Inconsistent FINRA Findings of Willful Nondisclosure Persist

March 13, 2017

Tax season is upon us and many Wall Street registered persons may be unable to pay their taxes. It's not something unique to the securities industry. Lots of folks can't pay their tax bills. In some cases, they miscalculated what they owed. In other cases, misfortune or folly has wiped out their bank accounts. For those in the biz, however, on top of trying to come up with some work-out for your tax debt, there is also the obligation to disclose various financial developments to your employer and regulators. In some cases the mere whiff of financial difficulties may get you fired: A consideration that often prompts such debtors to cross their fingers, not disclose what they know they must, and hope that no one finds out. It's a lousy bet and a gambit that may not only end with the likely discovery of the debts but it may cost the non-disclosing individual a career.

The Rule Book

Article V of FINRA's By-Laws: Registered Representatives and Associated Persons, 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:

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?

Statutory Disqualification for Willful Non-Disclosure

If an associated person willfully fails to disclose financial issues such as tax liens, Wall Street's regulators and the federal courts would likely deem that individual subject to a statutory disqualification. Under Section 3(a)(39) of the Exchange Act, in pertinent part, statutory disqualification attaches if:

such person . . . has willfully made . . . in any application for membership or participation in, or to become associated with a member of, a self-regulatory organization, . . . any statement which was at the time, and in 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 . . . report . . . any material fact which is required to be stated therein."

As noted by the Securities and Exchange Commission ('SEC") when the federal regulator reviews challenges to a finding by FINRA that a respondent's conduct was "willful":

[A] willful violation of the securities laws means "intentionally committing the act which constitutes the violation."16 The laws do not require that the actor "also be aware that he is violating one of the Rules or Acts."17 If McCune voluntarily committed the acts that constituted the violation, then he acted willfully.


Footnote 16: Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); see also Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (citing Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)); Craig, 2008 WL 5328784, at *4 (finding that respondent willfully violated IM 1000-1 and NASD Rule 2110 by providing false answers on his Form U4).

Footnote 17: Wonsover, 205 F.3d at 414 (citing Gearheart & Otis, Inc. v. SEC, 348 F.2d 798 (D.C. Cir. 1965)).

In the Matter of the Application of Michael Earl McCune for Review of Disciplinary Action Taken by FINRA (Opinion, SEC, '34 Act Rel. No. 77375; Admin. Proc. File No. 3-16768 / March 15, 2016).

Accordingly, a finding of willful nondisclosure in a FINRA Letter of Acceptance, Waiver and Consent settlement typically contains the following admonition:

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) of the Securities Exchange Act of 1934 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.

Case In Point: Eckstein AWC

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, Tammy Sue Eckstein, Respondent submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Tammy Sue Eckstein, Respondent (AWC  2015045596001, March 2, 2017).

The AWC asserts that Ecsktein was first registered in 1996 with FINRA member firm Park Avenue Securities LLC, where she remained until September 2010, at which time she was registered with FINRA member firm MML Investors Services, LLC, where she purportedly remained until April 2015.

Three Tax Liens

The Eckstein AWC asserts in pertinent part:

On September 2, 2008, the State of Indiana filed a tax lien against Eckstein. On August 13, 2010, the State of Indiana filed a second tax lien against Eckstein. On December 4, 2012, the State of Indiana filed a third lien against Eckstein. Eckstein became aware of the September 2008 tax lien on or about November 2010. She became aware of the August 2010 and December 2012 tax liens in December 2012. Eckstein failed to amend her Form U4 to reflect the three state tax liens in violation of Article V, Section 2(c) of FINRA's By-Laws, as well as FINRA Rules 1122 and 2010.


In accordance with the terms of the Eckstein AWC, FINRA imposed upon her a $2,500 fine and a two-months suspension from associating with any FINRA member in all capacities.

BrokerCheck Disclosures

Online FINRA BrokerCheck records as of March 13, 2017, disclose that on April 3, 2008, Eckstein filed for Chapter 7 bankruptcy, for which she received a discharge on August 5, 2008.

Eckstein's BrokerCheck records also disclose under the heading "Customer Dispute - Closed-No Action / Withdrawn/Dismissed/Denied" that MML disclosed its receipt on May 12, 2015, of a customer complaint seeking $5,500 in damages based upon allegations that:


MML denied the customer's complaint on July 7, 2015.

Bill Singer's Comment

I read and re-read the Eckstein AWC and her BrokerCheck records and, frankly, I'm both puzzled and lost. The AWC doesn't seem to mince words: The charge was NOT that Eckstein filed her required tax lien disclosure late but, worse, that she "failed to amend her Form U4," as in she apparently never, ever made the necessary updates.

