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CPA Firm Sanctioned for Audits of Broker-Dealers Where Daughter Served as FINOP


The SEC upheld sanctions against a broker-dealer because the concurring partner’s daughter served as the subjects’ financial operations principal, thereby violating independence requirements.  The auditing firm, a solo practice, hired an independent contractor to serve as Engagement Quality Reviewer (EQR) with respect to 14 audits of 7 broker-dealers over a 2-year period.  Although the firm knew that the EQR’s daughter served as FINOP of the broker-dealers, the SEC opines that the respondents acted at least recklessly by failing to understand that the relationship violated independence rules.  The SEC faulted the respondents for failing to consult either the regulators or private advisors.  The SEC also rejected the argument that the financial statements complied with applicable rules, because the failure to ensure independence is itself a violation of accounting rules.  The SEC notes the close relationship between the EQR and his daughter, who learned the business from her father and assumed several FINOP engagements following her father’s withdrawal due to FINRA sanctions.

Accounting firms cannot provide FINOP services for the broker-dealer clients for whom they also provide auditing services.  In case there was any doubt, this case makes clear that the EQR is part of the engagement team, and a close familial relationship with the FINOP violates independence. 

Adviser Barred for Failing to Register as BD for Private Fund Sales

A financial adviser was barred from the industry and ordered to pay over $400,000 in disgorgement and interest for failing to register as a broker-dealer while selling interests in a private fund.  According to the SEC, the respondent identified investors, communicated with them (including in person), advised prospective investors on the merits of the investment, assisted handling funds, and collected transaction-based commissions.  The adviser sold notes issued by a third party fund that ultimately defaulted.  The SEC charges that the respondent’s activities violated Section 15(a)(1) of the Exchange Act, which requires registration as a broker-dealer to sell securities.

OUR TAKE: Over the last couple of years, the SEC has increased enforcement efforts to prosecute individuals and firms who sell private funds without registering as, or becoming affiliated with, a broker-dealer.