Untimely Disclosure of Tax Liens Upends Chief Compliance Officer Via Statutory Disqualification

For willfully failing to timely update his Form U4 to disclose two tax liens 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 30 business days and fined $10,000. His willful violation subjects him to statutory disqualification. Respondent is assessed the costs of the hearing. 

1) he did not receive notice of the liens,  and  

2) an Internal Revenue Service agent advised him that the liens applied to his property, not him personally.

Holeman argues that our finding of willfulness itself acts as a sanction because the finding subjects him to statutory disqualification and its associated potentially adverse consequences. While we agree with Holeman that his conduct here does not merit severe collateral consequences, we do not impose statutory disqualification as a sanction. Instead, it is mandated by operation of Section 3(a)(39)(F) of the Exchange Act upon a determination that he willfully failed to disclose material information on his Form U4.

The Hearing Panel concluded that Holeman's nondisclosures were merely negligent, and that his violations were serious but not egregious. We disagree. We conclude based on the number of aggravating factors and the absence of any real mitigation that Holeman's misconduct was egregious and necessitates a sanction more meaningful than that imposed by the Hearing Panel. FINRA rules obligate individuals to make truthful and accurate disclosures. Holeman's false certification on his firm's compliance questionnaire and his repeated failures to amend his Form U4 to disclose material information about his financial problems raise serious questions about his ability to comply with regulatory requirements and demonstrate that he is currently unable to meet the high standards required of those employed in the securities industry. 

Finally, we agree with Enforcement that a "chief compliance officer's false statements to his firm on a compliance questionnaire constitute a particularly serious violation." As David Lerner's CCO, Holeman is the steward of his firm's compliance culture. He is responsible for managing compliance issues at David Lerner, including ensuring that his firm is complying with its regulatory requirements and that its employees are complying with internal policies and procedures. We find it deeply troubling that Holeman was aware of FINRA's investigation into his failure to disclose his federal tax liens, yet he failed to timely amend his Form U4 and falsely certified to David Lerner that no such liens existed. Holeman has four decades of experience in the securities industry, specifically in the area of compliance. He cannot legitimately claim any lack of understanding as to the importance of answering truthfully on a compliance questionnaire or the Form U4.

B. Holeman Is Statutorily Disqualified 

Like the Hearing Panel, we next consider the separate question of whether Holeman is statutorily disqualified. We affirm the Hearing Panel's finding that he is. A person is subject to a statutory disqualification under Article III, Section 4 of FINRA's By-Laws and Section 3(a)(39)(F) of the Exchange Act if he, among other things: 

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. 

15 U.S.C. § 78c(a)(39)(F). 

We find that Holeman acted willfully in failing to timely disclose material information - his federal tax liens - on his Forms U4. 

Registered principal of FINRA member firm appeals from FINRA disciplinary action finding that he did not timely update his Form U4 to disclose tax liens, that he provided false information in his firm's Annual Compliance Certification, and that he is subject to a statutory disqualification because he acted willfully and because the information that he failed to disclose was material. Held, FINRA's findings of violations, finding of a statutory disqualification, and imposition of sanctions are sustained.

Holeman acted with extreme recklessness despite his contention that he did not disclose the liens because he thought liens against property did not have to be disclosed. To the extent Holeman found Question 14M to be ambiguous, it was his "duty to determine whether disclosure was required." Indeed, Holeman testified at the hearing that had he known about the liens "it would have been my position at that time to report them or certainly check with counsel about reporting them." Holeman confirmed in response to a question from a hearing panelist that he "would have checked with counsel" even if the lien stated that it attached to property. But the record establishes that Holeman knew about the liens. 

To the extent Holeman claims that he did not see the liens until February 2015, that does not mean he was unaware of them before that time. Holeman stated repeatedly before the hearing that he knew about the liens but did not disclose them because he did not think they were against him, and the hearing panel did not credit his contrary testimony at the hearing. Yet Holeman did not consult counsel to determine if the liens needed to be disclosed. Although he attempts to rely on the email from David Lerner's general counsel and the Wexler letter, those communications occurred after FINRA began its investigation. Holeman cannot rely on these communications to justify his failure to disclose the liens until that time. Holeman's failure to take any steps to probe the liens or resolve his apparent confusion about whether the liens needed to be disclosed in response to a question asking whether he had any unsatisfied liens against him was such an extreme departure from the standards of ordinary care that the danger of misleading investors by not disclosing the liens was so obvious that he must have been aware of it.

Holeman willfully failed to disclose three tax liens totaling over $116,000 on his Form U4 and provided false information about them in his firm's Annual Compliance Certification. The liens were material to the ability of regulators, his employers, and their customers to assess Holeman's capability to function as an associated person of a FINRA member firm. Holeman did not disclose the April 2009 federal tax lien while it remained unsatisfied and later deleted the disclosure he made. He did not disclose the October 2009 federal tax lien for nearly six years despite the fact that it remained unsatisfied during that time, and he did not disclose the May 2011 federal tax lien for nearly four years despite the fact that it remained unsatisfied during that time. Holeman's disclosures were made only after FINRA began investigating the liens, and even then he waited six months to make the disclosures. We agree with the NAC that it is "deeply troubling that Holeman was aware of FINRA's investigation into his failure to disclose his federal tax liens, yet he failed to timely amend his Form U4." Indeed, we cannot understand how Holeman can maintain that he did not know about the liens until February 2015 when FINRA asked Holeman about all three liens specifically in November 2014. 

Holeman has worked in the securities industry as a registered person and principal for forty years. As a result, he must have been aware of the importance of accurate, current disclosures on Form U4 not only to his employer but also to firm customers and to the investing public. We have noted that "a representative's truthfulness in answering the financial disclosure questions on the Form U4 is a particularly critical measure of fitness for the industry because a commitment to accurate, complete, and non-misleading financial disclosure is central to any securities professional's responsibilities" and, therefore, "untruthful answers call into question an associated person's ability to comply with regulatory requirements."

The Guidelines instructed FINRA to consider as a potential mitigating factor whether a lien that was not timely disclosed had been satisfied. Although the April 2009 federal tax lien was ultimately satisfied in April 2013, Holeman failed to disclose that lien on six different Oppenheimer Form U4 amendments filed when it was unsatisfied. And both the October 2009 and May 2011 federal tax liens still remained unsatisfied at the time of the complaint in June 2016. The October 2009 federal tax lien has since been satisfied, but the record does not indicate that the May 2011 federal tax lien has been satisfied. We therefore find the fact that Holeman eventually satisfied the April and October 2009 federal tax liens warrants no mitigation of the sanctions.

[T]he SEC's conclusions that petitioner knew of the liens around the time they were filed, and thus failed to timely disclose them, and that petitioner provided a false statement on his 2014 Annual Compliance Certification, are supported by substantial evidence. See Steadman v. SEC, 450 U.S. 91, 96 n.12 (1981). Additionally, petitioner has failed to show that the SEC erred in concluding that he was statutorily disqualified under 15 U.S.C. § 78c(a)(39)(F) because he willfully failed to disclose the liens. See Wonsover v. SEC, 205 F.3d 408, 413-15 (D.C. Cir. 2000); SEC v. Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992). Finally, the SEC did not abuse its discretion in sustaining the sanctions imposed by FINRA. See PAZ Securities, Inc. v. SEC, 566 F.3d 1172, 1174 (D.C. Cir. 2009).

• Holeman
• IRS
• Tax Liens
• Liens
• OHO
• NAC
• SEC
• Statutory Disqualification
• Willfully
• Willful
• Form U4
• U4
• CCO
• BrokeAndBroker
• Bill Singer