SEC Rejects Stockbroker Appeal of 2006 NASD Bar
October 5, 2017
A stockbroker decides to leave the securities
industry -- you fill in the blank as to why. About 16 months later, she has a
change of heart and decides to return. During her interviews with a Financial
Industry Regulatory Authority member firm, she is shocked to learn that she had been barred for failing
to respond to a FINRA demand for information. She says that she never got any notices from FINRA. She says that when she left the biz, she had voluntarily
resigned and had no customer complaints. What she didn't realize, however, is that a
customer had filed a complaint against her about a month after she had left her last firm.
Turns out, the firm rejected the complaint and the matter was dropped.
Unfortunately for the former stockbroker, FINRA had opened an investigation
into the allegations and repeatedly attempted to get various documents from her. At some point, FINRA gave up trying and notified her that she
would be suspended and then barred if she persisted in not responding. She
persisted. FINRA suspended and then barred her.
You might think
that the above is a very rare fact pattern. It isn't. In fairness to FINRA, too
many associated persons walk away from their industry jobs and fail to update their
residential address on the Central Registration Depository ("CRD"),
as is required. As such, we have a disconnect between an individual's
"last known address" on CRD and whatever their current address is.
That lays the foundation for many default regulatory proceedings that end with a Bar. There's only so many times that the home-room teacher is going to call "Bueller" before marking him absent.
In some cases, however, there is a reason
why the former associated person didn't reply. During my career as a lawyer
handling regulatory matters, both as a former regulatory lawyer and in private
practice, I have come across a somewhat common fact pattern in which an associated
person is caught in a rancorous divorce and has moved out of the marital abode.
The spouse who remains in the family's home may decide to rip up all sorts of
important legal, regulatory, and billing notices sent in the mail to the
soon-to-be-former spouse. That's one example of why FINRA notices don't always
get through.
Under some extraordinary circumstances, the good folks at FINRA have empathy, sympathy, and compassion, and they may re-open a matter where an associated person had failed to timely reply to demands for information. Unfortunately, FINRA isn't always quick to reconsider its actions, which means that you better be mindful of your obligations to update your address and to timely respond to regulatory demands.
The Rulebook
As is often best is such cases involving failures to timely respond, let's take a look at FINRA's pertinent rules when it comes to providing and maintaining information:
FINRA Rule 9552: Failure to Provide Information or Keep Information Current (effective November 2, 2015)
(a) Notice of Suspension of Member, Person Associated with a Member or Person Subject to FINRA's Jurisdiction if Corrective Action is Not Taken If a member, person associated with a member or person subject to FINRA's jurisdiction fails to provide any information, report, material, data, or testimony requested or required to be filed pursuant to the FINRA By-Laws or FINRA rules, or fails to keep its membership application or supporting documents current, FINRA staff may provide written notice to such member or person specifying the nature of the failure and stating that the failure to take corrective action within 21 days after service of the notice will result in suspension of membership or of association of the person with any member.
(b) Service of Notice of Suspension Except as provided below, FINRA staff shall serve the member or person with such notice (or upon counsel representing the member or person, or other person authorized to represent others under Rule 9141, when counsel or other person authorized to represent others under Rule 9141 agrees to accept service for the member or person) in accordance with Rule 9134 or by facsimile or email. A copy of a notice under this Rule that is served on a person associated with a member also shall be served on such member. Papers served on a member by facsimile shall be sent to the member's facsimile number listed in the FINRA Contact System submitted to FINRA pursuant to Article 4, Section III of the FINRA By-Laws, except that, if FINRA staff has actual knowledge that a member's FINRA Contact System facsimile number is out of date, duplicate copies shall be sent to the member by overnight or personal delivery in conformity with paragraphs (a)(1) and (3) and (b)(2) of Rule 9134. Papers served on a member by email shall be sent to the member's email address listed in the FINRA Contact System submitted to FINRA pursuant to Article 4, Section III of the FINRA By-Laws and shall also be served by either overnight or personal delivery in conformity with paragraphs (a)(1) and (3) and (b)(2) of Rule 9134. Papers served on a person by facsimile or email shall be sent to the person's last known facsimile number or email address and shall also be served by either overnight or personal delivery in conformity with paragraphs (a)(1) and (3) and (b)(1) of Rule 9134. Papers served on counsel for a member, or other person authorized to represent others under Rule 9141, by facsimile or email shall be sent to the facsimile number or email address that counsel or other person authorized to represent others under Rule 9141 provides and shall also be served by either overnight or personal delivery in conformity with paragraphs (a)(1) and (3) of Rule 9134. Service is complete upon sending the notice by facsimile or email, mailing the notice by U.S. Postal Service first class mail, first class certified mail, first class registered mail, or Express Mail, sending the notice through a service, or delivering it in person, except that, where duplicate service is required, service is complete when the duplicate service is complete.
