CCO Fined and Suspended For Amending Her Own U5

March 8, 2018

Let's assume that a FINRA member firm fires its Chief Compliance Officer at 3 p.m. on February 8, 2018. So . . . who files that CCO's Form U5? Is the last act that a CCO should undertake is to file her own U5 and notify CRD that she is no longer registered with the member firm? Before you're too quick to answer, assume that the discharge was based upon the firm's inability to continue to pay the CCO's salary but otherwise it's all good and everyone is still friendly. Now assume that the firing is hostile and the CCO was told to get out of here immediately. Finally, simply assume that no one is particularly angry about the termination but there is no one on premises other than the COO with the registration necessary to prepare and submit the CCO's U5. Yeah, I know, that's quite a fact pattern to work through. In any event, consider today's featured FINRA AWC analysis by our publisher Bill Singer, Esq. and see what you think about the bit of self-help engaged in by a terminated CCO.

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, Christine A. Murphy submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Christine A. Murphy, Respondent (AWC 2017055369201, March 5, 2018).

Murphy first registered with a FINRA member firm in April 1993; and from the relevant time of May 23, 2016 through August 23, 2017, she was registered with FINRA member firm Noble Capital Markets, Inc. as an Introducing Broker-Dealer Financial and Operations Principal, Financial and Operations Principal, General Securities Principal, General Securities Representative, Registered Options Principal, Operations Professional, and a Securities Trader. The AWC alleges that during the relevant time, Murphy was Noble Capital Market's Chief Compliance Officer ("CCO"), which gave her authorized access to the firm's Central Registration Depository ("CRD") account in order to file disclosures. The AWC further asserts that at "the time of Murphy's misconduct, she was also registered through two other FINRA member firms as a Financial and Operations Principal."

The AWC asserts that "Murphy does not have any relevant formal disciplinary history with the Securities and Exchange Commission, any self-regulatory organization or any state securities regulator."

Amended Form U5

In part, the AWC asserts that:

On August 23, 2017, Noble Capital filed a Form U5 terminating Murphy's registration with the Firm. After reviewing her Form U5 on CRD, Murphy requested that Noble Capital amend the language in its filing. The Firm denied Murphy's request.

Immediately following her termination, Murphy still had access to the Firm's CRD account. On August 24, 2017, without authorization from Noble Capital, Murphy logged onto the Firm's CRD account using her own user identification of "CMURPHYNOBLE" and amended her Form U5. Among other things, Murphy changed the reason for her termination from "permitted to resign" to "voluntary." Murphy also changed the termination explanation. Although the new termination explanation entered by Murphy was not false, Noble Capital had not approved it or otherwise authorized Murphy to access the Firm's CRD account.

Thereafter, on January 11, 2018, Noble Capital filed an amended Form U5, which changed the reason for Murphy's termination to "other." The amended Form U5 included the following termination explanation: "Firm no longer able to accommodate employee's request to work from remote location." 

FINRA deemed Murphy's conduct to constitute a violation of FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Murphy a $5,000 fine, a one-month suspension from associating in any and all capacities with any FINRA member firm for one month, and a requirement that within 60 days of the date of the Notice of Acceptance of this AWC, that she complete 10 hours of continuing education by a provider not unacceptable to FINRA concerning any of the following topics: FINRA's rules regarding disclosures on CRD, ethical considerations for supervisors, and annual compliance reminders for supervisors and registered representatives.

Bill Singer's Comment

Online FINRA BrokerCheck records as of March 8, 2018, disclose that Murphy has "22 Years of Experience" with "31 Firms."

As is often the case when a firm parts ways with its CCO (either via the firm's discharge of her or her resignation), we are confronted with an oddball paradox: Can/Should the CCO file her own U5? 

A Friendly Parting

When the parting of ways is amicable, the CCO frequently authors her own U5 and files it via CRD. Until such time as a CCO hits "SEND" on the submission of her U5 to CRD, she often retains her authority as the CCO and is still acting within her capacity to terminate her own registration and submit whatever explanations she deems accurate. 

An Unfriendly Parting

In making the point in the above paragraph, note that I used the word "often" in contradistinction to "always." Clearly, there are times when a member firm fires its CCO, the circumstances are not amicable, and the firm would insist that once it told its CCO that she was fired that she immediately lost her authority to function in that capacity and should not file her own U5. 

