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Wage Garnishments Are FINRA Smoke Signals
November 1, 2016
Among the legacies of the Great Recession is a large number of extant wage garnishments. For many associated persons, these reminders are professional embarrassments and believed to be the reason behind a lack of job offers or promotions. Be it legal or not, many employers likely do take unpaid judgments and liens into consideration when it comes to hiring, retention, and promotion. In a recent regulatory settlement by the Financial Industry Regulatory Authority, we see how one member firm failed to grapple with notices of garnishment against some of its employees. As the self-regulatory organization saw it, the firm should have inquired as to whether the garnishments indicated other likely disclosable financial issues such as bankruptcies and unpaid judgments or liens.
Case In Point
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, ICAP Corporates LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of ICAP Corporates LLC, Respondent (AWC 2014038964301, October 24, 2016).
Since 1996, ICAP has been a FINRA member firm operating as an inter-dealer broker that facilitates and executes securities transactions between broker-dealers, dealer banks and other financial institutions, and currently employing about 200 registered representatives. The AWC asserts that ICAP does not have any prior relevant disciplinary history with the Securities and Exchange Commission, any self-regulatory organization or any state securities regulator.
Disclosable Events
The AWC alleges that during the relevant time from January 2010 through December 2013, ICAP had failed to:
- amend or timely amend several Uniform Application for Securities Industry Registration or Transfer ("Form U4"); and
- establish and maintain a supervisory system and written supervisory procedures reasonably designed to ensure the timely reporting of disclosable events.
Specifically, the AWC alleges that during the relevant time, 7 ICAP associated persons:
Reported potential disclosable events on their ACQs, yet ICAP did not investigate the events or timely amend the individuals' Forms U4.
NOTE: Annual Compliance Questionnaires ("ACQs")
The AWC further alleges that during the relevant period, ICAP's Payroll Department
processed wage garnishment orders for three associated persons that indicated that there were unsatisfied liens or judgments associated with the garnishment action, but ICAP did not timely amend the individuals' Forms U4.
The Rulebook
Article V of FINRA's By-Laws: Registered Representatives and Associated Person provides as follows:
Application for RegistrationSec. 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.
Additionally the Form U4 asks the following:
Financial Disclosure14K. 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?
Inadequate Supervisory System
During the relevant period, the AWC also alleges that ICAP failed to implement an adequate supervisory system to review associated persons' ACQ responses for reportable events; and that the firm had inadequate supervisory procedures to ensure that its Payroll Department notified compliance/supervisory personnel to determine whether a garnishment order involved a reportable event.
Sanctions
FINRA deemed ICAP's failures to amend to constitute violations of Article V, Section 2(c) of FINRA's ByLaws
and FINRA Rule 2010; and the member firm's inadequate supervisory system to constitute violations of NASD Rule 3010
and FINRA Rule 2010.In accordance with the terms of the AWC, FINRA imposed upon ACAP a Censure and $40,000 fine.
Bill Singer's Comment
An interesting and challenging regulatory settlement from FINRA. Reduced to basics, the self-regulatory organization reminds the industry that effective compliance requires member firms to connect the dots -- and I wholeheartedly concur with that requirement. Effective in-house compliance and supervision cannot be an exercise in willful blindness. Compliance officers and supervisors are not paid to sleepwalk through the workweek. If you smell smoke, there's a good chance that somewhere, a fire is burning. If you see A and C, you should inquire as to whether the unseen B was involved. I could go on with the examples but this is something that all professional compliance staff understands. It's preaching to the choir -- except for that fact that there are always a few choirboys who are not doing what they're supposed to be doing, and those knuckleheads give everyone else a bad reputation.
The mechanics and limits of wage garnishment vary from state to state. Generally, a creditor must first secure a court judgment on the amount owed, and, thereafter, obtain an order directing an employer to garnish your wages. Typically exempted from the judicial collections process, however, are unpaid taxes, child support, and defaulted student loans. As set forth on the United States Department of Labor's "Employment Law Guide"
Who is CoveredTitle III of the Consumer Credit Protection Act (CCPA) is administered by the Wage and Hour Division (WHD). The CCPA protects employees from discharge by their employers because their wages have been garnished for any one debt, and it limits the amount of an employee's earnings that may be garnished in any one week. Title III applies to all employers and individuals who receive earnings for personal services (including wages, salaries, commissions, bonuses, and periodic payments from a pension or retirement program, but ordinarily does not include tips).Basic Provisions/RequirementsWage garnishment occurs when an employer is required to withhold the earnings of an individual for the payment of a debt in accordance with a court order or other legal or equitable procedure (e.g., Internal Revenue Service (IRS) or state tax collection). Title III prohibits an employer from discharging an employee because his or her earnings have been subject to garnishment for any one debt, regardless of the number of levies made or proceedings brought to collect it. Title III does not, however, protect an employee from discharge if the employee's earnings have been subject to garnishment for a second or subsequent debt.Title III also protects employees by limiting the amount of earnings that may be garnished in any workweek or pay period to the lesser of 25 percent of disposable earnings or the amount by which disposable earnings are greater than 30 times the federal minimum hourly wage prescribed by Section 6(a) (1) of the Fair Labor Standards Act of 1938. This limit applies regardless of how many garnishment orders an employer receives. The federal minimum wage is $7.25 per hour effective July 24, 2009.Title III permits a greater amount of an employee's wages to be garnished for child support, bankruptcy, or federal or state tax payments. Title III allows up to 50 percent of an employee's disposable earnings to be garnished for child support if the employee is supporting a current spouse or child, who is not the subject of the support order, and up to 60 percent if the employee is not doing so. An additional five percent may be garnished for support payments over 12 weeks in arrears.An employee's "disposable earnings" is the amount of earnings left after legally required deductions (e.g., federal, state and local taxes; Social Security; unemployment insurance; and state employee retirement systems) have been made. Deductions not required by law (e.g., union dues, health and life insurance, and charitable contributions) are not subtracted from gross earnings when the amount of disposable earnings for garnishment purposes is calculated.Title III's restrictions on the amount of wages that can be garnished do not apply to certain bankruptcy court orders and debts due for federal and state taxes. Nor do they affect voluntary wage assignments, i.e., situations where workers voluntarily agree that their employers may turn over a specified amount of their earnings to a creditor or creditors.Employee RightsTitle III will in most cases give wage earners the right to receive at least partial compensation for the personal services they provide despite wage garnishment. This law also prohibits an employer from discharging an employee because of the garnishment of wages for any single indebtedness. The Wage and Hour Division accepts complaints of alleged Title III violations.. . .Relation to State, Local, and Other Federal LawsIf a state wage garnishment law differs from Title III, the employer must observe the law resulting in the smaller garnishment, or prohibiting the discharge of an employee because his or her earnings have been subject to garnishment for more than one debt.