(c) Contents of Notice A notice issued under this Rule shall state the specific grounds and include the factual basis for the FINRA action. The notice shall state when the FINRA action will take effect and explain what the respondent must do to avoid such action. The notice shall state that the respondent may file a written request for a hearing with the Office of Hearing Officers pursuant to Rule 9559. The notice also shall inform the respondent of the applicable deadline for filing a request for a hearing and shall state that a request for a hearing must set forth with specificity any and all defenses to the FINRA action. In addition, the notice shall explain that, pursuant to Rules 8210(a) and 9559(n), a Hearing Officer or, if applicable, Hearing Panel, may approve, modify or withdraw any and all sanctions or limitations imposed by the notice, and may impose any other fitting sanction.
(d) Effective Date of Suspension The suspension referenced in a notice issued and served under this Rule shall become effective 21 days after service of the notice, unless stayed by a request for a hearing pursuant to Rule 9559.
(e) Request for Hearing A member or person served with a notice under this Rule may file with the Office of Hearing Officers a written request for a hearing pursuant to Rule 9559. A request for a hearing shall be made before the effective date of the notice, as indicated in paragraph (d) of this Rule. A request for a hearing must set forth with specificity any and all defenses to the FINRA action.
(f) Request for Termination of the Suspension A member or person subject to a suspension pursuant to this Rule may file a written request for termination of the suspension on the ground of full compliance with the notice or decision. Such request shall be filed with the head of the FINRA department or office that issued the notice or, if another FINRA department or office is named as the party handling the matter on behalf of the issuing department or office, with the head of the FINRA department or office that is so designated. The head of the appropriate department or office may grant relief for good cause shown.
(g) Settlement Procedure Uncontested offers of settlement shall be permitted under this Rule and shall conform to the requirements of Rule 9270, except that, if an uncontested offer of settlement, made under Rule 9270(e) after a hearing on the merits has begun, is accepted by the Hearing Officer, the Hearing Officer shall issue the order of acceptance, which shall constitute final FINRA action. Contested offers of settlement shall not be considered in proceedings initiated under this Rule.
(h) Defaults A member or person who is suspended under this Rule and fails to request termination of the suspension within three months of issuance of the original notice of suspension will automatically be expelled or barred.
FINRA Rule 9134: Methods of, Procedures for Service
(a) Methods
The following methods of service are permitted:
(1) Personal Service
Personal service may be accomplished by handing a copy of the papers to the person required to be served; leaving a copy at the person's office with an employee or other person in charge thereof; or leaving a copy at the person's dwelling or usual place of abode with a person of suitable age and discretion then residing therein;
(2) Service by Mail by U.S. Postal Service
Service by mail may be accomplished by mailing the papers through the U.S. Postal Service by using first class mail, first class certified mail, first class registered mail, or Express Mail, except that a complaint shall be served upon a Respondent by U.S. Postal Service first class certified mail or Express Mail; or
(3) Service by Courier
Service by courier may be accomplished by sending the papers through a courier service that generates a written confirmation of receipt or of attempts at delivery.
