FINRA Jurisdiction Over Insurance Agent Activity Challenged In SEC Appeal

December 9, 2015

To what extent does securities-industry regulator FINRA have jurisdiction over non-securities transactions? A recent disciplinary case found the self-regulatory-organization asserting its jurisdiction over a registered representative who, in his role as an insurance agent, had deposited his customers' insurance premium payments into his personal and business accounts and, thereafter, used said funds for personal/business use. On top of the issue of jurisdiction, we are asked to consider whether the challenged deposits constituted an improper "conversion" by the agent/registered rep notwithstanding that before any lapse had occurred, the premium payments were deposited into the insurance company's bank account. READ how the respondent fared at FINRA and on appeal to the SEC.

Case In Point

Keilen Dimone Wiley was registered with Financial Industry Regulatory Authority ("FINRA") member firm Farmers Financial Solutions, LLC from April 2002 through June 7, 2011. Wiley was primarily employed as an insurance agent doing business as Wiley Insurance Agency and Associates ("WIA"), which was an agent of Farmers Insurance Group ("FIG").

2013 FINRA Complaint

On February 13, 2013, FINRA's Department of Enforcement filed a Complaint against Wiley alleging:

  1. Conversion of Customer Insurance Premiums in violation of FINRA Rule 2010; and
  2. Providing False and Misleading Testimony to FINRA in violation of FINRA Rules 8210 and 2010.

FINRA Department of Enforcement, Complainant, v. Keilen Dimone Wiley, Respondent, Respondent (Complaint, Disciplinary Proceeding No. 2011028061001, February 13, 2013)

According to the "Summary" section of the Complaint:

1. Respondent Keilen Dimone Wiley ("Wiley") collected approximately $6,500 in property and casualty insurance premiums from insurance customers, deposited the funds in undisclosed personal and business accounts, and then used the funds for his own personal and business use.

2. Wiley violated FINRA Rule 2010 (Just and Equitable Principles of Trade) by converting customer insurance premiums for his own use.

3. Although Wiley initially admitted to using customer funds for his own use during a company audit and in a subsequent written statement, Wiley later claimed during his on-the-record testimony that he did not convert the insurance premiums for his own use. Wiley's testimony was false and misleading.

4. Wiley violated FINRA Rules 8210 (Requirement to Provide Information and Testimony) and 2010 by providing false and misleading testimony to FINRA.

FINRA Department of Enforcement, Complainant, v. Keilen Dimone Wiley, Respondent, Respondent (Complaint, Disciplinary Proceeding No. 2011028061001, February 13, 2013).

2014 OHO Decision

Following a disciplinary hearing before FINRA's Office of Hearing Officers ("OHO"), a majority of the hearing panelists found that Respondent Wiley had engaged in conversion and provided false testimony. FINRA Department of Enforcement, Complainant, v. Keilen Dimone Wiley, Respondent, Respondent (OHO Decision, Disciplinary Proceeding No. 2011028061001, April 29, 2014). As more fully set forth in the OHO Decision [Ed: footnotes omitted]:

From March through April 2011, the relevant period for this case, Wiley collected over $6,000 in insurance premium payments from customers. He did not deposit the premiums into the Farmers Insurance Group bank account where the company required its agents to place them. Instead, Wiley deposited them into his WIA business bank account and used the funds to pay personal and business expenses. In early May 2011, when Wiley learned that he would be audited by Farmers Insurance Group, he quickly transferred funds from the WIA account into the Farmers Insurance Group account to bring himself current with the premium payments he owed to the company.

In the course of the audit, Wiley admitted that he had used premiums to meet personal needs, and followed up with an e-mail to his manager explaining why he had done so. However, a year later, testifying at a FINRA on-the-record interview, Wiley denied making personal use of the funds.

