FINRA Wrestles With Serious,Aggravating, And Egregious Filing Failures For Forms U4 and BD

May 14, 2015

Today's Blog examines a FINRA disciplinary case in which a registered representative winds up fined, suspended, and, as a result of the alleged "willfulness" of his misconduct, he becomes statutorily disqualified. In large part, the allegations revolve around failures to disclose reportable events -- or, at best, failure to timely disclose. To some extent, the individual respondent's defenses and explanation consist of the most common explanations that I hear when I am asked to represent registered representatives: I didn't know. I never got that letter. They never told me. My lawyer or accountant never warned me. To FINRA's credit, the self-regulatory organization explains the background issues and offer a rationale for its decisions in a very cogent and compelling manner.  

Case In Point

On September 19, 2013, a Financial Industry Regulatory Authority ("FINRA") Office of Hearing Officers ("OHO") Hearing Panel found Respondent William M. Dratel ("Dratel") and Respondent The Dratel Group, Inc. ("DGI") guilty of certain alleged violations, which were uncovered by FINRA examination staff during the annual 2009 and 2010 examinations of DGI. In the Matter of FINRA Department of Enforcement, Complainant, vs. The Dratel Group, Inc. and William M. Dratel, Respondents (Amended Hearing Panel Decision, Office of Hearing Officers, Complaint No. 2009016317701, September 19, 2013),  

Appeals To the NAC

Although Respondents Dratel and DGI were represented by legal counsel through the OHO Hearing, they were not represented by legal counsel on appeal to FINRA's National Adjudicatory Council ("NAC"). In the Matter of FINRA Department of Enforcement, Complainant, vs. The Dratel Group, Inc. and William M. Dratel, Respondents (Decision, National Adjudicatory Council, Complaint No. 2009016317701, May 6, 2015). As summarized in the NAC Decision

On October 11, 2011, the Department of Enforcement filed an 11-cause complaint against Dratel and DGI. A hearing was held on August 28-29, 2012. The Hearing Panel issued its amended decision on September 19, 2013, finding that Dratel willfully failed to make timely amendments to his Form U4, failed to establish and enforce supervisory control systems, and failed to certify compliance and supervisory processes; that DGI failed to report municipal securities trades and executed customer transactions in corporate debt securities without completing a TRACE participation agreement and failed to report transactions to TRACE; and that respondents willfully failed to make timely amendments to the firm's Form BD, willfully failed to create and preserve order memoranda, failed to preserve e-mail communications, failed to maintain accurate ledger and trial balances, shared in customers' losses, executed municipal securities transactions without being registered with the MSRB, and failed to have a registered municipal securities principal supervise municipal securities activities. 

The Hearing Panel fined Dratel $5,000 and suspended him for a total of 25 business days, fined DGI $2,500, and fined respondents, jointly and severally, a total of $31,000. 2 The Hearing Panel also determined that respondents were subject to statutory disqualification for their willful failures to make timely amendments to Forms U4 (Dratel) and BD (respondents).

Page 3 of the NAC Decision

NOTE: This Blog solely focuses on the first two Causes of Action filed against Respondents: Failure to Amend Forms U4 and BD. For additional details about the full 11-Count Complaint, reference the citations to the OHO and NAC Decisions provided at the end of this commentary.

Failures to Timely Amend Form U4 and Form BD

The OHO Decision found, among other things, that Respondent Dratel had willfully failed to timely amend his  Uniform Application for Securities Industry Registration or Transfer ("Form U4") and that Respondents Dratel and DGI had collectively willfully failed to time amend the firm's Uniform Application for Broker Dealer Registration ("Form BD"). Following appeals by both the Respondents and Complainant FINRA Department of Enforcement, the NAC affirmed the findings of the OHO as to, among other issues, the two counts pertaining to untimely amendments.

Both the OHO Decision and NAC Decision present an excellent background statement of facts and well-reasoned bases upon which the sanctioning was premised. Given the superb nature of the NAC Decision, I have opted for an unusually long citation from that document and have inserted yellow highlighting to underscore what I view as important portions. 