(b) Procedures
(1) Service on Natural Persons
Case In Point
Papers served on a natural person may be served at the natural person's residential address, as reflected in the Central Registration Depository, if applicable. When a Party or other person responsible for serving such person has actual knowledge that the natural person's Central Registration Depository address is out of date, duplicate copies shall be served on the natural person at the natural person's last known residential address and the business address in the Central Registration Depository of the entity with which the natural person is employed or affiliated. Papers may also be served at the business address of the entity with which the natural person is employed or affiliated, as reflected in the Central Registration Depository, or at a business address, such as a branch office, at which the natural person is employed, or at which the natural person is physically present during a normal business day. The Hearing Officer may waive the requirement of serving documents (other than complaints) at the addresses listed in the Central Registration Depository if there is evidence that these addresses are no longer valid, and there is a more current address available. If a natural person is represented by counsel or a representative, papers served on the natural person, excluding a complaint or a document initiating a proceeding, shall be served on the counsel or representative.
(2) Service on Entities
Papers served on an entity shall be made by service on an officer, partner of a partnership, managing or general agent, a contact employee as set forth on Form BD, or any other agent authorized by appointment or by law to accept service. Such papers shall be served at the entity's business address as reflected in the Central Registration Depository, if applicable; provided, however, that when the Party or other person responsible for serving such entity has actual knowledge that an entity's Central Registration Depository address is out of date, duplicate copies shall be served at the entity's last known address. If an entity is represented by counsel or a representative, papers served on such entity, excluding a complaint or document initiating a proceeding, shall be served on such counsel or representative.
(3) When Service Is Complete
Personal service and service by courier or express delivery are complete upon delivery. Service by mail is complete upon mailing.
A recent FINRA case that was appealed to the Securities and Exchange Commission ("SEC") offers us a fascinating roadmap through the maze of what to do and what not to do when FINRA comes knockin' and asking questions. In the Matter of the Application of Michael Ross Turner For Review of Action Taken by FINRA (Opinion, SEC, '34 Act Rel.No. 81693; Admin. Proc. File No. 3-17995 / September 22, 2017).
We start our journey with the regulatory travels and travails of Michael Ross Turner, for whom we find the following:
December 2005 "NASD Notice to Members/Disciplinary Actions": Turner listed under the heading "Individuals Suspended Pursuant to NASD Rule 9552(d)" as of October 24, 2005;
May 2006 "NASD Notice to Members/Disciplinary Actions": Turner listed under the heading "Individuals Barred Pursuant to NASD Rule 9552(h)" as of April 4, 2006).
RESPONDENT WAS SUSPENDED OCTOBER 24, 2005, FROM ASSOCIATING WITH ANY NASD MEMBER FIRM IN ANY CAPACITY. RESPONDENT FAILED TO REQUEST TERMINATION OF THE SUSPENSION WITH IN [sic] SIX MONTHS OF THE DATE OF THE NOTICE OF INTENT, THEREFORE HE IS AUTOMATICALLY BARRED FROM ASSOCIATION WITH ANY NASD MEMBER IN ANY CAPACITY PURSUANT TO NASD RULE 9552(H)
2017 SEC Appeal
On May 26, 2017, Turner appealed to the SEC and sought the federal regulator's review of NASD's (now FINRA's) Bar. As should be expected, FINRA was a bit perturbed by the roughly 12-year slumber from which Turner apparently awoke.
2004 Termination
The SEC Opinion explains that on March 8, 2004, Turner was terminated by American Express Financial Advisors ("Amex") and the Uniform Termination Notice for Securities Industry Regulation filed by the firm asserted that "client accounts may have been subject to multiple sales charges."
2005 FINRA Investigation
In response to Amex's sales charges allegations, from March to June 2005, FINRA (at the time NASD but the successor's name is used in the SEC Opinion) purportedly sent four demands for information via first-class and certified mail to Turner's last known address as maintained on CRD. Three of the four certified letters were returned. One of the returned certified letters indicated a new mailing address. FINRA then sent further communications to both the CRD address and the purported new mailing address. None of the first-class mailings sent to the CRD and the new address were returned. The letters admonished Turner that his failure to respond may result in a disciplinary action.
FINRA Notices of Suspension/Bar
Faced with the absence of any response to its demands, on September 28, 2005, FINRA mailed Turner notice that he would be suspended if he did not respond by October 24, 2005. Turner was warned that his failure to request the termination of such a suspension within six months would result in his being barred.
