FINRA NAC Affirms OHO But Eliminates Heightened Supervision

October 4, 2021

In 2020, a FINRA Office of Hearing Officers ("OHO") Hearing Panel found that Respondent William Joseph Kielczewski had engaged in private securities transactions, made false statements to his member firm employer, and willfully caused the firm to file a misleading initial Uniform Application for Securities Industry Registration or Transfer ("Form U4") and four Form U4 amendments.  FINRA Department of Enforcement, Complainant, v. William Joseph Kielczewski, Respondent (FINRA Office of Hearing Officer Extended Hearing Panel Decision, Disc. Proc. No 2017054405401 / May 15, 2020). In imposing sanctions on Kielczewski, the OHO Panel fined him $5,000, suspended him for 18 months from association with any FINRA member firm in all capacities, ordered him to requalify by examination, and as a condition to reassociation after his suspension, required that he be placed on one year's heightened supervision. The OHO Decision offers this brief summary of Respondent Kielczewski [Ed: footnotes omitted]:

Kielczewski entered the securities industry in June 1999. Over his nearly two-decade career, Kielczewski was associated with two FINRA-regulated broker-dealers: Fifth Third Securities ("Fifth Third"), a subsidiary of Fifth Third Bank, and Huntington Investment Company ("Huntington" or the "Firm"), a subsidiary of Huntington Bank. Kielczewski worked at Fifth Third from June 1999 until November 25, 2013. He obtained his Series 7 (General Securities Representative) and Series 63 (Uniform Sales Agent) securities licenses in November 1999 and February 2000, respectively.

After Kielczewski left Fifth Third, Huntington hired him as its managing director of institutional sales. He began on January 8, 2014, and worked in its Toledo, Ohio office. He was associated with Huntington as a general securities representative from January 15, 2014, until April 26, 2017, when the Firm involuntarily terminated his employment. In a Uniform Termination Notice of Securities Industry Registration (Form U5) dated May 25, 2017, Huntington reported to FINRA that it had terminated Kielczewski after concluding he had "misrepresented activity relating to an OBA [outside business activity], and engaged in private securities transactions without firm approval . . . ." At the time of the hearing, Kielczewski was not associated with a FINRA member firm. But from June 2017 until at least the time of the hearing, he was the president and chief investment officer of a registered investment advisory company. 

The alleged misconduct in this disciplinary proceeding occurred during Kielczewski's association with Huntington. But its roots began earlier, when Kielczewski was near the end of his association with Fifth Third. 

at pages 2 - 3 of the OHO Decision

As to the allegations in FINRA's Complaint against Respondent Kielczewski, this is how they are summarized:

[F]INRA's Department of Enforcement filed a Complaint charging that Kielczewski participated  in private securities transactions involving firm customers and totaling over $10 million without first notifying his firm in writing of his participation in them.

The Complaint also charges Kielczewski with falsely representing to his firm that he was merely a passive owner in the fund and did not solicit investments for it. According to the Complaint, he actively engaged in fund-related activities, including promoting the fund to potential investors; facilitating their investments in the fund; reviewing and revising the fund's promotional materials and quarterly portfolio reports; and occasionally suggesting to the fund's trader that he should purchase certain securities for the fund. Finally, Kielczewski is charged with willfully causing the firm to file a misleading initial Uniform Application for Securities Industry Registration or Transfer (Form U4) and four Form U4 amendments stating that he was a silent minority partner in the fund's investment manager and had "a passive position in which [his] personal monies [were] being invested in non investment grade [mortgage-backed securities]." But, according to Enforcement, Kielczewski actively engaged in fund-related activities.

at Page 2 of the OHO Decision

OHO Rationale

In providing the rationale for its findings and sanctions, the OHO Panel concluded that [Ed: footnotes omitted]:

for engaging in private securities transactions, making false statements to his member firm employer, and willfully causing the Firm to file a misleading initial Form U4 and four Form U4 amendments, Kielczewski should be suspended for 18 months from association with any FINRA member firm in all capacities and fined $50,000. The Guidelines provide that requiring requalification is appropriate where "a respondent's actions have demonstrated a lack of knowledge or familiarity with the rules and laws governing the securities industry." The evidence shows that Kielczewski failed to appreciate his responsibilities under the securities laws and would benefit from focusing on the securities rules and regulations. For these reasons, we find that requalification would be remedial here. We therefore order Kielczewski to requalify by examination as a registered representative before again acting in that capacity.

Finally, we impose an additional remedial sanction. Adjudicators may design sanctions other than those specified in the Guidelines. For example, they may require a firm to implement heightened supervision of certain individuals. We believe that a heightened supervision requirement would emphasize to Kielczewski the importance of complying with the securities laws and prevent the recurrence of his violative conduct. Accordingly, we require that as a condition to reentry after his suspension, Kielczewski may only become associated with a member firm that agrees in writing to place him on heightened supervision for one year. This requirement shall remain in effect until Kielczewski has been under heightened supervision by one firm for one year.

at Pages 46 - 47 of the OHO Decision

NAC Appeal

Kielczewski appealed the OHO Decision to FINRA's National Adjudicatory Council ("NAC"), where he conceded liability for the PST; however:

On the two remaining charges, he contends that he did not mislead the firm and fully disclosed to Chapman his activities for Mariemont, including his intention to solicit Huntington customers and that Chapman agreed that he could sell the Fund to transitioning Fifth Third customers away from Huntington. Consequently, he argues that he did not cause Huntington to file misleading Forms U4. 

at Page 5 of FINRA Department of Enforcement, Complainant, v. William Joseph Kielczewski, Respondent (FINRA National Adjudicatory Council Decision, Disc. Proc. No 2017054405401 / September 30, 2021)

The NAC affirmed the OHO Decision's findings that Kielczewski engaged in undisclosed PSTs, made false statements to Huntington, and willfully caused Huntington to file a misleading initial Form U4 and four misleading amendments. Further, the NAC affirmed the OHO's sanctions but eliminated the heightened supervision requirement. 

