FINRA Settles Untimely Disclosure of Four Felony Charges Without Willfulness Finding

July 1, 2020

In a recent FINRA regulatory settlement, a Respondent had failed to timely disclose four felony charges. FINRA sets out a compelling case, which seemed destined to settle with a finding that the Respondent had engaged in willful non-disclosure that would expose her to a statutory disqualification. Surprisingly, there is no such allegation and no such finding. That was a wonderful resolution for the Respondent. Many associated persons with the same fact pattern would likely have been charged with willful non-disclosure and deemed statutorily disqualified. Why didn't FINRA settle this case on that basis? Ahhh . . . that's today's puzzle.

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, Katie Ann Hudson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Katie Ann Hudson, Respondent (FINRA AWC 2019062699901) 
https://www.finra.org/sites/default/files/fda_documents/2019062699901
%20Katie%20Ann%20Hudson%20CRD%205508543%20AWC%20va.pdf

The AWC alleges that Hudson was first registered in 2008 with FINRA member firm Foresters Financial Services, Inc.The AWC asserts that Hudson "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization."

The AWC alleges that on August 4, 2013, Hudson was charged with two felonies in connection with a motor vehicle incident; and, thereafter, said charges were reduced to misdemeanors.

The AWC alleges that on June 23, 2015, Hudson was charged with two felonies in connection with a motor vehicle incident; and, thereafter, said charges were reduced to misdemeanors.

The AWC alleges that on November 21, 2015, Hudson certified on Foresters Financial Services' annual compliance questionnaire (the "ACQ") that she had not been charged with any felony, misdemeanor or other criminal offense since her last submission, even though the June 23, 2015 incident's charges fell within the prior year's coverage.

The AWC alleges that it was on April 15, 2019, when Hudson first disclosed the 2013 and 2015 felony charges on her Uniform Application for Securities Industry Registration or Transfer (the "Form U4").

The Rulebook


Criminal Disclosure
14A. 

(1) Have you ever:
(a) been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign, or military court to any felony?
(b) been charged with any felony? 
. . .

According to FINRA's online Form U4 Explanation of Terms
http://brokeandbroker.com/PDF/FormU4.pdf:

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

Note the distinction between a mere "arrest" and that of "charged," as set forth online in  FINRA "Form U4 and U5 Interpretive Questions and Answers" https://www.finra.org/sites/default/files/Interpretive-Guidance-final-03.05.15.pdf :

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)

Article V of FINRA's By-Laws:Application for Registration, Section 2 in part states:

(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.

FINRA Rule 4530. Reporting Requirements provides [Ed: highlighting added]:

(a) Each member shall promptly report to FINRA, but in any event not later than 30 calendar days, after the member knows or should have known of the existence of any of the following:

(1) the member or an associated person of the member:

(A) has been found to have violated any securities-, insurance-, commodities-, financial- or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body, self-regulatory organization or business or professional organization;

(B) is the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery;

(C) is named as a defendant or respondent in any proceeding brought by a domestic or foreign regulatory body or self-regulatory organization alleging the violation of any provision of the Exchange Act, or of any other federal, state or foreign securities, insurance or commodities statute, or of any rule or regulation thereunder, or of any provision of the by-laws, rules or similar governing instruments of any securities, insurance or commodities domestic or foreign regulatory body or self-regulatory organization;

(D) is denied registration or is expelled, enjoined, directed to cease and desist, suspended or otherwise disciplined by any securities, insurance or commodities industry domestic or foreign regulatory body or self-regulatory organization or is denied membership or continued membership in any such self-regulatory organization; or is barred from becoming associated with any member of any such self-regulatory organization;

(E) is indicted, or convicted of, or pleads guilty to, or pleads no contest to, any felony; or any misdemeanor that involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds, or securities, or a conspiracy to commit any of these offenses, or substantially equivalent activity in a domestic, military or foreign court;

(F) is a director, controlling stockholder, partner, officer or sole proprietor of, or an associated person with, a broker, dealer, investment company, investment advisor, underwriter or insurance company that was suspended, expelled or had its registration denied or revoked by any domestic or foreign regulatory body, jurisdiction or organization or is associated in such a capacity with a bank, trust company or other financial institution that was convicted of or pleaded no contest to, any felony or misdemeanor in a domestic or foreign court;

