Gregory Acosta Hands FINRA an Earth Shattering, Precedent Setting, Historic, Stunning Defeat

June 24, 2020

It's a rare moment when I am reading through a Securities and Exchange Commission Opinion and I recognize it as earth-shattering, precedent setting, historic, and a turning the regulatory world on its head event. So . . . as I worked my way through the allegations, the arguments, the findings, and the rationale in Gregory Acosta's appeal of FINRA's deeming him to be statutorily disqualified, I came to the end of the SEC's Opinion and was stunned. I don't do stunned. Well, not a lot of it. Regardless, I was stunned. And in a good way. It's encouraging to see that the SEC doesn't merely go through the motions when adjudicating appeals from FINRA. 

FINRA's Effective Bar

Former Kestra Investment Service, LLC representative Gregory Acosta was notified by the Financial Industry Regulatory Authority ("FINRA") that it deemed him subject to a "statutory disqualification" as set forth pursuant the Section 3(a)(39) of the '34 Act. Pursuant to such a designation, FINRA informed Acosta that he was not allowed to continue his association with Kestra unless that member firm requested and received FINRA's approval for his continued affiliation. In a dramatic and historic decision, the SEC held that it had jurisdiction over the dispute because FINRA's conduct "effectively bars Acosta from associating with any FINRA member." After considering the arguments of Acosta and FINRA, the SEC set aside FINRA's action.
In the Matter of the Application of Gregory Acosta for Review of Action Taken by FINRA (SEC Opinion, '34 Act Rel. No. 89121; Admin. Proc. File No. 3-18637 / June 22, 2020)
http://brokeandbroker.com/PDF/AcostaSEC200622.pdf

2018 California Insurance Department Accusation

By way of cutting to the chase, the pertinent background that prompted this regulatory imbroglio was the California Department of Insurance's January 10, 2018, issuance of an "Accusation" naming financial services company Diamond Bar Executive Benefits Programs & Insurance Services, Inc. ("EBP") and its President, Gregory Acosta. The Accusation alleged that Acosta had taken out a $750,000 life insurance policy on an elderly customer and without that customer's knowledge, named EBP as the beneficiary. Further, Acosta allegedly had a substantial loan from the customer at somewhat below average interest but, notably, Acosta was making monthly loan payments and was also paying the life insurance premiums. Apparently both the loan and the policy had been about ten years old, so this was not a then-current situation. The Accusation cited California Insurance Code provisions that would permit the revocation of EBP's and Acosta's insurance licenses. 

Acosta denied that his relationship with the elderly customer involved any fraud, and, in fact, he submitted declarations from the customer's family, attorney, and CPA affirming that the two had a long-time friendship, that the customer had previously lent money to both Acosta and his wife, and that the loan at issue in the Accusation was secured by a building that was financed by the loan. Pointedly, the declarants attested that the customer was aware of and had consented to the loan and the life insurance. In contrast, the Accusation alleged that in response to state investigators' questions "the Customer indicated that he was 87 years old, his "memory was not very good," and he could not recall the details of the loans or whether he had consented to EBP being a beneficiary on a life insurance policy in his name." at Page 3 of the SEC Opinion.

The Stipulation and Waiver

Ultimately, Acosta entered into a Stipulation and Waiver settlement with the Department of Insurance that, in pertinent part stated:

Without admitting or denying the allegations contained in [the] Accusation, . . . acknowledge[d] that, if proven to be true and correct, the facts alleged in [the] Accusation are grounds for the discipline, by the Insurance Commissioner of the State of California, of Respondent's licenses and licensing rights, pursuant to the provisions of the Insurance Code of the State of California referred to in [the] Accusation.

at Page 3 of the SEC Opinion

In furtherance of the settlement, Acosta and EBP consented, in part, to the revocation of their licenses and licensing rights, and to have restricted licenses and licensing rights issued for five years subject to certain terms. The Order setting out the Stipulation and terms of settlement was entered on May 21, 2018.