Page 2 of the OHO Decision

As to the charge of providing false/miseleading testimony during the FINRA investigation, the OHO Decision asserts [Ed: footnotes omitted; "Edmonds" is an FIG auditor]:

E. Wiley's On-The-Record Testimony

Almost exactly a year after the Farmers Insurance Group audit, Wiley testified in an on-the-record interview pursuant to a FINRA Rule 8210 request. In the course of the interview, Wiley recanted the admissions he made during and immediately after the audit. First, he denied that he had delayed depositing premiums because he needed funds for his business. Wiley testified, "That's . . . [Edmonds'] interpreting what I was saying." When asked directly whether he had used customer premiums to pay personal and business expenses, Wiley flatly denied doing so, stating, "No. And this is . . .[what] I have the most problem with . . . No, because I say the money was always there from the customers' payments that we collected." Notwithstanding that he had made no corrections to the statement when he signed it, and that he had affirmed its truth and accuracy at the audit, Wiley testified that the statement was "very inaccurate."

Page 9 of the OHO Decision

By a vote of 2 to 1, the majority of the OHO panelists decided to Bar Wiley from associating with any FINRA member in any capacity.

OHO Dissent

The OHO Dissent did not deem Wiley's conduct to rise to the level of deception and placed apparently significant weight on the fact that the premiums at issue had not lapsed prior to the eventual deposits by Wiley into the Farmer's bank account. In support of his contrary findings, the Dissent offered the following rationale [Ed: footnotes omitted]

I disagree that Enforcement proved that Wiley converted funds. Wiley routinely deposited premiums into the WIA account to facilitate his insurance business. As an independent contractor, the premiums belonged to WIA and WIA owed a debt to Farmers Insurance Group for the customer premiums Wiley collected. Wiley did not deceive Farmers Insurance Group.

He informed Farmers Insurance Group when he collected premiums, and the customers' insurance policies were not in jeopardy of lapsing.

Furthermore, Wiley testified that he had been doing business in the same manner from the inception of his agency agreement with Farmers Insurance Group. I find Wiley's testimony was credible as there was no evidence presented to contradict it.

I do not believe the testimony or the exhibits prove that Wiley was required to use the Farmers Insurance Group co-bank account. The ACA Manual only recommends that agents deposit premiums daily and refers to this as a "good business practice." Enforcement provided no documentation that Wiley was required to pay premiums into the co-bank account, and there is no signed acknowledgment by Wiley that the Farmers Insurance Group policy on paying premiums within a business day of receipt was anything more than a guideline applicable to him as an independent contractor.

I do not give weight to Wiley's written statement, which was taken by Edmonds, because I believe he was coerced to sign it under duress.

Furthermore, I find it significant that Farmers Insurance Group did not conclude that Wiley embezzled funds. Evidence of this is that Farmers Insurance Group placed a value on and purchased Wiley's book of business. The Agent Appointment Agreement specifically states that "[i]n the event termination is because of embezzlement, there is no Contract Value." If Farmers Insurance Group had concluded that Wiley embezzled, it would not have paid Wiley for his book of business. Finally, the Form U5 filed by Farmers Financial Solutions, LLC gives "Other" as the reason for Wiley's termination and states that the "Firm has elected not to maintain registration."

Because Wiley did not convert the premiums, I do not find that he misled FINRA when he provided his on-the-record testimony.

For these reasons, I would dismiss both causes of action.

Pages 19 -21 of the OHO Decision

2015 NAC Decision

On appeal to FINRA's National Adjudicatory Council ("NAC"), the NAC affirmed both the findings and sanction of the OHO. FINRA Department of Enforcement, Complainant, v. Keilen Dimone Wiley, Respondent, Respondent (NAC Decision, Disciplinary Proceeding No. 2011028061001, February 27, 2015). Among the arguments raised on appeal by Wiley, the NAC Decision notes:

On appeal, Wiley argues that FINRA exceeded its authority to take action against him because this matter involved an insurance business dispute that fell outside of FINRA's jurisdiction. In support of his claim, Wiley cites to FINRA's Code of Arbitration and associated case decisions that reference the insurance business activities exclusion under the Arbitration Code. According to Wiley, the terms of his service agreement with Farmers was a contractual dispute that should have been interpreted under the laws of the State of Texas rather than pursuant to FINRA's arbitration rules.