1. Facts

a. Federal Tax Liens

On March 23, 2010, the Internal Revenue Service ("IRS") sent Dratel a letter notifying him that it had filed a lien against him for $291,342.41 for unpaid income taxes for 2007 and 2008. Dratel admits that he received the notice, but testified that he could not recall precisely when.4 While Dratel acknowledged that he looked at the notice, he stated that he did not pay particular attention to it because he believed he was in the process of resolving his lien issues with the IRS. Dratel testified that he hired an accountant to assist him with the resolution of the liens. Dratel claimed that in the discussions with the IRS, the accountant made no mention of tax liens or judgments. Dratel testified that he began making payments to the IRS in June 2010.

On September 13, 2010, the IRS sent Dratel a "Final Notice of Intent to Levy and Notice of Your Right to Hearing" for unpaid income taxes for 2009. Several days later, on September 21, 2010, the IRS filed a second tax lien against Dratel for $123,368.59. Dratel admits he received notice of the lien by at least late September. Nonetheless, he claimed that he did not realize that the second federal tax lien had actually been filed. Dratel contends that he was not aware of the liens until FINRA informed him of their existence in late September 2010.

b. New York State Tax Judgments

On September 10, 2009, the New York State Department of Tax and Finance issued a tax warrant for the entry of a judgment in the amount of $42,487.84 against Dratel for outstanding 2006 and 2007 state taxes. The state sent the warrant to the office address Dratel had maintained in East Hampton until October 2009. Dratel testified that he does not recall when he received the warrant, but believes he first saw it in late 2010 when a FINRA information request prompted him to search through his records. By that time, Dratel had already entered into an installment payment plan with the state. Dratel contends the state employees with whom he negotiated the installment plan never mentioned that the warrant was in fact a judgment, such that it would trigger his reporting obligations

On April 19, 2010, New York state tax authorities issued a notice to Dratel of a second state tax warrant, which had been issued on February 22, 2010, in the amount of $31,061.38, for his 2008 taxes. The warrant explicitly stated that it was a money judgment against him that would be in effect for 20 years, unless Dratel paid it in full. The tax authorities sent the notice and warrant to Dratel's East Hampton address, but it was several months after he had moved to Southold. Dratel acknowledged that he eventually received the warrant, but could not recall when.

c. Bank Judgment 

On March 13, 2009, American Express filed a civil complaint against Dratel and DGI for failure to pay their credit card bills. An affidavit of service certifies that the complaint was served on a "John Smith," described as Dratel's co-worker, at DGI's East Hampton address on April l3, 2009. Dratel testified that he was not served, and that he had no co-worker named John Smith. The unanswered complaint resulted in a default judgment against respondents jointly in the amount of $85,333.83 on December 14, 2009. Another affidavit of service attests to the mailing of a copy of the judgment to the East Hampton address on January 6, 2010, but this was several months after DGI had moved from East Hampton to Southold. Dratel testified that while he endeavored to enter into a payment plan with American Express, he was not aware that a judgment had been entered against respondents until FINRA provided him copies of the relevant documents.

2. Dratel Updates Forms U4 and BD

Dratel testified that on or around September 22 or 23, 2010, during the 2010 FINRA examination, FINRA examiners gave him a copy of the American Express judgment and informed him orally of the existence of the other judgments and liens. Dratel testified that this was his first notice of the outstanding liens and judgments. He claimed that as soon as he realized FINRA wanted him to disclose them, he did so; however, Dratel did not amend his Form U4 and DGI's Form BD until January 25, 2011- four months later.

3. Discussion

FINRA Rule 1122 provides that "[n]o 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," thereby requiring that members and associated persons keep Forms U4 and BD complete and accurate.

In turn, Article V, Section 2(c) of the FINRA By-Laws requires member firms and associated persons to report certain disclosable events on Forms U4 and to keep the form updated and accurate. The By-Laws further require that certain reportable events be reported accurately no later than 30 days after the member firm learns of the facts or circumstances giving rise to a reportable event.5  Filing a misleading Form U4 or failing to file a timely amendment to a Form U4 when required, violates the high standards of commercial honor and just and equitable principles of trade to which FINRA holds its members under FINRA Rule 2010. See Jason A. Craig, Exchange Act Release No. 59137, 2008 SEC LEXIS 2844, at *8 (Dec. 22, 2008). Similarly, Article IV, Section 1(c) of the FINRA By-Laws requires that member firms update their membership applications within 30 days of learning of changes required to be disclosed on Form BD.6 

Dratel argues that because he was negotiating, or had negotiated, payment plans for his outstanding liens and judgments, he reasonably believed he was not required to disclose them. He also notes that he never received a copy of the American Express judgment because it was sent to a former address. Dratel also contends that once FINRA informed him that the judgments and liens needed to be disclosed, he did so. However, it is undisputed that respondents did not update the relevant forms until four months after the FINRA examiner questioned Dratel about the judgments and liens-well in excess of the By-Laws requirements for a timely amendment. Therefore, we find that Dratel failed to amend his Form U4 and DGI, acting through Dratel, failed to amend its Form BD, to disclose the respective liens and judgments, in violation of FINRA Rules 1122 and 2010.

a. Respondents are Statutorily Disqualified

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 Securities Exchange Act of 1934 ("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).

