SEC Nixes Stay of Statutory Disqualification

November 8, 2017

When FINRA finds a Respondent has engaged in a willful failure to disclose, that determination typical earns a statutory disqualification. You ask FINRA and the self-regulator will argue that it did not impose the SD but that it occurs by operation of law. FINRA claims that it does not impose a "statutory disqualification" but merely a finding of willfulness, which triggers the disqualification. That all may strike you as a lot of esoteric, legal mumbo jumbo. It may well be. On the other hand, an appeal of a FINRA finding of willfulness is now on the SEC's radar screen and the ramifications of this academic debate take on very serious real-life consequences.

Case In Point

In the Matter of Department of Enforcement, Complainant, v. Richard Allen Riemer, Jr., Respondent (Decision, Office of Hearing Officers, 2013038986001 / November 4, 2016) , the syllabus states that: 

For willfully failing to timely update his Form U4 to disclose two tax liens and a bankruptcy petition and making false statements to his firm on annual compliance questionnaires, Respondent is suspended from associating with any FINRA member firm in any capacity for six months and fined $5,000. His willful violation subjects him to statutory disqualification. Respondent is assessed the costs of the hearing.

Respondent Riemer appeared pro se. In reaching its findings and imposing sanctions, the Office of Hearing Officers ("OHO") Panel explained in pertinent part that [Ed: footnotes omitted]:

Riemer testified truthfully at the hearing, repeatedly accepting responsibility for his decision not to disclose the IRS liens and bankruptcy. He convincingly expressed considerable remorse for his actions. Nonetheless, the Hearing Panel finds that Riemer's contrition is outweighed by the considerable length of time he failed to make required disclosures, the nature of the events he failed to disclose, and his repeated false statements to his firm.

Riemer urges the Hearing Panel to find that he did not act willfully because doing so subjects him to a statutory disqualification. He testified that National Life has told him it will discharge him if this disciplinary action results in a statutory disqualification. The Hearing Panel however does not impose a statutory disqualification as a sanction. Instead, it is a collateral consequence arising from the operation of Section 3(a)(39)(F) of the Exchange Act when there is a determination that a person willfully failed to disclose material information on his Form U4.

At page 12 of the OHO Decision

Visit the BrokeAndBroker.com Blog "Willfulness" Archive

Download a PDF copy of the BrokeAndBroker.com Blog's "Willfulness and Statutory Disqualification" Analysis by Bill Singer, Esq.

NAC Decision

On appeal to FINRA's National Adjudicatory Council ("NAC"), Riemer again represented himself. In the Matter of Department of Enforcement, Complainant, v. Richard Allen Riemer, Jr., Respondent (Decision, NAC, 2013038986001 / October 5, 2017) http://www.finra.org/sites/default/files/NAC_2013038986001_Riemer_100517_0_0.pdf In affirming OHO's findings and sanctions, the NAC Decision explains that:

Riemer's primary argument on appeal is that the statutory disqualification resulting from his willful failures to update and timely update his Form U4 is actually a sanction imposed by FINRA, which renders the sanctions imposed excessive and punitive. Reimer's argument has no merit. 

As discussed above, Riemer's statutory disqualification is a consequence imposed by operation of Section 3(a)(39)(F) of the Exchange Act and is not a sanction imposed by FINRA. See McCune, 2016 SEC LEXIS 1026, at *37; see also Anthony A. Grey, Exchange Release No. 75839, 2015 SEC LEXIS 3630, at * 47 n.60 (Sept. 3, 2015) (explaining that a "statutory disqualification is not a FINRA-imposed penalty or remedial sanction"). The imposition of the statutory disqualification is "automatic" where, as here, a respondent has willfully failed to disclose material information of a Form U4. See McCune, 2016 SEC LEXIS 1026, at *37.

