Yet another new year. Yet another FINRA regulatory settlement involving the alleged willful nondisclosure of tax liens. Yet another year and another case in which we are left to ponder what exactly rises to willfully failing to disclose according to FINRA's rules. Frankly, many (likely most) of these nondisclosure cases are spot on with their accusations that a given respondent intentionally, knowingly, willfully, and with the intent to deceive decided against disclosing the existence of tax liens. The point of concern, however, is not with the 99% who are likely guilty but with the 1% who are not.
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, Joe Edward Poe Jr. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Joe Edward Poe Jr., Respondent (AWC . 2015043352501, December 27, 2016).
In 1987, Poe was first registered and from June 2009 through February 2015, he was registered with FINRA member firm ACAP Financial, Inc.
Oklahoma State Tax Warrants
The AWC asserts that in 2004 and 2005, the Oklahoma Tax Commission recorded two tax warrants against Poe for unpaid state taxes totaling more than $30,000. Also, the AWC alleges that Poe received contemporaneous notice of the recording of each warrant and just before joining ACAP in May 2009, he knew that the warrants remained unsatisfied. Further, the AWC asserts that:
These tax warrants were the equivalent of tax liens and constituted material information that required disclosure on Poe's Form U4.
Federal Tax Lien
The AWC further asserts that about a year after joining ACAP, in June 2010, the Internal Revenue Service recorded about a $300,000 federal tax lien against Poe for unpaid taxes. The AWC asserts that Poe received notice of the Federal tax lien in June 2010.
The Rule Book
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 Or Transfer ("Form U4") asks the following:
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?
The AWC alleges that when Poe first joined ACAP, he had "willfully" failed to disclose the State Tax Warrants on his Form U4. Further, the AWC alleges that after having registered with ACAP, Poe "willfully" failed amend his Form U4 to disclose the tax warrants and the IRS tax lien. FINRA deemed Poe's conduct to constitute violations of Article V, Section 2(c) of the FINRA ByLaws, NASD IM-1000-1 (before August 17,2009), and FINRA Rules 1122 (on or after August 17,2009) and 2010.
In accordance with the terms of the AWC, FINRA imposed upon Poe a $10,000 fine and a six-month-suspension from association with any FINRA member firm in any capacity. Pursuant to a finding of willful nondisclosure, the AWC contains the following paragraph:
I understand that this settlement includes a finding that I willfully omitted to state a material facts on a Form U4, and that under Section 3(a)(39)(F) ofthe Securities Exchange Act of 1 934 and Article III, Section 4 of FINRA's By-Laws, this these omissions make me subject to a statutory disqualification with respect to association with a member.
Bill Singer's Comment
Let me refer you to the thoughts of veteran industry lawyer Alan Wolper, Esq. "Statutorily Disqualified? FINRA Says 'Deal With It'" (Broker Dealer Law Corner, by Alan Wolper, Esq. November 18, 2016):
The problem is, it is difficult to figure out exactly when FINRA will deem a failure to report a tax lien in a timely manner to be willful, and when it will not. I can personally attest that I have had a variety of clients tell essentially the same story to FINRA - I did not know about the lien, or I did not know I had to report the lien - yet come away with widely different outcomes. On one end of the spectrum, I have had FINRA take no formal action, and choose to content itself by issuing a Cautionary Action letter. In the middle, I have had FINRA take formal action, but agree the violation was not willful. Finally, on the other extreme end of the spectrum, FINRA has taken formal action and deemed the violation to be willful. It can be extremely frustrating to make the same argument over the same set of facts, but get different results.
. . .
Finally, one more thing about statutory disqualification: FINRA could care less that a finding of willfulness renders a registered representative SD'd. As the Department of Enforcement recently put it in a brief it filed in one of my cases,
statutory disqualification is not a FINRA sanction; it is a status that flows as a matter of course from predicates enumerated in the Exchange Act. If [Respondent] believes that statutory disqualification is an unduly harsh outcome for willfully violating U4 reporting requirements, he should address his grievances to the SEC and Congress. The SEC and the NAC surely would not want FINRA hearing panels to engage in the equivalent of jury nullification by declining to find willfulness where it has been proved.
What an outrageously callous remark for the staff to make. At least one hearing panel, over a decade ago, had the courage to state the obvious: "A finding of willfulness, though not an element of the offense under Rule 2110, has serious collateral consequences." That FINRA staff consciously disregards these consequences, however, potentially career-ending consequences, just blows me away.
Clearly, the existence or non-existence of a statutorily disqualifying event is relevant. And I know this because the Sanction Guideline for inaccurate U-4 cases includes as one of the Principal Considerations "[w]hether [the] failure resulted in a statutorily disqualified individual becoming or remaining associated with a firm." The fact that whether someone is SD'd or not is expressly pertinent to the determination of the appropriate sanction necessarily means it is not just a material fact, but an important one. For FINRA simply to pretend it doesn't care that its charging decision will dictate whether or not a respondent gets SD'd, or that such a finding isn't a "sanction," is both short-sighted and unfair.
Bravo Mr. Wolper! Well said!!
Finally, let me present you with a bit of a puzzle -- a thought piece, if you will.
After having waived his rights to notice, a hearing, to appear and present evidence, to appeal, and other procedural rights, Respondent Clark consented to the entry of an Order and Findings fo Fact and the Conclusions of Law. In the Matter of the Investment Advisor Representative Registration and the Agent Registration of Bruce Russell Clark (Disciplinary Order, REG16-CAF-05; Texas State Securities Board, December 22, 2016). In pertinent part, the Texas Disciplinary Order asserts that from 1996 through 2016, Respondent had five liens that he had failed to disclose on his Form U4 until September 10, 2016 (three liens from 1996, 1997, and 2002) and August 23, 2016 (two liens from 2013 and 2014).
Although the Board concluded as a matter of
law that Respondent had engaged in "failure to disclose," nowhere in that order
was the misconduct deemed "willful." Further, although Respondent was "reprimanded"
and ordered to pay a $5,000 administrative fine, the Order grants his
registration as an investment advisor and also as an agent. Odd, isn't it, how regulatory findings and sanctions vary from one regulator to another.