In the absence of any response to its warnings, FINRA notified Turner via letter on October 24, 2005, that he was suspended and would be barred in six months absent any request to terminate the suspension. Notwithstanding notification of the suspension and possible bar to both his CRD and new addresses, Turner did not respond and FINRA notified him on April 4, 2006, that he was barred subject to thirty days in which to file an appeal with the SEC.
The 2009 Awakening
As set forth in the SEC Opinion, Turner alleges that he only first learned of the Bar in 2009. As explained in the Opinion:
Turner asserts that he did not learn of the bar until 2009. According to him, he "moved residences three times" in 2004 and 2005 and never received the correspondence FINRA sent him during that period. Turner says that also he did not investigate his registration status at that time because his post-Amex employer prohibited employees "from maintaining securities licenses," he was "satisfied with [his] employment situation," and he "intended to allow [his] licenses to lapse and planned to renew them if and when appropriate."
In 2009, after his employer reversed its policy prohibiting securities licenses and alerted him that he had been barred, Turner spoke with an employee in FINRA's Office of the Ombudsman. On October 27, 2009, this employee emailed Turner a copy of his Bar Notice, along with updated information for filing an appeal with the Commission. Turner acknowledged receipt the same day. He explained that he had "moved a few times between the years 2004- 2005," that he "[did] not think that [he] ever received [the Bar Notice]," and that he was "very interested in requesting an appeal." He asked whether an appeal was "still an option since the month period has lapsed," and if so "what the steps are." The record also shows that Turner spoke on the phone with another FINRA employee on November 2, 2009. Turner did not appeal within thirty days of receiving the Bar Notice via email.
Two years later, on November 23, 2011, Turner spoke with and subsequently emailed Jacqueline Whelan, then with FINRA's Department of Enforcement. He expressed interest in "get[ting] a job in . . . a non-securities banking position and/or maybe renew[ing] [his] license." Whelan responded on November 29, 2011, suggesting that Turner contact Alan Lawhead, a FINRA Vice President and Director of its Office of General Counsel's Appellate Group. 2 Turner replied the same day, saying that he would "pursue action through the contact [Whelan] provided." Ten days later, on December 9, 2011, Turner told Whelan by email that "my attorney . . . feels that in order to proceed that I need to be sponsored by a broker dealer." In a response later that day, Whelan described the process for "a member firm wishing to associate [Turner]" and stated: "You should rely on your attorney to advise you about your options and the process going forward." Turner still did not appeal.Over three years later, on March 11, 2015, Turner emailed Lawhead to ask how he could "get [his] record expunged." The next day, Lawhead responded that "[t]here is no procedure in FINRA's rules that allows for the elimination or expungement of a default decision." He continued: "You should consider consulting with an attorney of your choice to address your issues." Once again, Turner did not appeal.
Lo and behold, on February 7, 2017, Turner filed a lawsuit in California seeking the expungement of the Bar. On May 1, 2017, after alleged consultation with FINRA, he moved to dismiss his court petition without prejudice.
SEC Rule of Practice 420: Appeal of determinations by self-regulatory organizations.(a) Application for review; when available. An application for review by the Commission may be filed by any person who is aggrieved by a determination of a self-regulatory organization with respect to any:
(1) Final disciplinary sanction;(2) Denial or conditioning of membership or participation;(3) Prohibition or limitation in respect to access to services offered by that self-regulatory organization or a member thereof; or(4) Bar from association as to which a notice is required to be filed with the Commission pursuant to Section 19(d)(1) of the Exchange Act, 15 U.S.C. 78s(d)(1).