The Last Act?

It is not clear from the AWC's fact pattern as to whether Murphy and Noble parted on friendly, unfriendly, or neutral terms. It is clear, however, that she did not have authorization to log onto Noble's CRD gateway and amend her U5. Of course, that raises an interesting question as to just how a firm with one and only one CCO can submit a U5 for anyone if the CCO has resigned or been fired but no replacement has yet been designated. Some might argue that the last act that a CCO is required to engage in would be the filing of her own U5 in order to officially terminate her registration in that capacity. Pointedly, I'm not taking a position on that last question as it is nuanced and very, very fact dependent but it does raise an interesting question as to who can and should file a CCO's U5.

2 Wrongs Don't Make 1 Right

Let's just agree that on August 23rd, someone at Noble filed Murphy's Form U5.  Upon reviewing the August 23rd U5, Murphy asked Noble to amend some disputed language, which appears to include her unhappiness with the disclosed basis for her termination as "Permitted to Resign." For reasons not explained in the AWC, Noble refused Murphy's request. Thereafter, on August 24th, Murphy allegedly logged onto the firm's CRD account using her former access identification and amended the U5 to show that her termination was "Voluntary." I concede without equivocation that Murphy's unauthorized access and her use of her access identifier were improper acts in violation of both regulatory rules and compliance policies. So . . . we all at least clear that I am NOT defending Murphy's conduct? Two wrongs don't make one right.

Not False

In digesting Noble's disclosure of Murphy's termination as "Permitted to Resign" and her self-help amendment to "Voluntary," I have taken note of -- and placed great emphasis on -- the AWC's assertion that: "Although the new termination explanation entered by Murphy was not false, Noble Capital had not approved it or otherwise authorized Murphy to access the Firm's CRD account."

Okay, let's slow down that regulatory roll. As a CCO, Murphy would seem to be under an obligation to ensure that any filed U5 is "accurate." Similarly, as a FINRA member firm, Noble would be under the same "accurate" proscription. Of course, FINRA has this penchant for obfuscation, which explains why the self-regulatory-organization characterizes Murphy's amended language as "not false." Not false? As in what? Not untrue? Not not a lie? I mean for godsakes we're reading a settlement of regulatory allegations and FINRA doesn't think it's time to fish or cut bait and either conclude that Murphy's amendments were "true" or "false"?  If, in fact, Murphy's amendments constituted lies and falsehoods, that would strike me as exacerbating factors. If her amendments were accurate and entered to ensure that disclosures filed with an industry regulatory were truthful, then that raises an interesting dilemma. 

No Harm But Foul?

On January 11th, Noble amended Murphy's U5 by amending the Reason for Termination from the firm's initial filing of "Permitted to Resign" and Murphy's amended "Voluntary Resignation" to "Other." Also, Noble amended the Termination Explanation to "Firm no longer able to accommodate employee's request to work from remote location."  In the end, it sort of seems like Noble acknowledged that its first iteration of Murphy's U5 was something between "not false" and "not true," and, as such, maybe clarification was necessary. 

I would view the whole U5 scenario as much ado about nothing unless Noble complained to FINRA about Murphy's unauthorized access. If the firm did complain, then, okay, I won't argue the point and will respond to this AWC with a shrug. If the firm did not complain to FINRA, then the underlying events come off as the type of crap that often occurs when an employee is transitioning to a former employee and there are a few punchlist items that need to be addressed along the continuum. 

Corrective Action Statement

The Murphy AWC includes a provision under "III. OTHER MATTERS" that states:

D. I may attach a Corrective Action Statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct. I understand that I may not deny the charges or make any statement that is inconsistent with the AWC in this Statement. This Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.

As more fully explained in a 1998 NASD (FINRA's predecessor) document: "Regulatory Short Takes: NASD Clarifies Policy On Corrective Action And Mitigation Statements": :

Respondents in a settled disciplinary action may submit a Corrective Action Statement and/or a Mitigation Statement to NASD Regulation. This article clarifies the NASD policies regarding such Statements.

A Letter of Acceptance, Waiver and Consent (AWC) permits a respondent in an NASD Regulation disciplinary action to settle the matter prior to the filing of a formal complaint. A Corrective Action Statement may be attached to the AWC, which is filed with the SEC and available to the public, provided such statement is: (1) limited to demonstrable steps taken to correct a problem associated with the disciplinary action; (2) generally no longer than 2-3 pages; and (3) contains the following legend:

This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by NASD Regulation, Inc., nor does it reflect the views of NASD Regulation, Inc., or its staff.