The Hearing Panel determined that respondents are subject to statutory disqualification for their failures to update Dratel's Form U4 and DGI's Form BD promptly because respondents' failure to disclose the judgments and liens were willful and constituted material information. Respondents argue that while they do not deny the existence of the liens and judgments, their failures to disclose were not willful and that the information was not material. We disagree.

(1) Respondents' Failures to Disclose Were Willful

We agree with the Hearing Panel that respondents' failures to disclose the judgments and liens were willful. In order to find a willful violation of federal securities laws we must find "that the person charged with the duty knows what he is doing." Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000). We need not find that respondents intentionally violated FINRA rules, only that respondents knew what they were doing when they did not timely amend the forms to disclose the judgment and tax liens. See Mathis v. SEC, 671 F.3d 210, 216-218 (2d Cir. 2012) (finding that respondent was statutorily disqualified where he voluntarily failed to amend Form U4 to disclose tax liens). Here, the record demonstrates conclusively that respondents knew about the judgment and liens, yet they failed to amend the Forms U4 and BD for at least four months. Thus, our finding that they acted willfully is predicated on respondents' intent to commit the act that constitutes the violation-failing to amend the forms. Dratel acknowledged that he received notice of one of the federal tax liens as early as April 2010. He also discussed the judgments and liens and his duty to amend his Form U4 with a FINRA examiner in September 2010. At best, respondents did not amend these forms for another four months even though they were required to do so within 30 days.

Even though Dratel has made these admissions, respondents argue that their failures to disclose were not willful. Respondents maintain that they did not know of the liens and judgments because Dratel was talking with his accountant and the various creditors, and none of them mentioned that there were any liens or judgments outstanding or perfected. This is belied by the fact that Dratel admits that he was aware of their existence by, at the very latest, September 2010. Furthermore, respondents cannot shift their disclosure obligations to their accountant or their creditors. See Craig, 2008 SEC LEXIS 2844, at *15 (noting that respondent could not shift his disclosure responsibility). Respondents had an affirmative responsibility to ensure that they made full, accurate, and timely disclosures of the reportable events on the Forms U4 and BD. Respondents therefore acted willfully.

(2) The Information Was Material

Having found that respondents acted willfully, we turn next to the question of whether the federal and state tax liens and the American Express judgment were material for purposes of disclosure on Dratel's Form U4 and respondents' Form BD respectively. Dratel argues that the judgments and liens were not material because none of his customers called to inquire about them nor did they complain about them or withdraw their accounts once the information was  - 8 - reported. Therefore, Dratel maintains, the information could not have been material. However, whether customers raised concerns over the information is not the standard for determining materiality.

"[B]ecause of the importance that the industry places on full and accurate disclosure of information required by the Form U4, [it is presumed] that essentially all the information that is reportable on the Form U4 is material." Dep't of Enforcement v. Tucker, Complaint No. 2007009981201, 2011 FINRA Discip. LEXIS 66, at *20-21 (FINRA NAC Oct. 4, 2011) (quoting Dep't of Enforcement v. Knight, Complaint No. C10020060, 2004 NASD Discip. LEXIS 5, at *13 (NASD NAC Apr. 27, 2004)), aff'd, Exchange Act Release No. 68210, 2012 SEC LEXIS 3496 (Nov. 9, 2012), appeal dismissed, No. 13-31 (2d Cir. Sept. 24, 2013). Similarly, the Commission notes that:

The principal purpose of this Form [BD] is to permit the Commission to determine whether the applicant meets the statutory requirement to engage in the securities business. The Form also is used by applicants to register as brokerdealers with certain self-regulatory organizations and all of the states. The Commission and the Financial Industry Regulatory Authority, Inc. maintain the files of the information on this Form and will make the information publicly available.