(b) Procedure. As required by section 19(d)(1) of the Securities Exchange Act of 1934, 15 U.S.C. 78s(d)(1), an applicant must file an application for review with the Commission within 30 days after the notice of the determination is filed with the Commission and received by the aggrieved person applying for review. The Commission will not extend this 30-day period, absent a showing of extraordinary circumstances. This rule is the exclusive remedy for seeking an extension of the 30-day period.(c) Application. The application shall be filed with the Commission pursuant to Rule 151. The applicant shall serve the application on the self-regulatory organization. The application shall identify the determination complained of and set forth in summary form a brief statement of the alleged errors in the determination and supporting reasons therefor. The application shall state an address where the applicant can be served. The application should not exceed two pages in length. If the 83 applicant will be represented by a representative, the application shall be accompanied by the notice of appearance required by Rule 102(d). Any exception to a determination not supported in an opening brief that complies with Rule 450(b) may, at the discretion of the Commission, be deemed to have been waived by the applicant.(d) Determination not stayed. Filing an application for review with the Commission pursuant to paragraph (b) of this rule shall not operate as a stay of the complained of determination made by the self-regulatory organization unless the Commission otherwise orders either pursuant to a motion filed in accordance with Rule 401 or on its own motion.(e) Certification of the record; service of the index. Fourteen days after receipt of an application for review or a Commission order for review, the self-regulatory organization shall certify and file with the Commission one copy of the record upon which the action complained of was taken, and shall file with the Commission three copies of an index to such record, and shall serve upon each party one copy of the index.
Section 19(d)(2) of the Securities Exchange Act of 1934 provides that a person who wishes to appeal FINRA action must file an application for review with the Commission "within thirty days after the date" that notice of the decision "was . . . received by such aggrieved person, or within such longer period as [the Commission] may determine." Rule of Practice 420(b), which is the "exclusive remedy for seeking an extension of the 30-day [filing] period," authorizes us to consider an otherwise untimely application for review if we find, in the exercise of our discretion, that "extraordinary circumstances" are present. We have said that "[a]n applicant whose application is delayed as a result of extraordinary circumstances remains under an obligation to proceed promptly in pursuing appellate recourse." We find that Turner did not file his application for review as soon as reasonably practicable after receiving actual notice of FINRA's decision, and that there are no extraordinary circumstances justifying a late appeal.
11 Because he did not appeal promptly after receiving actual notice, we need not consider Turner's claims that extraordinary circumstances exist because he did not receive FINRA's letters, he expected his employer to update his CRD address, and FINRA failed to serve him through his new employer's business address. We note that Turner's brief erroneously truncates FINRA Rule 8210(d) to imply that when FINRA has actual knowledge of an out-of-date CRD address it must mail its notices "to the last known business address of the member." The rule provides that in that situation FINRA may mail the notices either to "the last known business address of the member" or "the last known residential address of the person as reflected in the Central Registration Depository" and "any other more current address" known to FINRA. We note further that while registered with a broker-dealer and while a formerly registered person subject to FINRA's continuing jurisdiction-for the two years after Amex filed the Form U5 in October 2004-Turner was obligated to update his CRD within 30 days of a change in his residential address. See, e.g., NASD Reminds Registered Persons of Continuing Obligation to Update NASD Records, NASD Notice to Members 97-31, 1997 WL 1909798, at *1-2 (May 1997) (reminding registered persons of their obligation to notify FINRA of their current mailing address "while . . . associated with any NASD member firm" and "as long as the NASD retains jurisdiction to bring a disciplinary action against the registrant"). Despite conceding that he "moved residences three times" in 2004 and 2005, Turner did not update his CRD address.
13 We have suggested that "attorney misconduct" might be an "extraordinary circumstance beyond the party's control" that could excuse an untimely filing. PennMont Sec., 2010 WL 1638720, at *4. But Turner has not attempted to substantiate a claim of attorney "misconduct," and we discern no basis in the record to do so. Having advised Turner to become "sponsored by a broker-dealer," his prior counsel apparently contemplated that a member firm would apply on Turner's behalf "for relief from the statutory disqualification by filing an MC-400 Application" with FINRA. Nicholas S. Saava, Exchange Act Release No. 72485, 2014 WL 2887272, at *2 (June 26, 2014) (describing FINRA's eligibility proceedings as the vehicle for seeking relief from a statutory disqualification); see also 15 U.S.C. § 78c(a)(39)(A) (defining a statutory disqualification to include a "bar[] . . . from being associated with a member of" FINRA). Turner's former attorney might have counseled this course of action since Turner had not appealed within 30 days of FINRA sending the Bar Notice in 2006 or his receiving it in 2009. This speculation aside, Turner did not introduce meaningful evidence about his prior counsel's representation and therefore did not meet his burden of substantiating a claim of attorney misconduct.