FINRA Felony Jigsaw Puzzle

August 10, 2017

If you buy a jigsaw puzzle, right there on the box, they tell you the number of pieces and show you the picture of what the completed image will look like. In real life, however, some of the puzzles we have to deal with don't come with information about exactly how many pieces you're supposed to have and what the finished product should look like. The same can be said for the regulatory puzzles of Wall Street. When some registered reps get into trouble, they have no idea as to what to do with the pieces in front of them. Consider a recent FINRA regulatory settlement and see if you can put everything together.

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, Robert Lyndon Taylor submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Robert Lyndon Taylor, Respondent (AWC 2016051320601, July 27, 2017).

The AWC asserts that Taylor entered the securities industry in August 1985 and from 1995 to the present was registered "with two other member firm including Voya Financial Advisors, Inc." The AWC asserts that he has "no prior relevant disciplinary history."

Criminal History

The AWC asserts that Taylor was

  • arrested on December 2, 2015;
  • formally charged with a felony Driving Under the Influence ("DUI") on February 10, 2016; and
  • pled guilty to the felony DUI charge on June 16, 2016.

What should Taylor have done, if anything, in terms of disclosing the above arrest, charge, and guilty plea?

The Rulebook

For starters, how about we all refresh our dim recollections by referencing the pertinent rules (which, yeah, you're right, you would have to remember that each of those rules actually exists before you would even think about confirming whether they apply. We all know that old line about how ignorance of the law is no excuse.

Wall Street's regulatory rulebook is huge. Some say it is beyond the comprehension of most humans. That's a problem because if you do X and there is an an applicable rule about X but you don't remember it or you were never told about it, you're may wind up with a violation. Even if you remember a rule and you reference it, the way they write those things, you need a law degree to decipher the language. In the event you want to raise that "law degree" thing with FINRA, good luck with that. As such, taking Respondent Taylor's fact pattern into consideration, let's start meandering through some industry rules and regulations. I'm trying to avoid only presenting the pertinent language in a given rule so that readers will better understand the enormity of what's on the books and the complexity of each and every section, subsection, and sub-sub section. As I noted in my introduction, sometimes you don't know what the puzzle is supposed to look like or how many pieces there are:

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

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.

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.

The Uniform Application for Securities Industry Registration or Transfer ("Form U4") provides:

Question 14A(1)(a): "Have you ever been convicted of or pled guilty or nolo contendere ("no contest") in a domestic foreign or military court to any felony?"

Question 14A(1)(b): "Have you ever been charged with any felony?"

FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade provides:

A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.

Article III of FINRA's By-Laws: Qualifications of Members and Associated Persons provides:

Definition of Disqualification

Sec. 4.  A person is subject to a "disqualification" with respect to membership, or association with a member, if such person is subject to any "statutory disqualification" as such term is defined in Section 3(a)(39) of the Act.

Section 3(a)(39) of the Securities Exchange Act provides:

(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-

(A) has been and is expelled or suspended from membership or participation in, or barred or suspended from being associated with a member of, any self-regulatory organization, foreign equivalent of a self-regulatory organization, foreign or international securities exchange, contract market designated pursuant to section 5 of the Commodity Exchange Act (7 U.S.C. 7), or any substantially equivalent foreign statute or regulation, or futures association registered under section 17 of such Act (7 U.S.C. 21), or any substantially equivalent foreign statute or regulation, or has been and is denied trading privileges on any such contract market or foreign equivalent;

(B) [12] is subject to-
(i) an order of the Commission, other appropriate regulatory agency, or foreign financial regulatory authority-
(I) denying, suspending for a period not exceeding 12 months, or revoking his registration as a broker, dealer, municipal securities dealer, government securities broker, government securities dealer, security-based swap dealer, or major security-based swap participant or limiting his activities as a foreign person performing a function substantially equivalent to any of the above; or
(II) barring or suspending for a period not exceeding 12 months his being associated with a broker, dealer, municipal securities dealer, security-based swap dealer, major security-based swap participant, government securities broker, government securities dealer, or foreign person performing a function substantially equivalent to any of the above;
(ii) an order of the Commodity Futures Trading Commission denying, suspending, or revoking his registration under the Commodity Exchange Act (7 U.S.C. 1 et seq.); or (iii) an order by a foreign financial regulatory authority denying, suspending, or revoking the person's authority to engage in transactions in contracts of sale of a commodity for future delivery or other instruments traded on or subject to the rules of a contract market, board of trade, or foreign equivalent thereof;

(C) by his conduct while associated with a broker, dealer, municipal securities dealer, government securities broker, government securities dealer, security-based swap dealer, or major security-based swap participant, or while associated with an entity or person required to be registered under the Commodity Exchange Act, has been found to be a cause of any effective suspension, expulsion, or order of the character described in subparagraph (A) or (B) of this paragraph, and in entering such a suspension, expulsion, or order, the Commission, an appropriate regulatory agency, or any such self-regulatory organization shall have jurisdiction to find whether or not any person was a cause thereof;