Bill Singer's Comment: Let's stop things here for a moment. Notwithstanding all of the lurid details about the elderly client and the loans and the insurance beneficiary, it's important to take note, very careful note, of the precise nature whereby the State of California resolved things with Acosta an EBP. The State entered into a Stipulation, but that settlement mechanism was predicated upon Acosta's and EBP's position that they did not admit or deny any of the allegations. In essence, they signed off on an agreement whereby the State alleged all sorts of unpleasant things but Acosta and EBP merely acknowledged that "that's what you say" but never agreed to any misconduct. The price of all that non-admission/non-denial was the revocation of the respondents' licenses and the imposition of five years of restricted licenses.

As readers of my BrokeAndBroker.com Blog know, there are times when I detest the regulatory community's resort to such nonsense "without admitting or denying." Rarely do such settlements further the public interest. There are times, however, when the harm of such a process manifests itself in forcing an otherwise innocent respondent to accept a settlement imposing fines and suspension because of the unaffordable cost of an ongoing defense are untenable. Pointedly, I offer no opinion as to whether the Acosta/EBP insurance settlement was in the public's interest, and I am not coming to either respondent's defense. In my role as the omniscient voice of the narrator of this story, I'm just barging in here to make sure that you understand how things work and where things came to rest among the State, Acosta, and EBP. Their licenses were revoked via a settlement whereby they neither admitted nor denied any charges.

Form U4: June 2018

In June 2018, Acosta disclosed the settlement with the California Department of Insurance via an amendment to his Uniform Application for Securities Industry Registration ("Form U4"). At this point, things sort of jump the rails and we pick up the action as follows [Ed: footnotes omitted]:

[K]estra initially reported that it was not a "final order based on any violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct." But FINRA disagreed and, on July 13, 2018, its Department of Member Regulation sent Kestra a letter (the "SD Notice") stating that the California Order made Acosta statutorily disqualified under the Exchange Act. The SD Notice, which a FINRA Regulatory Review Analyst sent, stated that "FINRA has determined that Gregory Acosta, a person associated with your firm, is subject to a disqualification as defined in Section 3(a)(39)" of the Exchange Act. The SD Notice further stated that "[t]he disqualification arises from the [California] Order" which revoked or restricted his licenses "based on a violation of Section 1668(i) of the California Insurance Code, a law or regulation that prohibits fraudulent, manipulative, or deceptive conduct." 

The SD Notice stated that "[g]enerally, no person who is, or who becomes, subject to a disqualification shall associate, or continue association, with a FINRA member unless the member requests and receives written approval from FINRA . . . referred to as the Membership Continuation process." That process is initiated by an affected firm filing an MC-400 application with FINRA. The SD Notice directed that, if Kestra did not initiate the MC-400 application process, it "should immediately terminate its association with [Acosta], and notify FINRA in writing . . . of the termination by August 1, 2018." 

Kestra declined to submit the MC-400 application and, in accordance with FINRA's instruction, terminated Acosta's association with the firm. Acosta's counsel communicated with FINRA's Associate Director of Regulatory Review by exchanging documents and raising grounds for why the California Order was not based on violations of laws or regulations prohibiting fraudulent, manipulative, or deceptive conduct. FINRA staff ultimately adhered to its earlier determination that Acosta was statutorily disqualified. Acosta then initiated this proceeding by filing an application for review with the Commission. 

