Another Registered Person Loses FINRA Exam Waiver Battle

March 12, 2012

Whether an employee of Merrill Lynch, Smith Barney, Bear Stearns, Lehman Brothers, Wachovia, UBS, Morgan Stanley, JP Morgan or any number of former or current brokerage firms, the inevitable rounds of lay-offs and firm failures play havoc with the registrations of the industry's registered persons.  As I have long argued, the failure to reform this registration system that inappropriately holds hundreds of thousands of registered men and women hostage to their employer firm is an ongoing disgrace that ultimately fosters corruption and imposes unacceptable conflicts within the broker-customer relationship.

Westor: Round One

In December 1985, James Lee Goldberg passed the Series 7 General Securities Representative examination and, thereafter, was registered with seven member firms and, additionally, worked as a self-employed consultant. On October 31, 2007, Westor Capital Group, Inc. ("Westor') filed a Uniform Application for Securities Industry Registration or Transfer ("Form U4″) seeking to register Goldberg as a Series 7 General Securities Representative. Goldberg's prior registered employment had terminated in June 2006.

FINRA did not approve Goldberg's registration with Westor because he had failed to complete a required continuing education ("CE") course; and several months later, on April 28, 2008, FINRA's Central Registration Depository ("CRD") system automatically changed his registration status to "purged.

On April 30, 2008, Westor filed an amended Form U4, providing Goldberg with an additional 120 days to renew his registration by taking the CE course, which he completed on May 12, 2008 - unfortunately, by that time, FINRA had suspended Westor's membership for failure to file its 2007 annual report.

As a consequence of Westor's suspension, Goldberg's registration was not approved by FINRA; and on July 8, 2008, Westor terminated him via the filing of a Uniform Termination Notice for Securities Industry Registration ("Form U5″), which noted a "voluntary" resignation status because the firm was "unable to facilitate deals at this time."

Westor: Round Two

You may recall that following Goldberg's July 2008 termination by Westor, Wall Street fully entered into the Great Recession and the market would not bottom out until March 2009.  About a year after having been U5'd by Westor, Goldberg rejoined the firm in June 2009; and on April 20, 2010, the firm filed a U4 seeking to register him as a Series 7.  At some point prior to or during this second tour with Westor, Goldberg seems to have figured out that although he had satisfied his CE requirement in May 2009, FINRA had purged his Series 7 because Westor's membership was not in good standing at that time because of the untimely filing of its 2007 annual report.

In August 2010, FINRA granted Goldberg a waiver of the Series 7 examination conditioned on the satisfaction of his CE obligations within 90 days, which Goldberg failed to satisfy within the allotted time. On November 15, 2010, FINRA withdrew its conditional waiver of Goldberg's Series 7 examination requirement - and his registration remained unapproved.

SIDE BAR: Subsequently, Goldberg argued that he was unable to sit for the exam because Westor owed $2,000 in FINRA fees and the firm was unwilling to pay that balance.  Presumably, Goldberg inferred from those circumstances that FINRA would not process his exam score until the member firm's financial obligations were satisfied.

On January 25, 2011, Westor filed a Form U5 terminating Goldberg's association. The Form U5 stated the reason for the termination was "voluntary." Inexplicably, the U5 stated that the termination had occurred some nine months earlier on April 26, 2010 (three days after the firm had filed Goldberg's U4).

The Series 79 Opt-In

During Goldberg's second association with Westor, FINRA had adopted amendments to NASD Rule 1032 requiring individuals whose activities were limited to investment banking to

  1. pass the new Series 79 Limited Representative - Investment Banking Qualification Examination; or, in the alternative,
  2. opt-in for a six-month transitional period between November 2, 2009 and May 3, 2010, in which those investment bankers who had Series 7s could submit an amended Form U4 requesting an exemption from taking the exam.  Following the May 3, 2010 transition date, those applicants who were opted-in would be required to pass the exam or obtain a further waiver.

Westor did not file an amended Form U4 seeking to opt-in Goldberg for the Series 79 and he had not passed the test.

SIDE BAR: The Series 79 examination qualifies an investment banking representative to advise on or facilitate debt or equity offerings through a private placement or public offering or to advise or facilitate mergers or acquisitions, tender offers, financial  restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions.


In February 2011, Goldberg joined Katalyst Securities, LLC ("Katalyst"), and that member firm filed a Form U4 seeking to register him as a general securities representative and as an investment banking representative - and the firm also requested waivers of the Series 7 and 79 examination requirements on Goldberg's behalf.

Series 7 Waiver Granted

On February 17 2011, FINRA granted the Series 7 waiver conditioned on Goldberg taking a required CE course, which he completed and FINRA approved his Series 7 registration on March 3, 2011.

Series 79 Waiver Problem

On February 22, 2011, FINRA's Department of Testing and Continuing Education (the "Department") requested additional information regarding Goldberg's Series 79 waiver request. Pointedly, the Department wanted a description of his prior investment banking experience and an explanation as to why Westor had not previously opted-in Goldberg.