(D) by his conduct while associated with any broker, dealer, municipal securities dealer, government securities broker, government securities dealer, security-based swap dealer, major security-based swap participant, or any other entity engaged in transactions in securities, or while associated with an entity engaged in transactions in contracts of sale of a commodity for future delivery or other instruments traded on or subject to the rules of a contract market, board of trade, or foreign equivalent thereof, has been found to be a cause of any effective suspension, expulsion, or order by a foreign or international securities exchange or foreign financial regulatory authority empowered by a foreign government to administer or enforce its laws relating to financial transactions as described in subparagraph (A) or (B) of this paragraph;

(E) has associated with him any person who is known, or in the exercise of reasonable care should be known, to him to be a person described by subparagraph (A), (B), (C), or (D) of this paragraph; or
(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.

But . . . NOT Convicted

So . . . you got all of that? Really???

Some of the above you may remember, right? Some of that you likely forgot. Some of that you're not sure you ever quite understood. Some of that you still don't understand.

Taylor did not disclose his felony "charge" or "guilty plea" until September 2016. Said disclosures were purportedly prompted by his employer Voya's discovery of the charge and plea during background monitoring. Let me add this additional wrinkle from his AWC:

Taylor has not been convicted of a felony in that his sentencing has been deferred until June 2021 pending his completion of all conditions of his supervised probation.

The Questions

First, should Taylor have disclosed his December 2, 2015, arrest and, if so, when?

Second, should Taylor have disclosed his February 10, 2016, charge and, if so, when?

Third, should Taylor have disclosed his June 16, 2016, guilty plea and, if so, when?

Fourth, should Taylor have disclosed his deferred conviction and, if so, when?

The Arrest

According to FINRA's online Form U4 Explanation of Terms:

Charged: Means being accused of a crime in a formal complaint, information, or indictment (or equivalent formal charge).

You're a lawyer and you understand the difference between an "arrest" and a "charge," right? Oh, sorry, you're just some shlub without a law degree and you're not exactly sure what to make of this legalese?  On the other hand, a clever guy like you would do a bit more online research and you come across an online FINRA "Form U4 and U5 Interpretive Questions and Answers" :

Q3: If a registered person is arrested but not charged with a crime, is the arrest required to be reported?

A: No. An arrest without a charge is not required to be reported. (02/13/98)

Apparently you don't have to disclose a mere arrest, which is different from a charge. It says that an "arrest without a charge" doesn't need to be reported but, gee, Taylor was charged, albeit a couple of months after his arrest. Now what? Should he have disclosed the December 2015 arrest if he thought he was going to be charged in February 2016? That seems absurd. What if he didn't believe that or was so out of it that he left it all to his lawyer. Wow, this disclosure crap isn't as simple as I thought. No wonder they pay that handsome and brilliant lawyer Bill Singer all those bucks.

You've read through a lot of disclosure rules and you're pretty sure that FINRA's By-Laws' Article V, Section 2 requires disclosure "not later than 30 days after learning of the facts or circumstances." The problem with knowing the deadline as a layperson is that folks caught up in the criminal justice system use a lawyer to deal with the police, prosecutor, and judge. As is often the case when a defendant is represented by a lawyer, you pretty much leave things to that professional. As your case develops, your lawyer may have told you that she could get you off or plead the felony charge down to a misdemeanor or that there was some kind of deal that if you kept your nose clean for a few years the court would dismiss everything and it would be as if nothing had happened. Keep in mind, however, that many criminal lawyers have little if any familiarity with Wall Street's regulatory rules and regulations -- fact is, many have never heard of FINRA.

Guilty Plea

What the hell are you supposed to make of the fact that you were arrested, you were charged with a felony, and your lawyer had you plead guilty to a felony on June 16, 2016, but  your lawyer assured you that your case had been adjourned contemplating a dismissal ? Quite possibly, your understanding was that the plea was something of a formality and you had not actually been "convicted" of a felony and that everything was "deferred" until June 2021? Deferred as in this would all go away if you kept your nose clean. All go away as in you would only have to disclose something if you screwed up between the plea and the closing of the books on June 2021.

Deferred, Diversion, and Intervention

At some point, you know that you entered into a plea bargain and you're sort of under the impression, right or wrong, that you may not have to disclose anything to anyone at this time. Being extra diligent, you go back online to do more research and find a FINRA document titled "Form U4 and U5 Interpretive Questions and Answers" and you read this:

Q5: Is an offense that results in an individual being placed in a pre-trial diversion or intervention program required to be reported?

