The Chief Compliance Officer, The Taxman, And FINRA

October 24, 2016

There are some regulatory cases that leave you discomforted. In those moments of unease, the regulator is right and on the side of the angels but you still feel sorry for the respondent, who did wrong, should have known better, probably did know better, and offered, at best, a lame excuse. Why do you feel sorry for such a person? Perhaps it's what makes us human.

Today's Blog presents a Financial Industry Regulatory Authority settlement in which the respondent's conduct was wrong. It's that simple. A text-book case of FINRA doing its job and the respondent not doing hers. Nonetheless, when the dust settles, it's tough not to feel sorry for her. It's tough not to wish that the sanctions were less severe, but that would have required her conduct to have been very different. Yes, justice was done here. But doing justice isn't always easy to behold. Sometimes we have to hold our nose and then swallow.

Case in Point

In response to the filing of a Complaint on March 31, 2016, by the Department of Enforcement of the Financial Industry Regulatory Authority ("FINRA"), Respondent Mary Delores Negro submitted an Offer of Settlement dated October 13, 2016, which the regulator accepted. Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent Mary Delores Negro consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs Mary Delores Negro, Respondent (Order Accepting Offer of Settlement, FINRA Office of Hearing Officers, 2014040813801, October 14, 2016) (the "Settlement Order").

Impressive Credentials

The Settlement Order asserts that Negro first became registered in 1985; and from March 2005 to her voluntary termination on June 2013, she was registered with FINRA member firm Harvest Capital LLC; and, thereafter, from July 1, 2013, to the present with FINRA member firm Stock USA Execution Service, Inc. as a:
  • General Securities Representative;
  • General Securities Principal;
  • General Securities Sales Supervisor;
  • Municipal Fund Securities Principal; and
  • Operations Professional
The Settlement Order asserts that Negro was the Chief Compliance Officer ("CCO") for both Harvest Capital and Stock USA.

IRS Tax Liens

The Settlement Order asserts that around 2006, Negro started receiving correspondence from the Internal Revenue Service ("IRS") that she had failed to pay taxes. Thereafter, the IRS filed the following five tax liens against Negro on the approximate dates noted and for the cited amount:
  • September 12, 2008 : $27,333.05
  • June 7, 2010: $32,684.00
  • August 29, 2011: $57,997.28
  • July 2, 2012: $37,167.19
  • May 31, 2013:$19,108.13
November 2012 IRS Meeting

The Settlement Order alleges that around November 2012, Negro met with an IRS Agent to discuss her tax issues and learned of the four federal tax liens that had filed against her in 2008 through July 2, 2012. She learned of the May 31, 2013, via her receipt of written notice from the IRS regarding the lien.

U4 Question 14M

The Settlement Order alleges that as CCO of Harvest Capital, Negro routinely reviewed the Uniform Application for Securities Industry Registration or Transfer ("Form U4") of individuals seeking employment at the firm, and, that such required her to review applicants' responses to Question 14M. Notwithstanding, FINRA deemed that Negro failed to timely disclose on her own Form U4 the federal tax liens.


In or about March 2014, Negro amended Stock USA's written supervisory procedures ("WSP") to include language requiring a registered or associated person to report all judgments and liens. Specifically, Negro's amendment included the following language:

Whenever information changes, the RP will promptly notify [Stock USA] of the change. [Stock USA] will then amend the Form U-4 within 30 days receipt of notice . . .RP's are required to disclose any unsatisfied judgments or liens, bankruptcy or compromise with a creditor to [Stock USA] . . .

Better Late Than Never? Maybe Not

The Settlement Order asserts that it was only sometime around May 2014 when Negro first disclosed to Stock USA her tax liens, and that said disclosure was prompted by an inquiry from FINRA. From May 2014 to about November 2014, the Settlement Order alleges that Negro:
updated her Form U4 to disclose the federal tax liens filed by the IRS in June 2010, August 2011, July 2012, and May 2013. At the time Negro updated her Form U4, each of these federal tax liens remained unsatisfied.