In this case, the materiality of information about the judgments and liens are particularly evident because the disclosure of such information was required by specific questions on the Form U4 and the Form BD. See Joseph S. Amundsen, Exchange Act Release No. 69406, 2013 SEC LEXIS 1148, at *41 (Apr. 18, 2013), aff'd, 575 F. App'x 1 (D.C. Cir. 2014). Moreover, "the judgments, bankruptcies, and liens [respondents] failed to disclose . . . constituted serious financial problems critical to evaluating his fitness to associate in the securities industry." Robert D. Tucker, Exchange Act Release No. 68210, 2012 SEC LEXIS 3496, at *32 (Nov. 9, 2012). We further find that respondents' failure to disclose the judgment and liens significantly altered the total mix of information available. Therefore, this information constituted material information that should have been disclosed timely on Dratel's Form U4 and DGI's Form BD.

* * * *
Because we find that respondents willfully failed to disclose material information on Dratel's Form U4 and DGI's Form BD, respondents are statutorily disqualified. 


4 During his testimony at the hearing, Dratel identified a notation he made on the envelope containing the notice "4/5/10," which, according to Dratel, could have been April or May of 2010.

5 Question 14M on the Form U4 asked: "Do you have any unsatisfied judgments or liens against you?" The General Instructions for Form U4 state that "[a]n individual is under a continuing 
obligation to amend and update information required by Form U4 as changes occur." 

6 Question 11K on the Form BD asks "Does the applicant have any unsatisfied judgments or liens against it?" The General Instructions for Form BD state that "[b]y law, the applicant must promptly update Form BD information by submitting amendments whenever the information on file becomes incomplete for any reason."

7 See Uniform Application for Broker Dealer Registration,

Pages 4 - 8 of the NAC Decision

Serious Versus Egregious

The OHO Hearing Panel found that Respondent Dratel's failures to timely amend his Form U4 and DGI's Form BD were "serious" but not "egregious" acts, and, accordingly, when referencing the FINRA Sanction Guidelines, the panel did not impose an enhanced sanction as suggested for the exacerbating option. In response to that finding, Complainant Department of Enforcement appealed: arguing that the violations were "egregious" and also urging that the NAC set aside the OHO Decision for the two causes of action at issue. Further, Complainant argued that OHO had wrongly taken into account Respondent Dratel's "statutory disqualification" status when determining sanctions, resulting in the misapplication of the Sanction Guidelines. In appealing OHO's sanction, Complainant asked the NAC to impose upon:
  • Respondent Dratel:  for the U4 violations: a three-month suspension and $15,000 fine
  • Respondent Dratel and DGI: for the Form BD violations: joint and several $10,000 fines
Not A Total Failure But An Untimely One

Although the NAC concurred with Complainant's assertion that OHO had misapplied the guidelines, the appellate body saw no reason to alter the sanctions imposed. Pointedly, NAC admonished that OHO had wrongly referenced the guidelines for "Failure to File or Filing False, Misleading or Inaccurate Forms or Amendments," when the more relevant guidelines were found under cases involving untimely or late filings - the distinction being between a "late" filing and an absolute "failure" to file. Citing the relevant "late filing" Sanction Guidelines, the NAC observed that the Guidelines do not recommend a suspension but do recommend a fine of between $2,500 and $25,000, as well as a fine between $5,000 and $50,000 for the firm or the responsible principal. The NAC did allow that in "egregious" cases, the enhancement could provide for a suspension of up to two years or a bar.

Apparently wrestling with semantics and perhaps reflecting the spectrum of opinion among the NAC panel, the NAC Decision sought to rebuff a finding that the untimely filings were "egregious," while, at the same time, finding that the violations: 

Involved aggravating factors that fully warrant an upward departure from the Guidelines. Because of the absence of mitigating factors and the presence of several aggravating factors, particularly the extended period of time that it took respondents to update the forms, and the importance of the information that they failed to timely update, we believe that a 15-day suspension for Dratel and a $5,000 fine for respondents,imposed jointly and severally, are appropriately remedial sanctions for these violations.

Pages 23 -24 of the NAC Decision

Bill Singer's Comment

Compliments to FINRA and the drafters of both the OHO and NAC Decisions for offering us both content and context. An excellent effort that provides insight into how a regulatory hearing panel wrestles with nuance, explanations, excuses, and defenses. Particularly revealing was the exercise in trying to find the correct terminology as among "serious," "aggravating" and "egregious." Impressive!