For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Joseph Tarnofsky submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Joseph Tarnofsky, Respondent (AWC 20110271784, September 5, 2012).
In 2004, Tarnofsky became employed with AXA Advisors LLC , from which he was permitted resign effective March 31, 2011 for failing to timely notify AXA about and update his Uniform Application For Securities Industry Registration Or Transfer ("Form U4") to disclose four civil judgments against him. The AWC asserts that Tarnofsky had no prior disciplinary history in the securities industry.
First Two Actions
In early June 2010, AXA received a garnishment summons and documents relating to a civil judgment in the amount of $10,957.66 that had been entered against Tarnofsky on May 20, 2010, for his failure to pay outstanding credit card bills ("Action #2″).
On June 15, 2010, AXA received a garnishment summons and documents from a law firm relating to a civil judgment in the amount of $21,721.17 that had been entered against Tarnofsky on April 13, 2010, for his failure to pay outstanding credit card bills. ("Action #1″)
FINRA By-Laws Article V, Section 2(c)requires that applications for registration be kept current and that amendments be filed within 30 days of learning facts or circumstances necessitating an update.
FINRA Rule 1122 prohibits associated persons from filing information that is incomplete or inaccurate or failing to amend an incomplete or inaccurate filing after receiving notice of the need for the amendment
FINRA Rule 2010 requires registered representatives to observe high standards of commercial honor and just and equitable principles of trade.
Upon learning of the two cited actions, AXA reminded Tarnofsky of the applicable regulatory reporting requirements.
Amendments And Reprimand
On June 16, 2010, Tarnofsky timely amended his Form U4 to report Action #2 and untimely amended for Action #1.
On June 29, 2010, AXA sent Tarnofsky a letter of reprimand for the untimely U4 amendment of Action #1, directed him to a $750 late filing to FINRA, and imposed upon him an internal firm fine of $250. The letter of reprimand, which Tarnofsky signed on July 8, 2010, placed him under enhanced supervision for a minimum period of six months and warned that his failure to comply with the provisions of his enhanced supervision could result in termination. The enhanced supervision required Tarnofsky to submit all outgoing correspondence for prior review, to submit all new business to either the Branch Manager or branch compliance person for review, and to attend bi-weekly meetings with the branch compliance manager about proper sales practices.
Four More Surprises
About six months after the whole letter of reprimand episode, on January 18, 2011, AXA learned of four additional civil default judgments against Tarnofsky for non-payment of credit card bills (each action arose after the firm took internal action against Tarnofsky for the first two actions):
On February 14, 2011, Tarnofsky amended his Form U4 to reflect the four additional civil judgments but he was, nonetheless, terminated by AXA on March 31, 2011 for his noncompliant filing conduct.
Tarnofsky filed for bankruptcy in In August 2011, and his debts were discharged November 11, 2011.
The AWC alleged that Tarnofsky had:
in violation of FINRA By-Laws Article V, Section 2(c) and FINRA Rules 1122 and 2010.
In accordances with the terms of the AWC, FINRA imposed upon Tarnofsky a four-month suspension . . . ahhh, but not so fast- the "willfully" failed findings will result in Tarnofsky being deemed statutorily disqualified and after his four-month suspension he will find that he is essentially barred from the industry absent a special waiver by FINRA that is not so easily granted.
It bears noting that on page 3 in the second paragraph under the "Sanctions" section of Tarnofsky's AWC is this disclosure:
Tarnofsky understands this settlement includes a finding that he willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934 and Article III, Section 4 of FINRA's By-Laws, this omission makes him subject to a statutory disqualification with respect to association with a member.
If you are found to have willfully (intentionally) failed to timely disclose a material fact as required on the Form U4, that conduct can expose you to a statutory disqualification. As such, you wind up with the oddball outcome in which you could have a modest fine and suspension imposed upon you by FINRA but when you attempt to return to work, you learn that your willful misconduct rendered you a statutorily disqualified individual. Beware of this regulatory speed trap!
For those of you who enjoy a good puzzle, here's the language from the cited section of the federal securities exchange act:
(39) A person is subject to a ‘‘statutory disqualification'' with respect to membership or participation in, or association with a member of, a self-regulatory organization, if such person-
. . .
(F) has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (D), (E), (H), or (G) of paragraph (4) of section 15(b) of this title, has been convicted of any offense specified in subparagraph (B) of such paragraph (4) or any other felony within ten years of the date of the filing of an application for membership or participation in, or to become associated with a member of, such self- regulatory organization, is enjoined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4), has willfully made or caused to be made in any application for membership or participation in, or to become associated with a member of, a self-regulatory organization, report required to be filed with a self-regulatory organization, or proceeding before a self-regulatory organization, any statement which was at the time, and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, or has omitted to state in any such application, report, or proceeding any material fact which is required to be stated therein.
Some pro se regulatory respondents and more than a few inexperienced lawyers often find themselves in negotiations with FINRA staff where, for example, a failure to timely disclose a material event on a Form U4 could have prompted an initial settlement offer from the regulator of, hypothetically, a 1 year suspension and a $20,000 fine. After some grueling negotiations, FINRA may agree to 30 days and $5,000. Wow - you're really, really thrilled. What is missed is that the AWC states that you willfully failed to amend your Form U4. So what, you think: I'm only going to sit down for 30 days and pay a lousy $5,000, all of which I can make up. Think again. When your 30 days are up, you're going to get a nasty surprise because you are now statutorily disqualified.
I call this issues a regulatory speed trap because it continues to trip up the unwary. During my career, many industry registered persons have contacted me concerning this very issue. More often than not, a former employee of Merrill Lynch, Wells Fargo, Smith Barney, Morgan Stanley, JP Morgan, UBS, or any other number of large and small firms feels that they were sandbagged. And this anger is not solely directed at FINRA staff but also at the former lawyer.
In many cases, there is a sense that FINRA sucker punched the registered rep by "slipping in" to an AWC or Offer of Settlement seemingly innocuous language about "willful" failure. Time and time again I have heard complaints from folks who became statutorily disqualified that they never, ever thought that by settling with FINRA that they had so destroyed their careers. A simple and fair solution to this ongoing issue would be for FINRA to mandate that its staff provide a one page, boldfaced notice attendant to all "willful" settlements that the registered person affirms that by signing the AWC or Offer of Settlement that the finding of willful misconduct constitutes a statutory disqualification.
In addition to complaints against FINRA staff, those who feel that they entered into settlements without understanding that they had consented to being deemed statutorily disqualified also rage against their in-house legal counsel and independent outside counsel for failing to inform them of this situation. Sometimes I have to recommend that the registered person consult with a legal malpractice lawyer because it is apparent that they were inadequately counseled about this nasty wrinkle - and in some cases it turns out that the lawyer was unfamiliar with this statutory disqualification issue. All of which explains why I regularly publish these cases so as to better inform the industry of these issues.
FINRA Says Stockbroker Willfully Failed To Disclose Bankruptcy
Bankrupt Stockbroker Fined And Suspended By FINRA
Bankrupt Stockbroker Winds Up Statutorily Disqualified
Ameriprise Broker Barred Over Credit Card Fiasco
Statutory Disqualification for Undisclosed Tax Liens Sustained by FINRA, SEC, and Federal Court
Broker Fined And Suspended For U4 Tax Lien, Credit, and License Disclosures