at Pages 4 - 5 of the SEC Opinion

Bill Singer's Comment: Hi again. Yeah it's me, the dashing and debonair omniscient voice of that strikingly handsome yet oddly modest Bill Singer. Let's make sure you understand where things ended up with FINRA. FINRA says that Acosta is now statutorily disqualified from working in the industry. Why? Well, FINRA says that Acosta's insurance license was revoked by California because of Acosta's violation of the State's Insurance Code or of a law or regulation that prohibits fraudulent, manipulative, or deceptive conduct. Except,  hmmmm, what about all that neither admitting nor denying stuff? If Acosta settled with California but never admitted any misconduct, was his license revoked because of the misconduct that he never admitted? And now we see the horrific flaw in such settlements. Moreover, Acosta is exiled to some bizarre form of FINRA wilderness where he is told that the only way he can attack FINRA's deeming him as statutorily disqualified for conduct that he never admitted to engaging in, is by having a FINRA member firm submit an application seeking to effectively gain a waiver for his misconduct and allow his return to FINRA registered status.  In theory, perhaps that process makes sense but in reality, not a lot of FINRA member firms would want to risk the ire of their regulator by sponsoring the registration of someone that FINRA has deemed statutorily disqualified. 
Can Acost short-circuit this barrier to re-entry by submitting his own MC-400. No. Why not, you ask. Because the form must be submitted by a FINRA member firm that is sponsoring Acosta's registration, I answer.  Let me draw a word picture for you. You're in a rush to get to work. You come to a token turnstile that's between you and the subway or train tracks. You swipe your transit card. Nothing happens. The turnstile refuses to turn. You can't get onto the tracks. You keep swiping. Nothing happens. That's where we find Acosta. FINRA is the turnstile. His transit card is rejected as "statutorily disqualified." 

SEC Appeal

On appeal to the SEC, Acosta argued that the SEC had jurisdiction under Section 19(d) and that FINRA's action should be set aside on the merits. In contrast, FINRA argued that the SEC lacked jurisdiction under Section 19(d) and, further, that its action should not be set aside. In finding that FINRA's determination of statutory disqualification effectively barred Acosta from associating with a FINRA member firm, the SEC concluded that the conduct at issue was reviewable under Section 19(d). In pertinent part, the SEC found [Ed: footnotes omitted]:

[I]n Richard T. Sullivan, we found jurisdiction to review SRO action revoking an associated person's registrations as a result of his failure to pay fines assessed in an earlier disciplinary proceeding because that action "effectively bar[red] the applicant from association with a member firm."Similarly, in Frank R. Rubba, we found jurisdiction to review SRO action where the SRO conditioned applicant's request to reenter the securities industry on his requalifying by examination because the SRO had "effectively barred Rubba from applying for association with any NASD member until he satisfies the requalification requirement." In neither case did the SRO impose a "bar"; rather, the SRO's action had the effect of preventing the applicant from associating with a member firm. As in Sullivan and Rubba, FINRA's determination that Acosta is subject to a statutory disqualification prevents him from associating with a FINRA member firm and is reviewable.

The cases that FINRA cites in support of its argument that we lack jurisdiction here are inapposite. FINRA cites Joseph Dillon & Co., where we held that we lacked jurisdiction to review an SRO's determination to deny a firm's request for an exemption from a rule that applied to all member firms. Although the firm argued that the determination effectively barred persons from associating with the firm because the firm could not comply with the rule, we recognized that "this is true of every rule violation involving any NASD member, i.e., any member firm's failure to comply with NASD rules jeopardizes its membership and potentially inhibits the ability of registered persons to associate with that firm." And "[w]hatever the consequences to the Firm of the exemption denial, it [did] not constitute a bar of [the firm's] registered representatives because they will remain free to associate with other firms." Unlike those representatives, Acosta is not free to begin a new association with any member firm unless he first persuades a member firm to sponsor him in a MC-400 application that FINRA approves. 

FINRA also cites Interactive Brokers,where we refused to consider a hearing panel's determination in connection with a membership continuance application that the associated person at issue was subject to a statutory disqualification. But unlike here, the firm had already filed a membership continuance application. We noted that "denials of a firm's application to retain its membership if it employs a statutorily disqualified person are reviewable by the Commission" but also that FINRA had "not yet made a final determination to deny" the membership continuance application. Our holding in the case was that, having filed a membership continuance application, the firm could not yet obtain Commission review of a hearing panel's ruling regarding that application because FINRA provided for further review of the application. We had no occasion to consider whether the Commission has jurisdiction to review a determination by FINRA's staff that a person is subject to a statutory disqualification in the absence of a membership continuance application having been filed. 