Page 10 of the NAC Decision

SEC Order

On October 20, 2017, Riemer appealed to the Securities and Exchange Commission ("SEC") and moved for a stay of FINRA's Decision. In the Matter of the Application of Richard Allen Riemer, Jr. for Review of Action Taken by FINRA (Order Denying Stay, '34 Act Rel. No. 82014, Admin. Proc. File No. 3-18262 / November 3, 2017), we are informed that:

[R]iemer requests that the Commission stay "the final disciplinary action of FINRA," set forth in its decision, and argues that he will be terminated from employment in the insurance industry if FINRA's statutory disqualification finding remains effective during his appeal. FINRA did not respond to Riemer's motion . . .


In Other Words

Artful or not, pro se litigant Riemer moved for a stay of FINRA's "final disciplinary action." The gist of his arguments appear to be focused on getting the SEC to stay the finding by FINRA that his conduct was "willful," and, as such, triggers the characterization of his conduct as falling under the ambit of a "statutory disqualification." Notwithstanding the imposition of only a six week suspension, Riemer's statutory disqualification amounts to a Bar subject to his right to apply for a waiver. 

SIDE BAR: FINRA Rule 9370: Application to SEC For Review states that the mere filing by a respondent of an application for review by the SEC stays any sanction in a final disciplinary action except for a Bar or Expulsion. Assuming that the stay of FINRA's sanction is perfunctory  upon filing for review, one then has to consider why the SEC has Rule of Practice 401(d): Stay of an Action by a Self-Regulatory Organization. Despite appearing to address the same issues, the FINRA Rule addresses the stay of its "sanction," whereas the SEC Rule addresses the stay of an "action." Pointedly, if the SEC's response to a requested stay of a FINRA sanction is that "we don't need to impose a stay on our end because FINRA has imposed one on their end," then such an explanation suggests a need for the two regulators to review their separate rules and provide meaningful clarification. As minor or "semantic" as the confusion may seem to you, keep in mind that not all parties seeking an SEC review of a FINRA action/sanction are lawyers, as is the case with Riemer. Consider the following:

FINRA Rule 9370: Application to SEC for Review

(a) Appeal to SEC; Effect

A Respondent aggrieved by final disciplinary action pursuant to the Rule 9200 Series or the Rule 9300 Series may apply for review by the SEC pursuant to Section 19(d)(2) of the Exchange Act. The filing with the SEC of an application for review by the SEC shall stay the effectiveness of any sanction, other than a bar or an expulsion, imposed in a decision constituting final disciplinary action of FINRA for purposes of SEA Rule 19d-1(c)(1).

(b) FINRA Notification to Member

FINRA shall promptly notify any FINRA member with which a Respondent is associated if the Respondent files an application for review to the SEC.

SEC Rule of Practice 401: Issuance of Stays.

(a) Procedure. A request for a stay shall be made by written motion, filed pursuant to Rule 154, and served on all parties pursuant to Rule 150. The motion shall state the reasons for the relief requested and the facts relied upon, and, if the facts are subject to dispute, the motion shall be supported by affidavits or other sworn statements or copies thereof. Portions of the record relevant to the relief sought, if available to the movant, shall be filed with the motion. The Commission may issue a stay based on such motion or on its own motion.

(b) Scope of Relief. The Commission may grant a stay in whole or in part, and may condition relief under this rule upon such terms, or upon the implementation of such procedures, as it deems appropriate.

(c) Stay of a Commission Order. A motion for a stay of a Commission order may be made by any person aggrieved thereby who would be entitled to review in a federal court of appeals. A motion seeking to stay the effectiveness of a Commission order pending judicial review may be made to the Commission at any time during which the Commission retains jurisdiction over the proceeding.

(d) Stay of an Action by a Self-Regulatory Organization.

(1) Availability. A motion for a stay of an action by a self-regulatory organization for which the Commission is the appropriate regulatory agency, for which action review may be sought pursuant to Rule 420, may be made by any person aggrieved thereby.

(2) Summary Entry. A stay may be entered summarily, without notice and opportunity for hearing.

