In Rare Move, SEC Overturns a FINRA Bar Over Test-Taking

"FINRA barred Lykos because it found that he cheated by receiving assistance on a qualification exam, for which the [FINRA] Sanctions Guidelines recommend imposing a bar as the standard sanction," SEC Chairman Paul Atkins, along with SEC Commissioners Hester Peirce and Mark Uyeda, wrote. "But we have now set aside FINRA’s finding that Lykos received outside assistance on the exam," and because of that and the other circumstances, "conclude that a bar is excessive and should be reduced."

SEC Commissioner Caroline Crenshaw, a Democrat, dissented.

"The facts about what transpired during the exam are certainly odd, but the most noteworthy aspect of this SEC order is the active role the Commissioners took in their role reviewing the factual record," Nick Morgan, founder of the nonprofit advocacy group Investor Choice Advocates Network, told me in an email. "Distinguishing between compelling and uncompelling circumstantial evidence is a level of nuance not normally reflected in SEC orders of this kind."

The SEC's modification of FINRA's sanctions "is also noteworthy: reducing the bar to a suspension that ends immediately is certainly not the norm," Morgan added. "This SEC is clearly not going to rubber-stamp FINRA disciplinary findings and sanctions."

Christina Zaroulis Milnor, partner at Mincey Bell Milnor, agreed in a LinkedIn post that the SEC decision "continues the Commission’s emerging trend: not everything warrants a lifetime bar. Even more striking — there’s a dissent. That’s extremely rare in Commission adjudications."

Case Details

In February 2018, Sanders Morris Harris LLC, a FINRA member firm, hired Lykos, an attorney with over 20 years of experience in the securities industry, as general counsel and chief compliance officer.

Although Lykos was registered as a general securities rep at the time, FINRA rules required Lykos to pass the Series 24 General Securities Principal Qualification Exam to remain in the CCO position, according to the opinion.

Shortly after Lykos started, SMH’s chairman and CEO, George Ball, began prompting him to take the exam.

Lykos failed the Series 24 exam in April 2018 and retook it three months later.

During that exam, "video footage shows Lykos writing notes on the dry erase board over the course of the morning," according to the opinion. "Later in the morning, he began to write on his driver’s license with the dry erase pen. At several points, Lykos would write on his license for a few seconds, pausing to look up at the computer screen, and then flip the license over so the writing was not visible. At another point he flipped his license face down — and began writing on the dry erase board — when two individuals walked behind his workstation. Later, Lykos began to write between the fingers on his left hand with the dry erase pen while periodically looking up at the computer screen."

Lykos admitted at the FINRA hearing "that he wrote on his driver’s license multiple times during the exam and that he knew at the time that doing so was inconsistent with the Rules of Conduct," the opinion states.

He also left the test center on a 24-minute unscheduled break.

"The evidence shows (and Lykos admits) that he violated FINRA Rule 2010 by not complying with the Rules of Conduct during a Series 24 exam," Atkins and the other commissioners state.

"Although those failures to comply with the Rules of Conduct do not rise to the level of cheating on a qualification exam, they are serious breaches," they continued. "The record also includes certain aggravating factors. Lykos attempted to conceal his conduct, including by writing between his fingers and attempting to rub the writing off his fingers before a Prometric employee could photograph it after the exam."

Atkins and the SEC commissioners concluded that as the bar has been in effect since Dec. 16, 2021, "reducing that bar to a suspension in all capacities, ending as of the date of this opinion, is appropriate to protect the investing public and is remedial and not punitive."

In its opinion, the SEC "acknowledged deceptive behavior — such as attempting to conceal writing and violating exam protocols — even though it ultimately stopped short of confirming that Lykos received outside assistance," added Tiffany Duncan-Magri, senior regulatory advisor at Smarsh, in another email. "The key themes of intent, trust, and evasive behavior are highly relevant, particularly as the SEC chose to reduce — but not eliminate — the sanction, based on behavioral concerns rather than proven cheating."

FINRA Enforcement Review

FINRA CEO Robert Cook said on July 25 that the broker-dealer self-regulator has launched a review of its enforcement program to be spearheaded by its enforcement chief, Bill St. Louis, as part of the FINRA Forward initiative.

St. Louis will work to develop "meaningful, common-sense improvements" to the enforcement program while two outside experts — Troy Paredes of Paredes Strategies, a former SEC commissioner; and Paul Eckert, a professor at William and Mary Law School — "will consider governance, policies, processes, and communications, as well as how FINRA enforcement works with other FINRA departments and federal and state regulators," FINRA CEO Robert Cook said in a statement.

In mid-June, FINRA also filed with the SEC to allow broker-dealers to seek a stay of a sanction or disciplinary action — such as being suspended or barred from the industry — to allow time for the action to be reconsidered. The SEC has yet to take action.

The recent Alpine Securities case, "involving expulsion without SEC review, and other matters like it drew attention to FINRA's aggressive tactics and may have motivated the SEC, courts, private parties, and now FINRA itself to take a closer look," Morgan said.

Pictured: Melanie Waddell