FINRA relies further on WD Clearing, LLC, where we held that we lacked jurisdiction to review a member firm's withdrawal of its application for approval of a change in ownership.The member firm's withdrawal of the application "was precipitated by FINRA's warning" to the member firm "of a potential impediment to FINRA's approval" of the application -- a disciplinary action involving a person associated with the member firm's proposed buyer. We held that FINRA's warning did not "constitute a final decision or an official FINRA action" on the application, and that the selling party was free to proceed with the application process. FINRA argues that, here, the SD Notice did not terminate Acosta, and that Acosta remains free to find a firm to sponsor his membership continuance application. But, in this case, Acosta is seeking review of the SD Notice, and FINRA did not provide a procedure for any such review. The SD Notice was a final and official FINRA determination that Acosta is subject to a statutory disqualification. In WD Clearing, we also rejected the claim that the firm's representatives were "effectively barred" from associating with a FINRA member due to interim restrictions that had been imposed during FINRA's consideration of the application because the restrictions did not preclude associational status with any FINRA member firm. In contrast, that is the effect here -- where FINRA has determined that a person is subject to a statutory disqualification.

at Pages 6 - 8 of the SEC Opinion

Bill Singer's Comment: Dramatically, the SEC found that the effect of FINRA deeming Acosta as statutorily disqualified was tantamount to barring him. Remember my analogy of FINRA's "deeming" Acosta as being an SD to someone swiping a cancelled transit card at a turnstile? In essence, the SEC agreed -- FINRA issued the transit card to Acosta, Acosta had been using that card to gain access to Wall Street. One day, FINRA deems that Acosta is no longer eligible to use its transit card and cancels his right to access the turnstile providing entry to Wall Street. As FINRA argues to the SEC, the self-regulatory-organization never physically took the transit card away from Acosta. To the contrary, he still has it in his hands but he needs to contact us and arrange to have it re-authorized. And when Acosta contacts FINRA to have his non-working card fixed, FINRA tells him that he can't directly contact them but has to go through a FINRA member firm. FINRA argues that such a protocol doesn't rise to a bar and that Acosta should pursue his administrative remedies before bothering the SEC with some silly-assed appeal. 

In challenging the SEC's jurisdictional basis for review of its conduct, FINRA argued that Acosta was precluded from filing the instant appeal to the SEC because the whole "deeming" thing was merely an initial  action by the self-regulatory-organization. Initial as in not final. Initial as requiring Acosta to first exhaust his administrative remedies at FINRA before appealing to the SEC. As to what process was available to Acosta by which to pursue his administrative remedies at FINRA, well the regulator said that he was required to have a member firm submit an MC-400 application on his behalf -- and in the event that the application is denied, then the doors of appeal open. In what frankly comes off as a breath-taking analysis, the SEC finds in part that [Ed: footnotes omitted]:

FINRA's By-Laws do not support its position. As discussed above, its By-Laws provide that a person subject to a statutory disqualification may not associate with a member firm, but they do not require such a prohibition only if FINRA denies an MC-400 application submitted on the person's behalf. Rather, the By-Laws provide that statutorily disqualified persons are ineligible to "continue to be associated with a member"; that "no member shall be continued in membership, if any person associated with it is ineligible to be an associated person"; and that any such "member that is ineligible for continuance in membership may file with the Board an application requesting relief from the ineligibility . . . on its own behalf and on behalf of a current or prospective associated person."The fact that a member firm may seek permission to associate with a statutorily disqualified individual-and that FINRA may approve that relief- does not mean that FINRA's determination that the individual is subject to a statutory disqualification is any less of a bar from associating with a member firm.