(G) is a defendant or respondent in any securities- or commodities-related civil litigation or arbitration, is a defendant or respondent in any financial-related insurance civil litigation or arbitration, or is the subject of any claim for damages by a customer, broker or dealer that relates to the provision of financial services or relates to a financial transaction, and such civil litigation, arbitration or claim for damages has been disposed of by judgment, award or settlement for an amount exceeding $15,000. However, when the member is the defendant or respondent or is the subject of any claim for damages by a customer, broker or dealer, then the reporting to FINRA shall be required only when such judgment, award or settlement is for an amount exceeding $25,000; or

(H) (i) is subject to a "statutory disqualification" as that term is defined in the Exchange Act; or (ii) is involved in the sale of any financial instrument, the provision of any investment advice or the financing of any such activities with any person that is subject to a "statutory disqualification" as that term is defined in the Exchange Act, provided, however, that this requirement shall not apply to activities with a member or an associated person that has been approved (or is otherwise permitted pursuant to FINRA rules and the federal securities laws) to be a member or to be associated with a member. The report shall include the name of the person subject to the statutory disqualification and details concerning the disqualification; or . . .

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

(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 --  

. . .

(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.

Statutory Disqualification for Willful Non-Disclosure

In affirming a "willful" non-disclosure finding by FINRA, the Securities and Exchange Commission ("SEC") offered a definition of "willful" 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) https://www.sec.gov/litigation/opinions/2016/34-77375.pdf:

[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.

=====

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)).

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.

AWC Settlement Understanding

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 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 FINRA's By-Laws, this these omissions make me subject to a statutory disqualification with respect to association with a member.

OHO Willfulness Finding

If you do not opt to settle and demand your day in court, a FINRA OHO Decision may state the following:

For willfully failing to timely update Form U4, in violation of Article V, Section 2(c) of NASD's and FINRA's By-laws, NASD IM-1000-1, NASD Rule 2110, and FINRA Rules 1122 and 2010, Respondent is suspended from associating with any FINRA member firm in any capacity for [insert dates] and fined [insert amount]. Because his misconduct was willful, and the information he failed to disclose was material, he is subject to statutory disqualification. 

Visit the BrokeAndBroker.com Blog "Felony" Archive
http://www.brokeandbroker.com/index.php?a=topic&topic=felony


FINRA deemed that between August 2013 and February 2019, Hudson had failed to
timely amend her Form U4 to disclose that she had been charged with felonies on two occasions, in
violation of Article V, Section 2(c) of the FINRA By-Laws and FINRA Rules 1122 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Hudson a $5,000 fine and a two-month suspension from association with any FINRA member in any capacity.

Bill Singer's Comment

As disclosed in FINRA's online BrokerCheck records as of July 1, 2020, Hudson was charged on:
  • August 4, 2013, in New York State:
    • "Aggravated Unlic operator 1st degree," which is characterized as a Felony charge. BrokerCheck states that Hudson pled Not Guilty to the Felony charge and that "All charges covered and dismissed outside of DWAI on September 17, 2013; and
    • "Driving w/ability impaired by drugs," which is characterized as a Felony charge. BrokerCheck states that Hudson pled Not Guilty to the Felony charge, which was "reduced to DWAI traffic violation law 1192 01" on September 17, 2013. BrokerCheck states that Hudson paid a $300 fine, a $260 surcharge, and had her license revoked for 6 months.

  •  June 23, 2015, in New York State:
    • "Driving while ability impaired by drugs," which is characterized as a Felony charge. BrokerCheck states that Hudson pled Not Guilty to the Felony charge, which was "dismissed" on June 8, 2016; and
    • "Aggravated Unlicensed Operator 1st degree," which is characterized as a Felony charge. BrokerCheck states that Hudson pled Not Guilty to the Felony charge, which was "reduced to misdemeanor and sentenced to 3 years probation" on June 8, 2016;
Inexplicably and I would argue irresponsibly, FINRA fails to explain why the facts and circumstances set forth in the AWC did not rise to the level of a willful failure by Hudson to timely update her Form U4. Given the AWC's assertions of Hudson's non-disclosure of four felony charges from August 2013 and June 2015 until April 2019, it's hard to understand how such an extensive time span with so many felony charges did not involve willfulness. Now, to be clear, Hudson's non-disclosure did NOT involve willfulness because such an allegation is not made in the AWC. Regardless, why FINRA did not so charge is a mystery and one that needed to be dispelled in the AWC. 

I do not offer my comments in order to embarrass Hudson or add to her plight. I note my discomfort because so many associated persons with the same fact pattern have been charged with willful non-disclosure and are deemed statutorily disqualified. Consequently, it would be instructive for FINRA to delineate what it was about Hudson's non-disclosures that avoided crossing over the line from inadvertent to willful.


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