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FINRA Needs To Better Coordinate Its Admonition of Statutory Disqualification
January 3, 2020
A stockbroker who willfully omitted to state a material fact on a Form U4 will likely be deemed statutorily disqualified. You may have settled for $1. You may agree to a 1 day suspension. You may think you dodged the bullet -- however, if you agreed to having willfully failed to update your U4, after the dollar is paid and the day served, you may be in for a nasty surprise. Many of those shocked folks didn't retain a lawyer and thought they had negotiated a great deal with FINRA. All of which explains why FINRA often admonishes in its settlement agreement that an industry disqualification is a likely consequence of any finding of willful omission, regardless of the fines or suspensions imposed. In a recent case, however, FINRA didn't seem to issue its typical warning.
2016 FINRA Settlement
In response to the filing of a Complaint on March 21, 2016, by the Financial Industry Regulatory Authority's ("FINRA's") Department of Enforcement, Respondent Howard Brian Landers submitted an Offer of Settlement dated September 28, 2016, which the regulator accepted. Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent Howard Brian Landers consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs Howard Brian Landers, Respondent (Order Accepting Offer of Settlement, FINRA Office of Hearing Officers, 2013035298602, September 30, 2016) (the "FINRA 2016 Settlement Order").
https://www.finra.org/sites/default/files/fda_documents/2013035298602_FDA_SL677610
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The FINRA 2016 Settlement Order asserts that Landers was first registered in 1979 and since April 2002, he was associated with FINRA member firm Bridgehouse Securities LLC, where he had served as the firm's Chief Executive Office, Chief Compliance Officer, and Financial and Operations Principal. As set forth under the heading of "Summary":
During the period from September 2012 through June 2014, Landers willfully failed to timely amend his Uniform Application for Securities Industry Registration or Transfer ("Form U4") to disclose four unsatisfied Internal Revenue Service ("IRS") tax liens totaling approximately $375,704 that were filed against him in September 2012, April 2013 and June 2 2013. By engaging in such misconduct, Landers willfully acted in contravention of Article V, Section 2(c) of FINRA's By-Laws and violated FINRA Rules 1122 and 2010.
In accepting Lander's Offer of Settlement, FINRA imposed upon him a three-month suspension from association with any FINRA member in all capacities; and in light of his financial status, no monetary sanctions were imposed. Pointedly, the FINRA 2016 Settlement Order alleges in part that:
Based on the foregoing, Respondent willfully omitted to state a material fact on a Form U4 in contravention of Article V, Section 2(c) of FINRA's By-Laws and in violation of FINRA Rules 1122 and 2010.
The Rulebook
Section 3(a)(39) of the Securities Exchange Act provides [Ed: highlighting added]:
(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.
Article III of FINRA's By-Laws: Qualifications of Members and Associated Persons provides:
Definition of DisqualificationSec. 4. A person is subject to a "disqualification" with respect to membership, or association with a member, if such person is subject to any "statutory disqualification" as such term is defined in Section 3(a)(39) of the Act.
If you opt to settle a finding by FINRA that you were guilty of willful nondisclosure, the self-regulator's 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 , 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.
If you do not opt to settle and demand your day in court, a FINRA OHO Decision may state the following:
For willfully failing to timely update his Form U4, in violation of Article V, Section 2(c) of NASD's and FINRA's By-Laws, NASD IM-1000-1, NASD Rule 2110, and FINRA Rules 1122 and 2010, Respondent is suspended from associating with any FINRA member firm in any capacity for [INSERT TIME] and fined [INSERT AMOUNT]. Because his misconduct was willful, and the information he failed to disclose was material, he is subject to statutory disqualification.
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.
Bill Singer's Comment: My understanding is that a willful failure to timely amend a Form U4 would subject a Respondent to a statutory disqualification under Section 3(a)(39) of the '34 Act. I find nothing in the FINRA 2016 Settlement Order that either mirrors the admonition of disqualification provided in most AWCs or in FINRA OHO Decisions.