Given that the liens were filed from 2008 through 2012 (a period of four years) and given that the Eckstein AWC asserts that she "became aware" of the 2008 lien in 2010, and the 2010 and 2012 liens in 2012, the implication raised by FINRA that she did not file the required regulatory amendments as of her 2015 departure from the industry -- a period of between three to five years after she knew of the existence of the three liens.Notwithstanding that record, FINRA did not charge Eckstein with "willfully failing to disclose," which would have made her statutorily disqualified. Why was the finding not made? I have no idea because the AWC is inexplicably silent on what seems a compelling conclusion based upon the statement of facts.

If, in fact, FINRA found Eckstein's non-disclosure to be merely "inadvertent" rather than "willful," it sure as hell seems incumbent upon the self-regulatory organization to explain that rationale. I am not arguing that Eckstein's conduct was willful because FINRA specifically declined to make that charge. I am, however, arguing that the Eckstein AWC is unacceptable because it fails to explain the apparent disconnect from its allegations and its conclusions.

Let's consider another FINRA tax-lien settlement issued around the same time as the Eckstein AWC:

Case In Point: Misseri OS

In response to the filing of a FINRA Complaint on January 31, 2017, by FINRA's Department of Enforcement, Respondent Bernardo Misseri submitted an Offer of Settlement dated February 24, 2017, which the regulator accepted.  Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent Bernardo Misseri consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs Bernardo Misseri, Respondent (Order Accepting Offer of Settlement, FINRA Office of Hearing Officers, 2015046005901, March 3, 2017) (the "Misseri Order").

The Misseri Order asserts that he first became registered in 1998 and by 2009 was associated with FINRA member firm Legend Securities, Inc. By way of prior regulatory history, the Misseri Order asserts that:

In April 2006, in Department of Enforcement v. Bernardo Misseri. Disciplinary Proceeding No. E102003213801, Respondent submitted an Offer of Settlement and consented to the entry of findings and violations that he failed to disclose private securities transactions and an outside business activity in violation of NASD Conduct Rules 2110, 3030 and 3040. Respondent also consented to a two-year all capacities suspension and a $15,000 fine. In April 2006, the Offer of Settlement was accepted by the Office of Disciplinary Affairs.

As set forth in the Misseri Order:

Willful Failure to Update Form U4
(Article V, Section 2 of FINRA By-Laws, FINRA Rules 1122 and 2010)

Failure to Timely Disclose Tax Liens
2. During the Relevant Period, Respondent failed to disclose four unsatisfied federal tax liens and three unsatisfied state tax warrants (collectively referred to as the "Tax Liens") on his Form U4.
3. At all relevant times, Question 14M of the Form U4 asked, "Do you have any unsatisfied judgments or liens against you?"
4. If a registered representative affirmatively answers Question 14M on his Form U4, then he is required to provide detailed information about each unsatisfied judgment or lien, including the amount and filing date of the judgment or lien. The representative is required to make the disclosure within 30 days of learning ofthe facts that are required to be disclosed.  

Seven Tax Liens

As specified in the Misseri Order, FINRA asserted that he had willfully failed to timely disclose on his Form U4 seven tax liens (Ed: untimely Form U4 disclosure dates noted in parentheses):

New York State Tax Warrants
$37,321 filed on March 2, 2008 (March 28, 2014)
$11,884 filed on June 16, 2014 (June 19, 2015)
$6,746 filed on June 16, 2014 (June 19, 2015)

Internal Revenue Service Tax Liens
$217,256 filed on July 23, 2010 (March 28, 2014)
$14,564 filed on December 3, 2013 (March 28, 2014)
$37,847 filed on October 30, 2014 (June 19, 2015)
$7,662 filed on January 23, 2015 (June 19, 2015)

Untimely Disclosure of Compromise With Creditor

In addition to the allegations above for the willful untimely disclosure of the cited liens, the Misseri Order also alleged his willful failure to timely disclose a compromise with a creditor in the form of the May 26, 2010, settlement via the payment of $2,200 as a compromise of a $3,314 debt purportedly owed to LVNV Funding. That compromise was allegedly only first disclosed by Misseri on his Form U4 on March 28, 2014.


In accordance with the terms of the Misseri Order, FINRA imposed upon him a $5,000 fine and a three-month suspension from association with any FINRA member in any capacity. Pointedly, this is what is stated under the heading of "SANCTIONS":

It is ordered that Respondent be suspended for three months from association with any FINRA member in any capacity and pay a $5,000 fine. The fine shall be due and payable either immediately upon re-association with a member firm, or prior to any application or request for relief from any statutory disqualification resulting from this or any other event or proceeding, whichever is earlier.

