In response to the filing of a Complaint on June 21, 2011, by the Department of Enforcement of the Financial Industry Regulatory Authority ("FINRA"), Respondent Joseph Dale Frost, Sr. submitted an Offer of Settlement dated March 16, 2012, which the regulator accepted. Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent Frost consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs. Joseph Dale Frost, Sr. et. al, Respondents (Offer of Settlement, 2008016437801, March 21, 2012).
Note: The First Cause of Action in the Complaint was amended from a willful failure to disclose material information on a Uniform Application for Securities Industry Registration or Transfer (Form U4) to a non-willful failure to disclose material information on a Form U4.
Frost entered the securities industry in 1981, and during the relevant period of May 9, 2005, through December 5, 2011, he was registered as a general securities principal, general securities representative, and options principal Forsyth Securities, Inc.
On April 20, 2005, at a time when he was not associated with any FINRA member firm, Frost wascharged in St Louis County, MO, with a felony for non-payment of child support.
SIDE BAR: There is a difference between a mere criminal "arrest" and the more substantive criminal "charge," which frequently accompanies an arrest but not always. According to the Explanation of Terms provided with the Form U4:
Charged: Means being accused of a crime in a formal complaint, information, or indictment (or equivalent formal charge).
In keeping with FINRA's long-standing policy, as set forth in the regulator's published Form U4 and U5 Interpretive Questions and Answers:
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).
On May 9, 2005, Frost completed and signed a form U4 to become associated with Forsyth; however, he did not disclose the April 20th felony charge.
Pursuant to a routine background check attendant to the submission of Frost's Form U4, FINRA determined that Frost had been arrested and on May 26, 2005, the regulator requested that Forsyth's President and Frost's supervisor ( identified only as "Murray" in the Offer of Settlement) ensure that Frost's Form U4 was amended to disclose any criminal charges following the arrest - it seems that the regulator also asked for information concerning the criminal event. Apparently, FINRA was unaware that following his arrest that Frost had been charged with a felony. Murray shared these FINRA requests with Frost and directed him to respond to FINRA.
On October 12, 2005, Frost provided some information about the criminal charge to FINRA, notwithstanding that the regulator characterized that submission as "incomplete and did not indicate the nature of the charge against him." On the day of Frost's submission, FINRA requested further information about the arrest coupled with a specific instruction to Murray to once again ensure that the U4 disclosed any charges - suggesting that FINRA may still have been unaware that the matter had escalated beyond a mere arrest. Murray again directed FINRA's queries to Frost.
SIDE BAR: Not explained in FINRA's Order accepting the Offer of Settlement is why it took from May 26, 2005, when FINRA first requested documents and information, until October 12, 2005, for Frost to respond. Similarly, there is no explanation as to why FINRA did not demand a more timely reply than some five months.
About nine months following the filing of the felony charge and some eight months after FINRA's first advisory to update his Form U4, on February 1, 2006, Frost amended his U4 to disclose the felony charge for non-payment of child support. According to FINRA, Frost's untimely but non-willful update of his Form U4 had allegedly violated Article V, Section 2 of the NASD By-Laws, IM-1000-1, and NASD Conduct Rule 2110 from May 20, 2005 through February 1, 2006.
On April 10, 2006, Frost pleaded guilty in St. Louis County, Missouri to a felony for non-payment of child support.
FINRA alleges that under Article V, Section 2 of the NASD By-Laws, Frost was required to amend his Form U4 to disclose this guilty plea within ten days, or by April 20, 2006, because this guilty plea subjected him to statutory disqualification under Section 3(a)(39) and Section 15(b)(4) of the Securities Exchange Act of 1934. Frost did not amend his Form U4 by April 20, 2006 to disclose this guilty plea, which constituted a separate and distinct charge from that of failing to timely disclose the prior felony charge.