With respect to his past investment banking experience, Goldberg represented that over the preceding five years he had assisted several companies requiring investment banking services. Goldberg explained that he had provided business and financial planning, introductions to potential financing, had engaged in discussions with legal/accounting specialists, and had further involvement in the entire IB process.  Additionally, Katalyst responded that Goldberg would be involved in "the private placement of securities" and "various corporate restructurings and M&A activities." As to the failure of Westor to opt in Goldberg, FINRA was advised of that firm's financial problems, of which the unpaid fee issue was noted.

On March 29, 2011, the Department denied Katalyst's Series 79 examination waiver, which was sustained on appeal on August 2, 2011, by FINRA's Waiver Subcommittee of FINRA's National Adjudicatory Council.

SEC Appeal

On Appeal to the SEC, Goldberg based his Series 79 examination waiver request on two factors in the Waiver Guidelines:

  1. an alleged filing error caused by Westor's failure to "opt" him into the Series 79 category during the opt-in period, and
  2. Goldberg's experience in the securities industry.

In The Matter Of The Application Of James Lee Goldberg For Review Of Action Taken By FINRA (Opinion, Securities Exchange Act Of 1934 Rel. No. 66549 / Admin.Proc. File No. 3-14544 / March 9, 2012).

The SEC stated that FINRA's Waiver Guidelines permitted granting a waiver to an individual who

  1. has been functioning in good faith in the securities industry;
  2. and believed himself to be properly registered, but
  3. whose application forms had been incorrectly filed and are therefore not reflected in the CRD.

In confirming the Waiver Subcommittees finding that Westor's failure to opt-in Goldberg was a result of a "purposeful" financial decision by the firm, rather than an inadvertent filing mistake, the SEC declined to attribute any good faith belief to Goldberg that he was properly registered as a Series 79.  To the contrary, citing a February 2010 letter from Goldberg's attorney, the SEC noted that Goldberg knew since at least June 2009 that he lacked even a Series 7 license, the prerequisite for seeking an exemption from the Series 79 examination during the "opt-in" period.

As to Goldberg's effort to bootstrap the Series 79 opt-in to an alleged filing error with his Series 7, the SEC held that even if a filing error with respect to one licensing application could be the basis for a waiver of another, Goldberg had not established any such error with respect to the prior Series 7 application. To the contrary, the SEC characterized the lapse in Goldberg's Series 7 registration as initially caused by his failure to complete a CE course - thus defeating his argument that the lapse was caused by any filing error by the firm.

Finally, the SEC addressed Goldberg's contention the four bases that FINRA used to vet a waiver request were fully satisfied in his case:

  1. the length and quality of his experience;
  2. the specific registration he requested and type of business he would conduct;
  3. his previous registration history; and
  4. the nature of any regulatory matters as disclosed on his application for registration.

In affirming FINRA's assessment that Goldberg did not satisfy the four-prong test, the SEC concurred that Goldberg has not presented an "exceptional case" compelling the waiver.  In fairly dismissive language, the SEC found that:

[G]oldberg's waiver request, however, consisted of a four-line, unspecified list of "investment banking services" with which he "assisted" for "several companies," without any indication of the level or breadth of his involvement, or the specific services in which he was involved.

Moreover, although Goldberg's waiver request represented that, "for the past five years, [he] actively provided investment banking on wide variety of matters," FINRA found that "he has no direct experience in investment banking as a registered representative and gained - at best - only 15 months of investment banking experience at Westor . . . ." Goldberg offered little explanation of his past associations or his consulting practice to provide a basis to determine whether they compare with being an investment banking representative associated with a regulated broker-dealer. The letters of recommendation submitted on Goldberg's behalf were also vague, giving little indication of the kinds of investment banking services Goldberg provided.

Bill Singer's Comment

Unlike a number of prior waiver cases that I have reported, Goldbergstrikes me as presenting a scenario that justified both FINRA's and the SEC's denials.  I was particularly struck by the untimely CE satisfaction and the apparent foot-dragging by the firm and the registered person when it came to satisfying certain prerequisites and timely submitting paperwork.  On the other hand, none of those considerations overcome my historic objection to basing FINRA's registration system upon applications from its member firms rather than from the individuals seeking registration or waivers.  I know of few professional licensing protocols - lawyers, CPAs, doctors - that are premised upon an ongoing employment obligation coupled with placing the application portal solely in the hands of an employer.

Without question, there are legitimate reasons for imposing CE as a predicate for ongoing professional licensing on CE.  That being said, I am no fan of most CE systems because they are little more than a means for a state to generate fees or for trade groups to realize revenue from providing classes.  Further, the quality of the courses offered are often abysmal and most professionals grudgingly take the necessary hours without gaining much, if any, educational value.  All of which exalts form over substance.

To the extent a CE predicate is required, the most credible system would be to provide a wide array of qualified courses, offered by many providers at competitive rates, and vesting the individual subject to the obligation with the freedom to pick and choose the courses and the providers within the context of satisfying the educational and professional goals.  As a lawyer, I have a CE obligation that requires satisfaction every two years but I don't have to take the course at an employer's premises and I have the leeway to structure the program in ways that are relevant to my legal practice.  Wall Street's system is nothing even remotely like that and, in my opinion, is a joke.