Separately, respondents may submit a Mitigation Statement for consideration by NASD Regulation and the National Adjudicatory Council. Generally, such Statements are used to describe mitigating circumstances surrounding the violation for the decision maker to consider in its review of the terms of a settlement. Unlike Corrective Action Statements, Mitigation Statements are not attached to the AWC or public order.

Respondents may also settle a matter after the complaint is filed by submitting an Offer of Settlement. While both Corrective Action and Mitigation Statements may be submitted to NASD Regulation in connection with Offers of Settlements, these Statements are not attached to the final Order Accepting the Offer of Settlement, which is filed with the SEC and available to the public.

NASD Regulation will not accept Corrective Action or Mitigation Statements that deny the allegations or are inconsistent with the findings in the settlement. . .

FINRA AWCs permit the attachment of a Corrective Action Statement to demonstrate the steps taken by a respondent to prevent future misconduct subject to the understanding that such an attachment may not deny the charges or make any statement that is inconsistent with the AWC. Further the Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.

I am no fan of Corrective Action Statement and rarely, if ever, advocate their use.  Given that the premise of an AWC is a settlement made without admitting or denying the findings, I don't understand why anyone would voluntarily submit a statement that typically make admissions of facts and findings; promises to correct situations that have not necessarily been acknowledged or admitted to; and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statement, then ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal. If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it.

Some think that a Corrective Action Statement gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. As with any post-game analysis, it's just not going to change the score. Moreover, if during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in your statement, or, it is alleged that you failed to  implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission.

I notice that some settling Respondents submit a Corrective Action Statement that details a proposed or in-place supervisory scheme at a current FINRA member firm -- which takes on the trappings of a proposed scheme of enhanced supervision of a statutorily disqualified individual attendant to the filing of a FINRA Membership Continuance Application (the "Form MC-400") I find this written proposal an ill-advised practice because most AWC Respondents are merely suspended and fined and are not subjected to any further regulatory constraints after their time is served and the dollars paid. If FINRA wants to impose specific supervisory conditions upon a settling Respondent or require the submission of an undertaking by the registered rep or member firm, then so be it. On the other hand, why any member firm would draft an extensive list of compliance Do's and Don'ts to which a suspended rep would be subjected upon his or her return to production baffles me. Frankly, I'm old school: Don't volunteer anything and don't answer questions that weren't asked.

I appreciate that some employer members think that memorializing an enhanced scheme of oversight for a settling registered person gives the firm a hedge against future misconduct but I don't agree with that premise. If a firm harbors such concerns about a particular associated person that the member feels compelled to memorialize in a FINRA settlement agreement an extensive, proposed supervisory protocol, then maybe that firm should terminate the individual. You think that's harsh? Just imagine what some customer's lawyer will do with that published list of proposed corrective actions if the stockbroker engages in disputed conduct.  A savvy claimant's lawyer will cite all that voluntary language attached to an AWC about strict supervision as proof that the employer brokerage firm knew that the stockbroker was a compliance nightmare requiring enhanced oversight, which, it will be argued, did not occur in violation of the specific representations to a self-regulatory-organization as part of a disciplinary settlement. Yeah, I know, when I put it like that, it doesn't sound so good. Trust me, it will be put like just like that.  Notwithstanding my opinions, Murphy apparently determined that it was advisable to submit this Corrective Action Statement:

CRD 1510853
Pursuant to AWC
NO. 20170553692

On February 8, 2018, and in anticipation of the terms of AWC No. 20170553692, I purchased a subscription to FINRA ELearning Courses offered by RegEd for $45.00. The subscription provides unlimited access to the courses offered for a total of 365 cays from the date of purchase.

The following courses and exams have already been completed:

FINRA: Ethical Considerations for Supervisors (EL_ELC171) Course Completed Feb 12, 2018
FINRA: Customer Information Protection for Supervisors (EL_ELC156)   Course Completed Feb 12, 2018
FINRA: Books and Records (EL_ELC131) Course Completed Feb 12, 2018

Each course takes approximately 1 hour to complete and take the accompanying exam. I anticipate completing the CE requirement by February 28, 2018.

"This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA, or its staff."