On September 13, 2006, FINRA requested information from Murray about the final disposition of the felony charge against Frost at an April 10, 2006, hearing. After receiving no information, FINRA reiterated its request to Murray four times from April 17, 2007 through August 31, 2007.
No explanation is provided in the Order as to why FINRA delayed to follow up on this matter beyond four requests over nearly a year. Although directed by Murray to respond to FINRA, Frost apparently provided insufficient responses, among which was his failure to provide specifically request court documents of the final disposition of the felony charge. Somewhat bizarrely, the Order informs us that:
FINRA alleged that Frost conduct constituted violations of Article V, Section 2 of the NASD By-Laws,IM 1000-1, and NASD Conduct Rule 2110 from April 20, 2006 through July 29, 2007; and Article V, Section 2 of the FINRA By-Laws, IM-1000-1, and NASD Conduct Rule 2110 from July 30, 2007 through September 17, 2008.
18. On July 7, 2008, almost two years after FINRA's first request, Frost provided FINRA with court documents that showed he had pleaded guilty to the felony charge on April 10, 2006.
19. That same day, FINRA instructed Murray to ensure that Frost's U4 was amended to disclose his guilty plea to the felony charge. Again, Murray shared this instruction from FINRA with Frost and directed him to respond to FINRA.
20. Frost amended his Form U4 on September 17, 2008. In this amendment, Frost finally disclosed his April 10, 2006 guilty plea to the felony charge for non-payment of child support. This disclosure was over 29 months late, and again, long after FINRA had notified both Frost and Murray that disclosure on his Form U4 may be necessary.
21. Frost's failure to disclose his guilty plea on his Form U4 in a timely manner was not willful.
In accordance with the Offer of Settlement, FINRA imposed a 12-month suspension with any FINRA broker-dealer, and a $10,000 fine.
Not to quibble but, frankly, this is a poorly drafted regulatory document that leaves far too many questions unanswered. At its most unflattering, this settlement appears to reflect that FINRA was aware that Frost had been charged with a felony for several months but had not timely amended his Form U4. Worse, FINRA appears to have been on notice that Frost pleaded guilty to the felony charge some 2 1/2 years before disclosing that on his Form U4.
There may be many explanations and excuses that could place Frost's conduct in the underlying criminal matter in a far less serious light. If there were, I would have expected to see some of those reasons noted in the settlement document. Moreover, the presentation of facts in FINRA's Offer of Settlement implies that the regulator was on notice in 2005 that a registered person was charged with a felony for non-payment of child support and likely knew (or should have known) in 2006 that he had pleaded guilty to same. Inexplicably, this case seems to have been relegated to some back burner through 2008 and did not result in any final disposition until its 2012 settlement. At my most generous, this failure to timely disclose a felony charge meandered around without resolution by FINRA for about six years and the failure to timely disclose the plea for about four years.
What makes a non-payment of child support a potentially serious issue worthy of both an employer's concern and also that of a regulator's is that it not only involves a potential felony conviction that would result in a statutory disqualification, but the reasons for the non-payment could be a warning that a particular broker is experiencing financial troubles - and that circumstance could pressure the broker into engaging in fraud with the handling of clients' accounts.
Which is not to suggest - even remotely - that the Great Recession did not slam millions of Americans and impeded the ability of parents to honor their child support obligations. Without question that is likely a fact. Highly compensated professionals at Goldman Sachs, Merrill Lynch, JP Morgan, Wells Fargo, Morgan Stanley Smith Barney, as well as shlubs at smaller firms found their careers turned upside down and often unable to pay their mortgages, rent, alimony, child support, and countless other obligations that were routinely handled during better days. Notwithstanding, when a brokerage firm and an industry regulator learn that circumstances have gone to such an extreme that a given individual has been charged with a felony for non-payment of a child support obligation, it is at least an opportunity to undertake timely and aggressive compliance efforts to ensure that customers are protected.
Why months and years went by here without more sense of urgency is not something satisfactorily addressed in FINRA's Order accepting the Offer of Settlement.