Page 8 of the NAC Decision

As more fully set forth in the NAC Decision [Ed: footnotes omitted]:

We affirm the Hearing Panel's finding that Wiley converted customer insurance premium payments in violation of FINRA Rule 2010. The record sufficiently reflects that, during the relevant period, Wiley accepted money from 54 Farmers customers for the payment of their insurance premiums, and instead of forwarding the payments to Farmers to be applied to their policies, he intentionally deposited the payments into his WIA & Associates account for personal and business use. We agree with the Hearing Panel's finding that Wiley was neither entitled, nor authorized, to hold or use the customers' payments at his discretion. At best, his possession of the customers' payments was transitory, and he was obligated to relinquish any payments he received to Farmers by promptly depositing them into the co-banking account. Wiley failed to do so.

The Hearing Panel did not find credible Wiley's assertion that his practice of depositing customer funds into his WIA & Associates bank account was routine and customary - something he had done for many years. According to Wiley, it was at his discretion to make deposits into the Farmers co-banking account and that his collection of the payments created a debt he then owed to Farmers. We find no evidence in the record to support this claim and have no reason to challenge the Hearing Panel's credibility determination. See Kirlin Sec., Inc., Exchange Act Release No. 61135, 2009 SEC LEXIS 4168, at *53 (Dec. 10, 2009) (noting that the credibility determination of an initial fact finder is entitled to considerable weight and deference because it is based on hearing the witnesses' testimony and observing their demeanor and that such a determination can only be overcome where the record reflects substantial evidence for doing so). To the contrary, Wiley testified himself that Farmers expected to receive the payments once they were reported in the ACA system, and it was his obligation to remit the payments to Farmers because it was the company providing the insurance coverage.

We also reject Wiley's argument that, as an independent contractor, he was not required to adhere to the payment instructions set forth in his Agent Appointment Agreement or Farmers' published rules and manuals, all of which required the "prompt" depositing of payments that were due to Farmers. The Farmers rules and manuals, which applied to all of its independent agents, indicated that Wiley did not possess exclusive rights to the premium payments. The ACA Manual prohibited outright the commingling of customer funds. It also instructed agents: "No matter what kind of schedule is set up in your office, any agent submitting an ACA must deposit all checks and cash reported under his or her ACA within one business day . . . ." Based on this evidence, Wiley should have known that his use of the premium payments for his own purposes was wrong, notwithstanding his independent contractor status.

The record reflects that Wiley used the customer payments that were intended to pay for Farmers insurance premiums for business and personal reasons. His actions were intentional and unauthorized. Mullins, 2012 SEC LEXIS 464, at *40-41 (finding that respondent did not act with permission when he intentionally converted funds belonging to another); Smith, 2014 FINRA Discip. LEXIS 2, at *13-14 (finding that respondent's exercise of ownership over customer funds for business purposes was intentional and unauthorized). Accordingly, we find that Wiley converted customer insurance premium payments in violation of FINRA Rule 2010.

Pages 6 -7 of the NAC Decision

As to Wiley's argument that FINRA's lacked jurisdiction because the gravamen of the self-regulatory organization's charges pertained to his insurance business at a non-FINRA-member-firm, the NAC Decision found that:

Controlling precedent abundantly supports our rejection of Wiley's claim that FINRA lacked jurisdiction. While insurance regulation does not fall within FINRA's jurisdiction, Wiley's conduct was unethical and violated FINRA's requirement to observe high standards of commercial honor and just and equitable principles of trade in the conduct of his business. Wiley was appropriately disciplined for his unethical business conduct in accordance with FINRA rules.