SIDE BAR: Although an admonition is typically included in a FINRA AWC about the statutory disqualification impact of a finding of willful non-disclosure, no such admonition appears in the Misseri Order. Unlike the clear and direct statement in the typical AWC boilerplate that "these omissions make me subject to a statutory disqualification," no such language appears in the Misseri Order. As to why such inconsistency exists between two forms of FINRA regulatory settlement is puzzling.

BrokerCheck Disclosures

2013 IRS Lien

Online FINRA BrokerCheck records as of March 13, 2017, disclose under the heading "Judgment/Lien" that on August 4, 2013, the IRS filed a $217,156 tax lien against Misseri, which he purportedly learned about on February 28, 2014.

Settled Customer Dispute

Misseri's BrokerCheck records also disclose under the heading "Customer Dispute - Settled"  that on September 17, 2013, Legend received a FINRA Arbitration Complaint for $250,000 in damages based upon allegations that:


The matter was settled on April 15, 2016, for $45,000 and Misseri is noted as having contributed the full amount $22,500.

Denied Customer Disputes

Misseri's BrokerCheck records also disclose under the heading "Customer Dispute - Closed-No Action / Withdrawn/Dismissed/Denied"  four matters:

Disclosed by Legend:
  • A FINRA Arbitration Complaint for $50,000 in damages filed February 22, 2016, based upon allegations that:
Statement of Claim Alleges: Unsuitable recommendations, lack of diversification, negligence, breach of fiduciary duty, and breach of contract, violations of: the Iowa Uniform Securities Act, FINRA Rule 2010, FINRA Rule 2150, NYSE Rule 401, and NYSE Rule 405.

The matter was settled on August 12, 2016, for $50,000 and Misseri is noted as having contributed the full amount.

SIDE BAR: If this matter was "settled," why is it not disclosed under the heading of "Customer Dispute - Settled" ?
  • A customer complaint for $5,558 in damages received on August 24, 2014, based upon allegations that:

The matter is disclosed as "Closed/No Action" on September 5, 2014.

Disclosed by JP Turner:
  • A customer complaint for $15,985.49 in damags received on February 1, 2006,, based on allegations that:

The matter is disclosed as "Closed/No Action" on January 29, 2008.
  • A customer complaint for $150,000 in damags received on June 3, 2002, based on allegations that:

The matter is disclosed as "Closed/No Action" on September 4, 2002.

Pending Customer Disputes

Misseri's BrokerCheck records disclose under the heading "Customer Dispute - Pending" three matters:

Disclosed by Legend:
  • A FINRA Arbitration Complaint for $150,000 damages served on April 10, 2015, based on allegations that:
  • A $48,487.70 complaint for damages received on October 5, 2014:

Disclosed by J.P. Turner & Company LLC:
  • A $14,500 complaint for damages received on April 29, 2005:

Bill Singer's Comment

I included the BrokerCheck histories for both Eckstein and Misseri in order to show that filing of tax liens should often prompt compliance departments to engage in some forensic reviews of the subject registered person. Although liens may be sincerely contested by taxpayers as unwarranted, the inescapable fact exists that when individual are unable to honor their tax obligations, such circumstance raises concerns about the potential for conflicts of interests with customer relationships. Unquestionably, the filing of liens should prompt in-house compliance staff to review for evidence of excessive trading (to generate commissions) or inconsistent patterns of withdrawals from customer accounts. Consequently, today's Blog is not an attack on the need to ensure prompt regulatory disclosure of various financial events.

Of concern in today's blog is the lack of consistency and clarity in FINRA's approach to deeming conduct as "willful," with the exponential enhancement of sanctions to include a statutory disqualification -- the thermonuclear option for self regulation. FINRA owes it to the industry to promulgate a clear set of guidelines as to what constitutes willful non-disclosure and to provide comprehensive rationale when imposing such a finding. The facts in Eckstein and Misseri are such as to place FINRA in the uncomfortable posture of making irreconcilable, disparate findings for seemingly similar misconduct. When a regulator crosses such a line, it's deliberations may become unacceptably arbitrary and capricious. That is a disservice to the regulator, the industry it regulates, and the public it is charged with protecting.

Also READ:

FINRA Settles Non Disclosure Of Tax Liens Without Finding Willfulness  ( Blog,November 11, 2016):

And now we arrive at my point: The AWC should have indicated why it did not deem Greenberg's non-disclosures to rise to the level of "willful." The defense bar and pro se respondents need every bit of insight and every bit of information they can get from the self-regulatory organization when one case goes against the grain in such stunning fashion.

Tax Liens And Wall Street Disqualification ( BlogJanuary 12, 2017):

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.