver and Consent (“AWC”) to FINRA that the regulator accepted. (In the Matter of Patrick Walker, Respondent; AWC / 2008011724302, Aug. 19, 2011).
According to the AWC, during the relevant period between 2003 and mid-October 2007, Walker was president and chief compliance officer of Parker Financial; thereafter, he remained solely in the capacities of branch manager and registered representative until his voluntary resignation in September 2008. Walker had no prior securities industry disciplinary history.
You Wuz Warned
In 2006, FINRA's examination of Parker Financial discovered deficiencies in the firm's written supervisory procedures, including procedures regarding the SEC's Regulation S-P: Privacy of Consumer Financial Information. FINRA sort of let things go with a mere slap on the wrist in the form of a Letter of Caution, among the mildest of regulatory arrows in the self-regulator's quiver.
During a subsequent examination of Parker Financial in 2008, FINRA discovered deficiencies similar to those noted in the earlier 2006 review. Uh oh — you can see this train wreck coming a mile away. Having extended the courtesy of a mild rebuke in 2006, FINRA was unhappy with the persistence/recurrence of similar violations. By the time of the 2008 examination, FINRA believed that Walker knew about but failed to reasonably update and amend Parker Financial's deficient 2006 procedures.
Among the punchlist of items that FINRA alleged Walker had failed to address were:
- maintenance of the firm's Form BD;
- designation of an appropriately licensed principal for each of the member's product lines;
- maintenance of written supervisory procedures at each office of supervisory jurisdiction;
- investigation into the qualifications of new hires;
- timely provision of account records to customers;
- prompt notification to regulators of deficiencies in required net capital;
- prohibition of the sale of unregistered securities beyond the private offering's expiration dates;
- disposal of consumer report information, and safeguarding customer information.
There are no second chances when it comes to compliance. FINRA alleged that as Parker Financial's president and CCO, Walker was responsible for establishing and maintaining the firm's supervisory procedures, and that he failed to follow through and update and revise those deficiencies noted in the 2006 examination, in violation of NASD Rules 3010, 3012, and 2110.
NASD Rule 3010 requires each member to establish and maintain written supervisory procedures.
NASD Rule 2110 requires each associated person to observe high standards of commercial honor and just and equitable principles of trade.
NASD Rule 3012 requires members to designate one or more principals who shall establish, maintain and enforce supervisory control procedures. The principals must also test the control procedures to ensure that they are adequate for the business being conducted, and must create new procedures where any omissions in the procedures are identified through testing.
For whatever his reasons, Walker settled the allegations, and FINRA imposed a 10-business-day suspension in all supervisory and principal capacities, and a $5,000 fine.