Page 10 of the NAC Decision

2015 SEC Opinion

Having lost his case before FINRA's OHO hearing panel and subsequently on appeal to the NAC, Wiley filed another appeal with the Securities and Exchange Commission ("SEC"), where he essentially argued that his conduct did not violate FINRA Rule 2010. In the Matter of the Application of Keilen Dinone Wiley For Review of Disciplinary Action Taken by FINRA (SEC Opinion, '34 Act Rel. 76558; Admin. Proc. File 3-16461; December 4, 2015). In sustaining FINRA's findings of violation and its sanctions, the SEC found that FINRA had jurisdiction over Wiley's insurance-related activities to the extent that the self-regulatory organization needed to determine whether, in the conduct of his business, he had observed high standards of commercial honor and just and equitable principles of trade. As more fully explained in the SEC Opinion:

Wiley contends that FINRA's jurisdiction is limited to the securities industry and that it improperly "ventured into the distinctly separate and different realms of insurance and Texas independent contractor and contract law." He argues that only the states can regulate the insurance industry and resolve disputes that involve independent contractors or contract law. But state laws governing insurance business practices and independent contractors are irrelevant in this case because FINRA brought this disciplinary action against Wiley for violating FINRA rules. As an associated person of a FINRA member firm, Wiley was subject to FINRA's prohibition on converting customer premium payments for his own use.

Wiley unsuccessfully attempts to distinguish the long line of Commission cases holding that FINRA's disciplinary authority is broad enough to encompass business-related conduct that does not involve securities if that conduct is inconsistent with just and equitable principles of trade. He claims that none of those cases involved an independent contract insurance agent who never participated in the securities industry. And he claims that, unlike respondents in prior cases, he never fraudulently misappropriated insurance premiums, falsified documents, or allowed policies to lapse. But Wiley's status as an independent contractor does not shield him from complying with FINRA rules. FINRA Rule 2010 "protects investors and the securities industry from dishonest practices that are unfair to investors or hinder the functioning of a free and open market, even though those practices may not be illegal or violate a specific rule or regulation."

Page 6 of the SEC Opinion

As to the core issue of whether a conversion had occurred and whether such conduct constituted a violation of FINRA's "just and equitable principles of trade" proscription, the SEC Opinion explained that:

According to Wiley, this disciplinary action rests on what is essentially a misunderstanding. Wiley asserts that he "missed a payment owed to Farmers, an internal investigation was initiated, the accounts were balanced out, and all the debt owed to Farmers was remitted and the issues between Farmers and Wiley were resolved;" that he never allowed any client policies to lapse and never failed to remit payment to Farmers; and that if he had committed any legal infractions or breached the Agent Appointment Agreement, Farmers could have taken his book of business without being required to purchase the business as Farmers ultimately did. But these assertions are beside the point. Wiley intentionally used his customers' insurance payments for personal and business expenses, knowing this conduct was "questionable." He admitted he was willing to risk his customers' premiums to keep his business operating. That he eventually paid Farmers Insurance and no policies lapsed does not change the fact that he intentionally, and without authorization, took customer premiums to which he was not entitled to pay his own expenses. We agree with FINRA that this conduct is inconsistent with just and equitable principles of trade.

Page 9 of the SEC Opinion

In addressing the OHO Dissent, the SEC Opinion asserts that:

For the same reason, we reject the reasoning of the dissenting hearing panelist, who concluded that Wiley did not convert the premiums because "the premiums belonged to WIA and WIA owed a debt to Farmers for the premiums Wiley collected." But the dissent offers no support for this other than Wiley's testimony, which we find is outweighed by other evidence such as the Agent Appointment Agreement, the ACA Manual, the Agency Operations Guide, and the senior auditor's testimony. The dissent gave no weight to Wiley's written statement, finding that Wiley signed the statement under duress. But the dissent offered no support for this conclusion, which is inconsistent with the Hearing Panel's finding that the senior auditor testified credibly.

Page 9 of the SEC Opinion

Bill Singer's Comment

A soundly presented case from the initial FINRA Complaint through the OHO Hearing and NAC Appeal, and, thereafter, capped by a comprehensive SEC Opinion. Whether you agree or disagree with the findings and rationale presented at the different phases of this matter, you have to tip your cap to the extent to which both FINRA and SEC amply set forth the content and context of the dispute.