2019 FINRA 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, Howard Brian Landers submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Howard Brian Landers, Respondent (FINRA AWC 2018060415301) (the "FINRA 2019 AWC")
https://www.finra.org/sites/default/files/fda_documents/2018060415301
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The FINRA 2019 AWC asserts that from March 2018 through May 2019, Landers associated with FINRA member firm Frontier Solutions, LLC ("Frontier"). Under "Relevant Disciplinary History" the AWC asserts:
On September 30, 2016, FINRA issued an Order Accepting Offer of Settlement ("Order") in which he consented to a three-month all capacities suspension for willful violations of Article V, Section 2(c) of FINRA's By-Laws and FINRA Rules 1122 and 2010 for failing to timely amend his Form U4 to disclose tax liens. No fine was imposed based upon Landers' demonstrated inability to pay.
2018 Consultancy
As alleged in the 2019 FINRA AWC:
Landers was subject to a statutory disqualification as a result of the willful violations in the Order. In March 2018, Landers became associated with Frontier through a consulting agreement with the firm. On August 17, 2018, after Landers' Form U4 was filed at Frontier, FINRA's Registration and Disclosure Department notified Landers in writing that Landers was statutorily disqualified and he could not associate with the firm unless FINRA approved a Membership Continuance Application ("MC-400"). On September 6, 2018, Frontier submitted a MC-400 seeking approval of Landers' association with the firm. The MC-400 was not approved and was withdrawn by Frontier in May 2019. Nonetheless, during the Relevant Period, Landers associated with Frontier while statutorily disqualified by: conducting exams of Frontier branch offices; reviewing and approving Frontier registered representatives' outside business activities and private securities transactions requests; filing Forms U4 and US on behalf of Frontier for its registered representatives; reviewing requests from regulators and responding to regulators on behalf of Frontier, including requests from FINRA; and holding himself out to third parties as Frontier's Chief Compliance Officer.As a result of the foregoing, Landers willfully violated Article III, Section 3(b) of FINRA's By-Laws and FINRA Rule 2010.
That above explanation by FINRA is a tad too slick for my tastes. First off, how the hell did Landers, who was subject to a statutory disqualification, become associated with Frontier "through a consulting agreement?" Why the hell is FINRA apparently first notifying Landers in August 2018 that he was not eligible to associate with a member firm because he was statutorily disqualified -- that admonition should have been set out in the 2016 Order.
2017 Bankruptcy
Making matters worse for Landers, the 2019 FINRA AWC now tacks on yet another willful failure allegation:
Question 14K(1) of the Form U4 asks whether within the past 10 years "have you made a compromise with creditors, filed a bankruptcy petition or been the subject of an involuntary bankruptcy petition?" Landers answered no. However, on July 21, 2017, a Voluntary Petition for Individuals Filing for Bankruptcy was filed in the Southern District of Florida on behalf of Landers. Landers signed the bankruptcy petition and was aware of the bankruptcy petition at the time it was filed. Landers did not disclose the bankruptcy petition on his Form U4 until February 10, 2019 after FINRA staff inquired of Landers why he failed to disclose the bankruptcy. Accordingly, Landers willfully failed to timely disclose a reportable event, which was material information.As a result of the foregoing, Landers willfully violated FINRA's By-Laws Article V, Section 2(a) and FINRA Rules 1122 and 2010.
In accordance with the terms of the 2019 FINRA AWC, FINRA imposed upon Landers a two-year suspension from association with any FINRA member in any capacity. In light of Landers' continued financial status, FINRA declined to impose any monetary sanction. Finally -- and perhaps belatedly -- FINRA made sure to include the following admonition in its AWC:
Respondent understands that this settlement includes a finding that he willfully omitted to state a material fact 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 omission makes him subject to a statutory disqualification with respect to association with a member.
Bill Singer's Comment
I find the omission of the statutory disqualification admonition in the FINRA 2016 Settlement Order to be both inappropriate and troubling. To be clear -- I am unsympathetic to Landers and, frankly, shocked that Frontier even hired him without first checking with FINRA. If nothing else, the FINRA 2016 Settlement Order contains enough serious allegations of misconduct that a member firm should make a phone call to the self-regulator before undertaking such a hire (consulting agreement or not) -- or at least ask the firm's outside counsel if there's any issue to be concerned about.
There is no assertion that Landers was represented by legal counsel during his negotiations attendant to either the 2016 Order or the 2019 AWC. Landers may well have represented himself pro se. If that was the case, then the omission of the statutory disqualification in the 2017 Order is far more significant and troubling. Nonetheless, to its credit, FINRA included the necessary statutory disqualification warning in its 2019 AWC.
Hopefully, FINRA will consider the inconsistency between its statutory disqualification references in its Orders Accepting Settlements and its AWCs.
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