Undisclosed Banrkruptcy Petition Strains FINRA's Mercy

August 5, 2013

A registered person files for bankruptcy but her petition is denied after two months of consideration.  Unfortunately, she fails to timely notify both her firm and its self-regulatory organization.  In the end, we have a regulator displaying its awe and majesty.  Sadly, that same regulator appears lacking a heart. 

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, Ivy J. So submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of  Ivy J. So, Respondent (AWC 2012034568801, July 29, 2013).

So entered the securities industry in 1995 and first became registered in 1996.  In August 2006, she was registered with Ameriprise Financial Services, Inc. from which she reportedly voluntarily resigned in October 2012. The AWC asserts that So had no prior disciplinary history.

On October 7, 2009, So filed a Chapter 13 bankruptcy petition, which was dismissed without discharge on December 3, 2009. Sometime around October 2012, Ameriprise independently discovered the 2009 bankruptcy petition and on October 9, 2012, filed an updated Uniform Application for Securities Industry Registration or Transfer ("Form U4") for So disclosing both the bankruptcy filing and its dismissal.  

The Rulebook

Article V, Section 2(c) of FINRA's By-Laws (formerly Article V, Section 2(c) of NASD's By-Laws): registered representatives  must keep their  Form U4 current, typically within 30 days of learning of a triggering event.

Form U4 /Question 14K:  asks whether the registered representative has filed a bankruptcy petition within the past 10 years. Update required within 30 days of event.

Form U4 / Question 14M: asks whether the registered representative has any unsatisfied judgments or liens against him. Update required within 30 days of event.

FINRA Rule 1122: Associated person must ensure that Form U4 filings are accurate and complete. 

FINRA Rule 1122 (formerly NASD IM-1000-1): filing incomplete or inaccurate Form U4 (or the failure to correct such filings) is deemed conduct inconsistent with just and equitable principles of trade. 

FINRA Rule 2010 (formerly  NASD Rule 2110): Associated persons must observe high standards of commercial honor and just and equitable principles of trade. Failure to comply with FINRA Rule 1122 and with the FINRA and NASD By-Laws constitute violations of Rules 2010 and 2110. 

The "Financial Disclosures" section of the Form U4:

14K. Within the past 10 years:

(1) have you made a compromise with creditors, filed a bankruptcy petition or been the subject of an involuntary bankruptcy petition?

(2) based upon events that occurred while you exercised control over it, has an organization made a compromise with creditors, filed a bankruptcy petition or been the subject of an involuntary bankruptcy petition?

(3) based upon events that occurred while you exercised control over it, has a broker or dealer been the subject of an involuntary bankruptcy petition, or had a trustee appointed, or had a direct payment procedure initiated under the Securities Investor Protection Act?

14L. Has a bonding company ever denied, paid out on, or revoked a bond for you?

14M. Do you have any unsatisfied judgments or liens against you?

In-House Policies

Ameriprise's policies and procedures concerning Form U4 updates required its registered representatives to report all disclosure events, including reporting a bankruptcy within five days of the filing date.  Moreover, on October 27, 2009, So submitted an Annual Attestation to the firm in which she had agreed to her understanding that bankruptcy filings needed to be disclosed via a Form U4 update within five calendar days. 

In A Nutshell

So, watta we got here? Yeah, we have a single registered representative whose financial circumstances had apparently become so dire in 2009 that she felt compelled to file for bankruptcy. Y'all remember 2009, right?  You know, that lovely bit of financial disaster that is now known as the Great Recession. Consequently, as life as we knew it was apparently coming to an end. So believed that her only viable option was to file for bankruptcy.  

By the way, in case it may have slipped by you unnoticed, the bankruptcy court denied So's petition two months after it was filed.  Fast forward to about three years to October 2012, when Ameriprise apparently discovers that So had previously filed for bankruptcy but had failed to notify the firm and had failed to timely update her Form U4.  Permit me a bit of literary surmise here but I can sort of imagine how that first conversation between So and Ameriprise went:

Ameriprise: Hey Ivy, what the hell is with this 2009 bankruptcy filing?

So: Nothing.

Ameriprise: Waddya mean "nothing?"

So: I filed for bankruptcy in 2009 but the Court denied it.

Ameriprise: But you never told us and you never updated your Form U4.

So: No, no, no . . . you don't understand. I filed for the bankruptcy but the Court denied it. There was nothing for me to file and, for godsakes, it was three years ago during the Great Recession. 

Ameriprise: We understand but apparently you don't. First, you were supposed to notify us of your filing. Second, you were supposed to amend your Form U4. Then you were supposed to let everyone know that the filing had been denied.

So: Okay, fine - in October 2009 I filed for a bankruptcy but the Court rejected my petition in December 2009. Happy?

Ameriprise: I don't think you're getting the message here. FINRA is likely to come after you. You violated a whole batch of rules and, worst of all, the self-regulatory organization will likely deem you to have engaged in conduct inconsistent with Wall Street's high standards of commercial honor and just and equitable principles of trade. You could wind up with a suspension and a fine.

So:  Okay, what is this, some hidden camera show?  Are you serious? A suspension and fine for failing to disclose a denied bankruptcy petition from 2009? I filed the disclosures in October 2012 - so what's the big deal?

Ameriprise: I'm tellin' you Ivy. Those folks at FINRA don't take kindly to these serious violations.  You're headed for a world of hurt.

A World Of Hurt

In accordance with the terms of the AWC, FINRA imposed upon So a $2,500 fine and a 30-day suspension in all capacities.

Bill Singer's Comment

Puhleaaase don't get me started on this case.  

What a sanctimonious pile of warm, moist crap!  A $2,500 fine on this woman for failing to disclose the existence of a bankruptcy petition that was denied a tad under two months after she filed? And a 30-day suspension on top of the fine!  I'm guessing that So settled this AWC without an attorney and represented herself.  

Lemme be clear here. So should have timely disclosed her bankruptcy petition. Her failure to follow FINRA's rules and her firm's policies should not be excused.  Notwithstanding, there are extenuating circumstances here that don't seem to have been fully or fairly considered. Consequently, this settlement comes off as more of a smirk and a gotcha rather than a sincere and fair bit of regulation.  Frankly, I would refer all those eager and earnest FINRA regulators to the immortal words of the Bard:

The quality of mercy is not strain'd,
It droppeth as the gentle rain from heaven
Upon the place beneath: it is twice blest;
It blesseth him that gives and him that takes:
'Tis mightiest in the mightiest: it becomes
The throned monarch better than his crown;
His sceptre shows the force of temporal power,
The attribute to awe and majesty,
Wherein doth sit the dread and fear of kings;
But mercy is above this sceptred sway;
It is enthroned in the hearts of kings,
It is an attribute to God himself;
And earthly power doth then show likest God's
When mercy seasons justice. . .

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