A: Each case must be reviewed individually to determine if formal charges were filed. If so, the matter must be reported. The registered person should submit the official court documents and a copy of the relevant statute to demonstrate that no formal charges were filed or charges otherwise are not required to be reported. (02/13/98)

Now you're wondering whether that June 2021 "deferred sentencing" is the same thing as a "pre-trial diversion" or an "intervention program." That jerk of a lawyer you used is dead or retired or is out of business or she won't take your call because you stiffed her on the last bill. You don't recall her saying anything about a "diversion" or "intervention." Sure, formal charges were filed against you and that answer to Q5 above says that you should report it but, you know, you don't think what happened to you was a diversion or intervention, and, geez, maybe that means that you don't have to report the formal charges because your case is deferred until 2021.

In the Moment

By now, you're likely less confident in your answers about what Taylor was required to  do and when. That's great because that's my goal. Keep in mind that we're having a nice, leisurely, academic discussion here without much stress. Also keep in mind that the Taylors of Wall Street are being scrutinized for not making the right decisions when they are in the moment with the storm clouds swirling and the lightning flashin' and the thunder clappin'.

Look, we can all agree that in many, maybe even most non-disclosure cases, that the rep knew or should have known of the need to disclose. I will give you that without any argument. On the other hand, keep in mind that when folks are arrested and charged, their lives are turned upside down and, more to the point, their lives are often in turmoil leading up to their arrest, which often explains why they were doing what they should not have been doing in the first place. During such times of stress, your first thoughts aren't always about preparing disclosure paperwork within 30 days. Often, you're figuring that your lawyer is taking care of that or would have warned you to do it yourself.

As FINRA Sees It

All of which brings us back to the harsh glare of reality. Did Taylor have to disclose his February 10th "charge" within the requisite 30 days?  According to FINRA, Taylor should have answered "YES" to 14A(1)(b) by March 10, 2016. The AWC does not cite the untimely disclosure of the arrest, so we can infer that it did not require disclosure other than as part of the background explanation attendant to the later disclosure of the charge.

What about Taylor's June 16, 2016, guilty plea - should he have disclosed that within the requisite 30 days? According to FINRA, Taylor should have answered "YES" to 14A(1 (a) by July 16, 2016.

FINRA deemed that Taylor had "willfully" failed to timely amend his Uniform Application for Securities Industry Registration or Transfer ("Form U4") to disclose a felony charge against him and a subsequent guilty plea, and that such constituted a violation of Article V, Section 2 of FINRA's By-Laws, FINRA Rule 1122, and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Taylor a $5,000 fine and a three-month suspension from association with any FINR.A member firm in any capacity. As noted in Taylor's AWC:

Respondent understands that 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 FH\IRA's By Laws, this omission makes him subject to a statutory disqualification with respect to association with a member.

Statutory Disqualification for Willful Non-Disclosure

Under Section 3(a)(39) of the Exchange Act, in pertinent part, statutory disqualification attaches if:

such person . . . has willfully made . . . in any application for membership or participation in, or to become associated with a member of, a self-regulatory organization, . . . any statement which was at the time, and in 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 . . . report . . . any material fact which is required to be stated therein."

The Securities and Exchange Commission ("SEC") recently affirmed a "willful" non-disclosure finding by FINRA, In the Matter of the Application of Michael Earl McCune for Review of Disciplinary Action Taken by FINRA (Opinion, SEC, '34 Act Rel. No. 77375; Admin. Proc. File No. 3-16768 / March 15, 2016). In defining what constitutes "willful," the the McCune SEC Opinion asserts that:

[A] willful violation of the securities laws means "intentionally committing the act which constitutes the violation."16 The laws do not require that the actor "also be aware that he is violating one of the Rules or Acts."17 If McCune voluntarily committed the acts that constituted the violation, then he acted willfully.

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Footnote 16: Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); see also Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (citing Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)); Craig, 2008 WL 5328784, at *4 (finding that respondent willfully violated IM 1000-1 and NASD Rule 2110 by providing false answers on his Form U4).

Footnote 17: Wonsover, 205 F.3d at 414 (citing Gearheart & Otis, Inc. v. SEC, 348 F.2d 798 (D.C. Cir. 1965)).

If you opt to settle a finding by FINRA that you were guilty of willful nondisclosure, the self-regulator's Letter of Acceptance, Waiver and Consent settlement typically contains the following admonition:

I understand that this settlement includes a finding that I willfully omitted to state a material facts 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 these omissions make me subject to a statutory disqualification with respect to association with a member.

Visit the BrokeAndBroker.com Blog "Willful" Archive

Download a PDF copy of Bill Singer Esq's FINRA Rule 9216 (AWC) Analysis

Visit the BrokeAndBroker.com "Felony" Archive