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Misconduct Bricks In FINRA Wall of Statutory Disqualification
April 26, 2017In isolation, any number of acts may not seem to amount to all that big a deal when it comes to violations of in-house compliance policies or industry rules and regulations. A single example of a private securities transaction. An undisclosed civil judgment. A couple of measly tax liens. Just a few bricks -- not a wall. Then again, take a look at the wall and notice that it is, indeed, built by piling on just a few bricks and then a few more and a few more. Today's BrokeAndBroker.com Blog visits a FINRA work-site and we watch the regulators' bricklayers mix the mortar that seals the fate of one registered representative.
Case In PointFor 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, Leon Edward Dixon submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Leon Edward Dixon, Respondent (AWC 2016051430401, April 14, 2017).The AWC asserts that Dixon entered the securities industry in 1977, and from 1999 until his September 16, 2016, termination, he was associated with FINRA member firm AXA Advisors, LLC. The AWC asserts that Dixon had no prior disciplinary history with the Securities and Exchange Commission, FINRA, any other self-regulatory organization, or any state securities regulator. Start Me UpThe AWC asserts that during the relevant period from about April 2014 through October 2015, Dixon invested approximately $18,000 in a private start-up company that purportedly offered broadband and telecommunications services. Further, during the relevant period, Dixon allegedly solicited 15 AXA clients, who invested about $181,500 in the start-up. The AWC asserts that Dixon "facilitated those investments, including by assisting the Clients with sending payment checks to the Company." The AWC asserts that Dixon received about $15,000 from the start-up.FINRA deemed Dixon's role with the start-up to constitute a private securities transaction ("PST"). Not only did he fail to notify AXA of his PST but in his responses to the firm's Annual Compliance Questionnaires for 2014, 2015, and 2016, Dixon allegedly did not disclose his PST participation. FINRA deemed Dixon's PST conduct to constitute violations of NASD Rule 3040 and FINRA Rules 3280 and 2010.
Article V of FINRA's By-Laws: Registered Representatives and Associated Persons, provides:
Finally, the Uniform Application For Securities Industry Registration Or Transfer ("Form U4") asks the following:
SIDE BAR: To be clear, to be very clear: I get it when it comes to Dixon's alleged PST activities. To that extent, I have no issue with the self-regulatory organization's analysis of the cited conduct and its conclusion. On the other hand, c'mon, was it really necessary to get in that one last "facilitation" shot while Dixon is at the bottom of the PST pile? Facilitated those investments, including by assisting the Clients with sending payment checks to the Company? What the hell does that even mean? He gave them a pen to address an envelope? He gave them a free envelope? He addressed the envelope? He put a goddamn stamp on the envelope? At some point, enough is enough. FINRA doesn't need to pull the wings off of all the flies it catches.The Rule BookWall Street's associated persons are faced with some unique employment, compliance, and regulatory issues when confronted by liens, civil judgments, and bankruptcy. Consequently, it is critical to understand the applicable rules and regulations governing the disclosure of such unpaid obligations. Let's consider a few relevant components of that rule book:
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.
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.
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.
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?
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:
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."
The Securities and Exchange Commission ("SEC") recently affirmed a "willful" non-disclosure finding by FINRA, 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), and federal regulatory reiterated that:
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:[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)).
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.
Dixon's Civil Judgment and Tax Lien
FINRA Sanctions
The AWC asserts that on December 12, 2013, a $841,915.32 civil judgment was entered against Dixon, who purportedly learned of the civil judgment on or about December 17, 2013. Dixon failed to report the judgment via a Form U4 amendment until October 5, 2015.
Additionally, on March 9, 2016, the IRS allegedly filed a $9,567 tax lien against Dixon, who purportedly learned of the lien by August 2016. Dixon never reported the lien (which remains outstanding) via a Form U4 amendment.
FINRA deemed Dixon's belated and non-disclosures to constitute violations of Article V, Section 2(c) of FINRA's By-Laws, and FINRA Rules 1122 and 2010.
Willful Failure to Disclose
The AWC asserts that on August 8, 2016, the IRS filed a $21,559 tax lien against Dixon, who purportedly received relatively contemporaneous receipt of the Notice of Lien. Dixon never amended his Form U4 to disclose the lien, which remains outstanding.
FINRA deemed Dixon's non-disclosure of the August 2016 IRS tax lien to constitute his willful failure to timely amend his Form U4 in violation of Article V, Section 2(c) of FINRA's By-Laws, and FINRA Rules 1122 and 2010.
Discharged
Online FINRA BrokerCheck files as of April 25, 2017, disclose under the heading "Employment Separation After Allegations" that AXA "Discharged" Dixon on September 16, 2016, based upon allegations that:
RR discharged based upon the sale of securities outside the scope of his registration with the Firm, without the Firm's knowledge or approval.
In accordance with the terms of the AWC, FINRA imposed upon Dixon a $7,500 fine and a five-month suspension from association with any FINRA member firm in any capacity. Note that the willful failure to timely amend renders Dixon statutorily disqualified. Dixon's AWC includes this admonition:
I understand that this settlement includes a finding that I 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 Ili, Section 4 of FINRA's By-Laws, this omission makes me subject to a statutory disqualification with respect to association with a member. The sanctions imposed herein shall be effective on a date set by FlNRA staff.
Bill Singer's Comment
All in all, a persuasive and fair FINRA regulatory settlement.