Tax Liens Earn Stockbroker Disqualification

August 6, 2014

It happens. You run into financial difficulties, even if you're a stockbroker. Sometimes you can't catch up and you don't fully pay your taxes. The IRS doesn't like that. The State doesn't like that. Next thing you know, you've been hit with tax liens. And as if you didn't have enough to worry about, FINRA has its own rules about timely disclosing those liens. What if you didn't know about the liens? Hey, that happens too. On the other hand, if you're playing hide-and-seek and intentionally not disclosing the liens, you're headed for a world of regulatory hurt.

Case In Point

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, Edwin Emmett Lickiss submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of  Edwin Emmett Lickiss, Respondent (AWC 20130377343, July 30, 2014).

In 1987, Lickiss first became registered and by 1996, he was associated with FINRA member firm Investment Architects, Inc., where he was also a General Securities Principal. The AWC asserts that he had no prior relevant disciplinary history. 

The AWC asserts that the following tax liens were filed against Lickiss by the authorities, in the amounts, and on the dates noted:
  • Internal Revenue Service ("IRS"): $21,167.72 June 3, 2008;
  • State of California: $37,362.03 January 30,2009;
  • IRS: $97,100.34 June 1, 2010; and
  • IRS: $51,432.63 April 16,2012.
Ticking Clock of Disclosure

Article V of FINRA's By-Laws: Registered Representatives and Associated Person, provides as follows:

Application for Registration

Sec. 2.  (a) Application by any person for registration with the Corporation, properly signed by the applicant, shall be made to the Corporation via electronic process or such other process as the Corporation may prescribe, on the form to be prescribed by the Corporation and shall contain:

(1) an agreement to comply with the federal securities laws, the rules and regulations thereunder, the rules of the Municipal Securities Rulemaking Board and the Treasury Department, the By-Laws of the Corporation, NASD Regulation, and NASD Dispute Resolution, the Rules of the Corporation, and all rulings, orders, directions, and decisions issued and sanctions imposed under the Rules of the Corporation; and
(2) such other reasonable information with respect to the applicant as the Corporation may require.

(b) The Corporation shall not approve an application for registration of any person who is not eligible to be an associated person of a member under the provisions of Article III, Section 3.

(c) Every application for registration filed with the Corporation shall be kept current at all times by supplementary amendments via electronic process or such other process as the Corporation may prescribe to the original application. Such amendment to the application shall be filed with the Corporation not later than 30 days after learning of the facts or circumstances giving rise to the amendment. If such amendment involves a statutory disqualification as defined in Section 3(a)(39) and Section 15(b)(4) of the Act, such amendment shall be filed not later than ten days after such disqualification occurs. 

In addition to the above By-Law provision, FINRA Rule 1122: Filing of Misleading Information as to Membership or Registration, provides:

No member or person associated with a member shall file with FINRA information with respect to membership or registration which is incomplete or inaccurate so as to be misleading, or which could in any way tend to mislead, or fail to correct such filing after notice thereof.

Finally, the Uniform Application for Securities Industry Registration ("Form U4") asks the following:

Financial Disclosure

14K. Within the past 10 years:
(1) have you made a compromise with creditors, filed a bankruptcy petition or been the subject of an involuntary bankruptcy petition?
(2) based upon events that occurred while you exercised control over it, has an organization made a compromise with creditors, filed a bankruptcy petition or been the subject of an involuntary bankruptcy petition?
(3) based upon events that occurred while you exercised control over it, has a broker or dealer been the subject of an involuntary bankruptcy petition, or had a trustee appointed, or had a direct payment procedure initiated under the Securities Investor Protection Act?

14L. Has a bonding company ever denied, paid out on, or revoked a bond for you?

14M. Do you have any unsatisfied judgments or liens against you?

FINRA Steps In

The AWC asserts that Lickiss failed to report the liens on his Form U4 until December 5, 2013. FINRA deemed Lickiss's untimely reporting to have constituted willful violations of Article V, Section 2(c) of the FINRA By-Laws, NASD Rule 2110 and IM-1000-1, and FINRA Rule 2010.

Moreover, between October 2010 and May 2012, the AWC asserts that Lickiss did not disclose on four of his firm's compliance declarations that he was the subject of any liens filed against his assets or income. FINRA deemed such conduct to have constituted willful violations Article V, Section 2(c) of the FINRA By-Laws, NASD Rule 2110 and IM-1000-1, and FINRA Rules 2010 and 1122.

In accordance with the terms of the AWC, FINRA imposed upon Luckiss a $5,000 fine and a 4-month suspension from association with any FINRA member firm in any capacity. 

The Impact of Willfulness

The finding of willful (intentional) failure to timely disclose a material fact as required on the Form U4 will expose you to a statutory disqualification.  For those of you who enjoy a good puzzle, here's the language from the cited section of the 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.

As set forth in the AWC, Lickiss acknowledged the impact of the "willful" finding:

I understand that this settlement includes a finding that I 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 me subject to a statutory disqualification with respect to association with a member.

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