(3) Expedited Consideration. Where the action complained of has already taken effect and the motion for stay is filed within 10 days of the effectiveness of the action, or where the action complained of, will, by its terms, take effect within five days of the filing of the motion for stay, the consideration of and decision on the motion for a stay shall be expedited in every way, consistent with the Commission's other responsibilities. Where consideration will be expedited, persons opposing the motion for a stay may file a statement in opposition within two days of service of the motion unless the Commission, by written order, shall specify a different period.


SEC Rule of Practice 420: Appeal of Determinations by Self-Regulatory Organizations.

(a) Application for Review; When Available. An application for review by the Commission may be filed by any person who is aggrieved by a determination of a self-regulatory organization with respect to any

(i) final disciplinary sanction;

(ii) denial or conditioning of membership or participation;

(iii) prohibition or limitation in respect to access to services offered by that self-regulatory organization or a member thereof; or

(iv) bar from association as to which a notice is required to be filed with the Commission pursuant to Section 19(d)(1) of the Exchange Act, 15 U.S.C. 78s(d)(1).

(b) Procedure. An application for review may be filed with the Commission pursuant to Rule 151 within 30 days after notice of the determination was filed with the Commission pursuant to Section 19(d)(1) of the Exchange Act, 15 U.S.C. 78s(d)(1), and received by the aggrieved person applying for review. The application shall be served by the applicant on the self-regulatory organization. The application shall identify the determination complained of, set forth in summary form a brief statement of alleged errors in the determination and supporting reasons therefor and state an address where the applicant can be served with the record index. The application shall be accompanied by the notice of appearance required by Rule 102(d).

(c) Determination Not Stayed. Filing an application for review with the Commission pursuant to paragraph (b) of this rule shall not operate as a stay of the complained of determination made by the self-regulatory organization unless the Commission otherwise orders either pursuant to a motion filed in accordance with Rule 401 or on its own motion.

(d) Certification of the Record; Service of the Index. Fourteen days after receipt of an application for review or a Commission order for review, the self-regulatory organization shall certify and file with the Commission one copy of the record upon which the action complained of was taken, and shall file with the Commission three copies of an index to such record, and shall serve upon each party one copy of the index.



FINRA Belt and SEC Suspenders

In considering Riemer's Motion for Stay, the SEC Order explains in Footnote 7 that:

FINRA Rule 9370(a) ("The filing with the SEC of an application for review by the SEC shall stay the effectiveness of any sanction, other than a bar or an expulsion, imposed in a decision constituting final disciplinary action of FINRA for purposes of SEA Rule 19d- 1(c)(1)."); see also Thaddeus J. North, Exchange Act Release No. 80490, 2017 WL 1397541, at *1 (Apr. 19, 2017) (denying applicant's motion for a stay of monetary fine and time-limited suspensions imposed by FINRA as moot given operation of Rule 9370(a)).

To better frame Riemer's motion and underlying issue, consider this {Ed: footnotes omitted]:

FINRA found that it was undisputed that Riemer knew about and did not disclose his bankruptcy and federal tax liens on his Form U4. FINRA concluded that Riemer acted willfully by failing to update his Form U4 under these circumstances, and that the tax liens and bankruptcy were material. Based on these findings, FINRA concluded that Riemer was subject to statutory disqualification. FINRA rejected Riemer's argument that its statutory disqualification finding was an excessive and punitive sanction. FINRA concluded that statutory disqualification was not a sanction, but rather a consequence imposed by the Exchange Act

Page 2 of the SEC Order

Notwithstanding the SEC's reference to the automatic nature of the stay of FINRA "sanctions" and the parenthetical commentary about the mootness of such motions, Riemer argued that:

On October 20, 2017, Riemer filed an application for review of FINRA's decision with the Commission. At the same time, Riemer moved for a stay of FINRA's decision. Although FINRA rules stayed Riemer's suspension and monetary sanctions during the pendency of his appeal to the Commission, Riemer asserted that absent a stay, he "will be subject to statutory disqualification during the pendency of any review by the SEC and will lose his job." Riemer explained that he "currently works outside the securities industry as an insurance agent for National Life of Vermont," which he says has told him "it will immediately terminate" his affiliation if he is subject to statutory disqualification. "Without employment, Riemer[] . . . fears being unable to provide for his family."