Apparently, Negro never disclosed the existence of the September 2008 IRS tax lien, which also remained unsatisfied.

Disclosure by the Rulebook

Article V of FINRA's By-Laws: Registered Representatives and Associated Person, provides as follows:

Application for Registration

Sec. 2. (a) Application by any person for registration with the Corporation, properly signed by the applicant, shall be made to the Corporation via electronic process or such other process as the Corporation may prescribe, on the form to be prescribed by the Corporation and shall contain:

(1) an agreement to comply with the federal securities laws, the rules and regulations thereunder, the rules of the Municipal Securities Rulemaking Board and the Treasury Department, the By-Laws of the Corporation, NASD Regulation, and NASD Dispute Resolution, the Rules of the Corporation, and all rulings, orders, directions, and decisions issued and sanctions imposed under the Rules of the Corporation; and
(2) such other reasonable information with respect to the applicant as the Corporation may require.

(b) The Corporation shall not approve an application for registration of any person who is not eligible to be an associated person of a member under the provisions of Article III, Section 3.

(c) Every application for registration filed with the Corporation shall be kept current at all times by supplementary amendments via electronic process or such other process as the Corporation may prescribe to the original application. Such amendment to the application shall be filed with the Corporation not later than 30 days after learning of the facts or circumstances giving rise to the amendment. If such amendment involves a statutory disqualification as defined in Section 3(a)(39) and Section 15(b)(4) of the Act, such amendment shall be filed not later than ten days after such disqualification occurs.

In addition to the above By-Law provision, FINRA Rule 1122: Filing of Misleading Information as to Membership or Registration, provides:

No 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.

Finally, the Uniform Application for Securities Industry Registration ("Form U4") asks the following:

Financial Disclosure

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?

Accordingly, the Settlement Order charged that Negro willfully failed to timely amend her Form U4 to disclose the five federal tax liens in violation of Article V, Section 2(c) of FINRA's By-Laws, FINRA Rule 1122, and FINRA Rule 2010.

The Impact of Willfulness

The finding of willful (intentional) failure to timely disclose a material fact as required on the Form U4 will expose you to a statutory disqualification. For those of you who enjoy a good puzzle, here's the language from the cited section of the Securities Exchange Act:

(39) A person is subject to a ''statutory disqualification'' with respect to membership or participation in, or association with a member of, a self-regulatory organization, if such person
. . .

(F) has committed or omitted any act, or is subject to an order or finding, enumerated in subparagraph (D), (E), (H), or (G) of paragraph (4) of section 15(b) of this title, has been convicted of any offense specified in subparagraph (B) of such paragraph (4) or any other felony within ten years of the date of the filing of an application for membership or participation in, or to become associated with a member of, such self- regulatory organization, is enjoined from any action, conduct, or practice specified in subparagraph (C) of such paragraph (4), 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.


In accordance with the terms of the Settlement Order, FINRA imposed upon Respondent a $5,000 fine and a three-month suspension from association with any FINRA member in any capacity. As noted in the Settlement Order:

In light of Respondent's limited ability to pay, the fine shall be payable with an initial amount equal to 25% of the fine and the remaining amount payable over a 24-month period, commencing with the first payment to be made on the 1" day of the month following notice that the Offer of Settlement has been accepted and every month thereafter for a 24-month period.

Bill Singer's Comment

Online FINRA BrokerCheck records as of October 24, 2016, provide this "Statement" from Negro concerning her August 2011 $57,997 IRS tax lien:


Although the settlement appears to have been resolved through a three-month suspension and a payment plan for the $5,000 fine, that is not the case because of the finding that Negro had willfully omitted to state a material fact on a Form U4. That willfulness brings into play Section 3(a)(39)(F) of the Securities Exchange Act of 1 934 and Article III, Section 4 of FINRA's By-Laws, which subjects her to a statutory disqualification.