Bill Singer's Comment

Compliments to both OHO and the NAC for penning articulate Decisions replete with sufficient content and context so as to render them intelligible and compelling. In particular, I applaud the NAC's superb explanation of how it applied FINRA's Sanction Guidelines to Kielczewski's misconduct and the balancing act that it played when weighing mitigation and aggravating factors [Ed; footnotes omitted]:

B. Applying the Guidelines to Kielczewski's Misconduct 

We determine that several Guideline-specific considerations, along with the General Principles and Principal Considerations relevant to all sanction determinations, are applicable to Kielczewski's misconduct and serve both to aggravate and mitigate sanctions. For more than two years, Kielczewski participated in five PSTs with five firm customers who invested over $10 million in the Fund. Kielczewski was an owner of the Fund that he was promoting to his customers and the PSTs had the potential for his monetary gain. While prior written notice of PSTs is required by rule, Kielczewski also never provided the firm with verbal notice of any of the PSTs, and he misled the firm about whether he was involved in soliciting firm customers to invest in the Fund. Indeed, Kielczewski intentionally and repeatedly misled Huntington in emails, compliance questionnaires, and five Forms U4 by denying that he was soliciting firm customers or otherwise participating in PSTs or other activities for the Fund. For nearly three years, Kielczewski repeatedly and intentionally misrepresented to Huntington that he was merely a passive investor in the Fund, that he did not solicit investments on behalf of the Fund, and that he devoted "0 hours" to Fund activities. As discussed above, the evidence at the hearing conclusively showed that these representations were false. The compliance documents and Forms U4 are important documents, both for the firm and FINRA, including the questionnaire that Kielczewski completed inaccurately in advance of FINRA's examination of the firm.  See McGee, 2016 FINRA Discip. LEXIS 33, at *88. 

We also agree with the Hearing Panel that certain factors serve, in part, to mitigate Kielczewski's misconduct. The firm terminated Kielczewski's employment based on the same conduct at issue in this case. The Guidelines direct that we consider whether Kielczewski has shown the termination "has materially reduced the likelihood of misconduct in the future." After observing Kielczewski's demeanor at the hearing, the Hearing Panel found him "chastened and contrite," noting that Kielczewski stated he "should have got documentation from legal and compliance before" he came to Huntington and, if he had, he "would not be here." We agree that the record reflects that there were discussions between Chapman and Kielczewski prior to Kielczewski officially joining Huntington concerning, to some degree, his ongoing relationship with Mariemont. Kielczewski states that no one, including him, "took the time to ask the hard questions about his relationship with Mariemont and private securities transactions." 

The Hearing Panel also found sincere Kielczewski's assurance that he is "sure going to do better in the future" and gave it some mitigative weight. The Hearing Panel balanced this expression of remorse with the fact that Kielczewski failed to acknowledge all his misconduct or fully appreciate its seriousness, particularly when he failed to express remorse until after the firm discovered his misconduct.

Kielczewski argues that the sanctions imposed by the Hearing Panel should be reduced
substantially. For participating in PSTs, he contends a 60-day suspension is appropriate and argues the remainder of the sanctions should be dismissed. We disagree that the factors he highlights further mitigate his misconduct. Kielczewski argues that the sanctions here are higher than in other cases. Appropriate sanctions, however, are dependent upon the facts and circumstances of each case and "cannot be precisely determined by comparison with action taken in other proceedings." See Steven Robert Tomlinson, Exchange Act Release No. 73825, 2014 SEC LEXIS 4908, at *40 (Dec. 11, 2014), aff'd, 637 F. App'x 49 (2d Cir. 2016). And, indeed, none of the cases upon which Kielczewski relies encompass the facts and circumstances of this one. The dollar amount of Kielczewski's selling away is substantially higher, and he repeatedly
misled his firm about the PSTs and other activity for the Fund.
Kielczewski argues the customers who invested in the Fund suffered no harm. Lack of financial customer harm is not mitigating generally and is particularly not mitigating here when Kielczewski failed to disclose the PSTs. "[T]he violations at issue harmed the customers by depriving them of [the firm's] supervision of their investments." Mielke, 2015 SEC LEXIS 3927, at *63. Kielczewski's undisclosed PSTs, coupled with his false responses on Huntington's compliance questionnaires, and repeated in emails to firm supervisors, "sidestepped [the firm's] supervision of his activities and deprived [Huntington] of the opportunity to protect itself and . . . investors." See Seol, 2019 FINRA Discip. LEXIS 9, at *48-49. 

We conclude that there are numerous aggravating factors, and several mitigating factors, that support the Hearing Panel's 18-month suspension, $50,000 fine, and requalification order. We affirm these sanctions. Because Kielczewski is statutorily disqualified based on the finding that he willfully filed misleading Forms U4, we eliminate the heightened supervision requirement. A tailored heightened supervision plan will come more appropriately from the MC400 process, which is necessary should Kielczewski reapply for membership with a FINRA member.

at Pages 25 - 27 of the NAC Decision

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