Accepting FINRA's argument would mean that individuals who could not persuade a member firm to file an MC-400 application on their behalf would be unable to appeal FINRA's determination that they are subject to a statutory disqualification. FINRA acknowledges that "no individual has access to" the MC-400 process and that "there is no similar process open to individuals like Acosta." We believe that because an SD Notice effectively bars an individual from associating with a FINRA member firm we have jurisdiction over an appeal of that notice.

at Pages 8 - 9 of the SEC Opinion

Bill Singer's Comment: So, the SEC says that if FINRA issues a transit card and then disables it, FINRA can't then argue that the card still works and can be repaired by telephoning an in-house Hotline, which is only available to FINRA member firms. No, the SEC says, the card doesn't work. You cancelled it. You imposed a number of preconditions and steps through which you insist Acosta must first jump before he can even gain access to your Hotline. Effectively, you cancelled his card. We're not going to buy your crap that the card has only been temporarily suspended.
If Acosta can't find a member firm willing to call FINRA's Hotline and invest the time and money required to get his card working, then what? Does FINRA expect Acosta to take a seat outside the door to the law? Is FINRA's goal here one of irony? Does the self regulator hope that the waiting Acosta will breathe his last breath still waiting for the door to open, and, as Kafka so cynically ended the scene: 

The doorkeeper recognizes that the man has reached his end, and to let his failing senses catch the words roars in his ear: "No one else could ever be admitted here, since this gate was made only for you. I am now going to shut it."

READ: "Bill Singer Photographs Kafka's Doors To The Law" (BrokeAndBroker.com Blog /  February 6, 2012)
http://www.brokeandbroker.com/1274/kafka-the-law-door/

Having disposed of the procedural issues and the substantive legal/regulatory concerns, the SEC boldly sets aside FINRA's bar of Acosta. In pertinent part, the SEC notes that:

FINRA points to Acosta's acknowledgement in the Stipulation that, "if proven to be true and correct, the facts alleged" in the Accusation would be "grounds for . . . discipline." But that statement does not mean that Acosta violated a provision of the California Insurance Code that prohibited fraudulent, manipulative, or deceptive conduct. Nor is the fact that Acosta accepted discipline sufficient to support that conclusion. The Accusation identified several potential violations-both fraud and non-fraud-based-for which California could discipline Acosta. Thus, Acosta's acceptance of discipline as part of his negotiated settlement does not dictate the conclusion that the California Order and the Stipulation were based on a fraud rather than a nonfraud violation. Neither the California Order nor the Stipulation on which it was based indicate that a fraud violation was the basis for the state's final order. And we reject FINRA's contention-offered without argument or citation to authority-that we should conclude that the California Order and the Stipulation were based on fraud because they lacked recitations "excluding" the Accusation's allegation of a fraud-based violation under Section 1668(i). That the California Order and the Stipulation do not explicitly exclude fraud-based violations does not establish that they are based on such violations. 

FINRA further claims that, "[i]n the third and fourth paragraph of the Stipulation," Acosta "consents" to the sanctions "based on all of the violations" alleged in the Accusation- including the fraud-based allegation under Section 1668(i). But the referenced paragraphs do not support FINRA's claim. Instead, they contain a waiver by Acosta and EBP of their rights to a hearing and a consent to the license revocations and restrictions to which the parties had agreed as part of the settlement. They do not mention the Accusation's allegations. Paragraph six of the Stipulation does reference one of the statutory provisions mentioned in the Accusation, but it is the non-fraud violation in 1668.1-not 1668(i)-with which Acosta and EBP expressly agreed to come into compliance within the succeeding 30 days.

at Pages 13 - 14 of the SEC Opinion

In conclusion, the SEC ordered that FINRA's determination of Acosta as subject to a statutory disqualification be set aside.

Bill Singer's Comment

After nearly four decades on Wall Street in a legal/compliance/regulatory capacity, it is no small concession for me to make that Acosta ranks among the most stunning decisions that I have read. To say that it is a landmark case is not an understatement.

Pointedly, I congratulate Richard D'Amura and Lydia R. Zaidman of D'Amura & Zaidman, PLLC https://www.dz-pllc.com/aboutus for their extraordinary representation of Acosta. 


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