Pages 2 - 3 of the SEC Order

Although the automatic nature of the stay of FINRA's sanctions on Riemer seem -- well, you know, automatic -- the SEC denied Riemer's requested stay. Keep in mind that the denial of the Motion to Stay does not go to the merits of Riemer's appeal but solely to his attempt to hold off what he views as the implementation of the statutory disqualification. The SEC Order explains in pertinent part that [Ed: footnotes omitted]:

In deciding whether to grant a stay under Rule of Practice 401, the Commission considers: (i) the likelihood that the moving party will eventually succeed on the merits of the appeal; (ii) the likelihood that the moving party will suffer irreparable harm without a stay; (iii) the likelihood that another party will suffer substantial harm as a result of a stay; and (iv) a stay's impact on the public interest.The moving party has the burden of establishing that a stay is warranted.

Riemer has failed to meet his burden. First, although our analysis of the merits of Riemer's appeal is necessarily preliminary, and "[f]inal resolution must await the Commission's determination of the merits of [movant's] appeal," it does not appear at this stage that there is a strong likelihood that Riemer will succeed on the merits. Indeed, Riemer does not even assert that his appeal is likely to succeed. Rather, Riemer addresses the merits of his appeal only in his application for review (and there in summary fashion), which repeats arguments that FINRA rejected below. Riemer does not attempt to rebut FINRA's findings or further develop his arguments, let alone explain why they now are likely to succeed before the Commission. And it appears from his application that Riemer may have narrowed his arguments on appeal: Riemer's application for review does not specifically challenge FINRA's finding that he acted willfully, a core determination with respect to statutory disqualification.

Second, Riemer does not identify any irreparable harm that he will suffer in the absence of a stay of FINRA's decision. To establish irreparable harm, Riemer must show an injury that is "both certain and great" and "actual and not theoretical."  A stay "will not be granted [based on] something merely feared as liable to occur at some indefinite time,"  and a "movant must show that the alleged harm will directly result from the action which the movant seeks to [stay]." Moreover, "'[m]ere injuries, however substantial, in terms of money, time, and energy necessarily expended in the absence of a stay, are not enough' to constitute irreparable harm."

Riemer's claimed injuries do not satisfy this standard. Riemer asserts that without relief he will lose his job working for an insurance company, and thus his income. Assuming that a third party's threatened termination of Riemer from the insurance industry satisfies the direct causation requirement, "the fact that an applicant may suffer financial detriment" -- here the potential loss of income -- "does not rise to the level of irreparable injury warranting issuance of a stay." Riemer also states that if he loses his job he fears he will be unable to provide for his family. But these speculative "fears" do not meet the irreparable harm standard, particularly where, as here, Riemer does not assert (much less establish) that he could not find other employment.

The remaining elements, which Riemer fails to address, do not support granting a stay. FINRA found that Riemer willfully failed to disclose tax liens and his bankruptcy. The Commission has explained that a registered representative's serious undisclosed financial problems "raise concerns about whether [he] could responsibly manage his own financial affairs, and ultimately cast doubt on his ability to provide trustworthy financial advice and services to investors relying on him to act on their behalf as a securities industry professional." And it has sustained prior FINRA determinations that a willful and material failure to disclose on a Form U4 renders the violator subject to statutory disqualification. Any relief staying FINRA's statutory disqualification finding here while the Commission considers Riemer's appeal of that finding could endanger investors. It would allow Riemer to seek employment in the securities industry without the protections provided by FINRA's membership continuance application process, which considers the public interest when weighing whether to allow a proposed association that is otherwise prohibited. The public interest and the risk of harm to others therefore do not support Riemer's motion. Particularly in light of Riemer's complete failure to attempt to establish a likelihood of success on the merits, we find that the public interest and risk of harm to others far outweighs any claimed irreparable harm.

Pages 3 - 5 of the SEC Order