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Perplexing FINRA AWC About the Likely Statutorily Disqualified Rep
September 13, 2019
It's not an uncommon tale of woe. You owe taxes. You can't pay the taxes. The tax authority doesn't care. They get a tax lien. It's embarrassing for you. On top of everything, you really don't want to tell your broker-dealer because, well, you know, if you can't manage your own financial affairs, they're going to say, we're not comfortable having you manage our customers'. So . . . you figure it's best to just keep your mouth shut and do your best to pay off the debt. The years roll by. No one is any the wiser. Everything eventually works out. Until it doesn't.
FINRA 2016 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, Clay Gavin Erickson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Clay Gavin Erickson, Respondent (FINRA AWC 2015046883301) (the "2016 AWC")
https://www.finra.org/sites/default/files/fda_documents/2015046883301_
FDA_SL677607%20%282019-1563158960759%29.pdf
https://www.finra.org/sites/default/files/fda_documents/2015046883301_
FDA_SL677607%20%282019-1563158960759%29.pdf
The AWC asserts that Erickson entered the securities industry in 1985 and by January 2011, he was registered with FINRA member firm Hornor, Townsend & Kent, LLC. Online FINRA BrokerCheck records as of September 12, 2019, disclose that Erickson was first registered in 1991. The 2016 AWC asserts that "Erickson has no formal disciplinary history."
Willful Nondisclosures
As set forth under the 2016 AWC heading of "Overview"
Between 1995 and 2014, while registered with six different FlNRA-member firms, Erickson willfully failed to amend or failed to timely amend his Uniform Application for Securities Industry Registration or Transfer Form ("Form U4") to disclose 35 reportable financial events. As a result, Erickson violated Article V, Section 2(c) of NASD's By-Laws (for conduct before December 15, 2008), NASD Conduct Rule 210 (for conduct before December 15,2008), NASD IM-1000-1 (for conduct before August 17, 2009), Article V, Section 2(c) of FINRA's By-Laws (for conduct on or after December 15, 2008), FINRA Rules 1122 (for conduct on or after August 17, 2009) and 2010 (for conduct on or after December 15, 2008).
FINRA Sanctions
FINRA alleged that over the span of some two decades, Erickson had failed to properly disclose 35 judgments/liens. Frankly, that's a prodigious accomplishment. In accordance with the terms of the 2016 AWC, FINRA imposed upon Erickson a $15,000 fine and a 10-month suspension from association with any FINRA member in any capacity.
Although it appears that Erickson was suspended for only 10 months, the fact is that he was found to have "willfully failed to disclose," which rendered him subject to a statutory disqualification. As noted in the 2016 AWC:
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 the FINRA By-Laws, this omission makes me subject to a statutory disqualification with respect to association with a member.
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.
Finally, the Uniform Application For Securities Industry Registration Or Transfer ("Form U4") asks the following:
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?
Visit the BrokeAndBroker.com Blog "Willfulness" Archive
http://www.brokeandbroker.com/index.php?a=topic&topic=willful
http://www.brokeandbroker.com/index.php?a=topic&topic=willful
FINRA 2019 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, Clay Gavin Erickson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Clay Gavin Erickson, Respondent (FINRA AWC 2017056602301) (the "2019 AWC")
https://www.finra.org/sites/default/files/fda_documents/2017056602301
https://www.finra.org/sites/default/files/fda_documents/2017056602301
%20Clay%20Gavin%20Erickson%20CRD%201583644%20AWC%20jm.pdf
Under the 2019 AWC heading "Relevant Disciplinary History" is the following:
On September 29, 2016, FINRA issued a Letter of Acceptance, Waiver and Consent in Matter No. 2015046883301, wherein Respondent consented to the entry of findings that, between 1995 and 2014, he willfully failed to disclose, or timely disclose, 35 judgments and liens totaling approximately $319,000 on his Uniform Application for Securities Industry Registration or Transfer ("Form U4"). As a result, Respondent violated Article V, Section 2(c) of NASD's By-Laws; NASD Conduct Rule 2110; NASD IM-1000-1; Article V, Section 2(c) of FINRA's By-Laws; and FINRA Rules 1122 and 2010. Respondent was suspended from association with any FINRA member firm in any capacity for ten months and fined $15,000.
Ummm . . . what the hell? Wasn't Erickson subject to a statutory disqualification in 2016 based upon the willful failure finding? Why isn't that referenced in the 2019 AWC history?
Making matters worse, we have this somewhat tepid version of events under the "Background" heading in the 2019 AWC:
[O]n October 27, 2016, the Firm filed an initial Uniform Termination Notice for Securities Industry Registration ("Form U5"), terminating Respondent's registration.On November 29, 2017, the Firm filed an amendment to that Form U5 disclosing that it received a written customer complaint alleging that Respondent, while registered, transferred funds in the customer's variable annuity sub-accounts without the customer's knowledge. Respondent is not currently associated with a FINRA member, but remains subject to FINRA's jurisdiction pursuant to Article V, Section 4(a)(i) of FINRA's By-Laws.
Let's try it again: Ummm . . . what the hell? Wasn't Erickson subject to a statutory disqualification in 2016 based upon the willful failure finding? Why isn't that referenced in the 2019 AWC history? Wasn't the statutory disqualification the reason that Hornor, Townsend & Kent terminated Erickson? When the 2019 AWC says that "Respondent is not currently associated with a FINRA member . . ." isn't that because said Respondent is statutorily disqualified? Otherwise, why not say the a recently deceased registered rep is not currently associated with a FINRA member?
2016 Unauthorized Transfers
The 2019 AWC alleges in pertinent part that Respondent Erickson violated FINRA Rule 2010 via the following conduct:
On January 13 and 14, 2016, Respondent transferred all of the funds held by 57 customers across 86 variable annuity contracts to a money market sub-account in an effort to protect customers' account value, because he anticipated an imminent market downturn. To transfer these funds, Respondent effected 494 transactions, totaling $5,317,233.32. Respondent executed these transactions without obtaining authorization from the customers. In addition, Respondent did not possess discretionary authority over his customers' accounts.Respondent did not receive any compensation in connection with executing the transactions. The customers' accounts did not suffer any losses, and the customers did not incur any fees in connection with the transactions. The Firm resolved the one complaint it received from a customer regarding Respondent's conduct.
On the unfavorable side of the compliance/regulatory ledger, we got two days of unauthorized trades on January 13th and 14th of 2016 affecting 57 customers and involving 494 transactions totaling some $5.3 million. There's just no way to soften that. It looks bad. It sounds bad. It is bad.
On the somewhat favorable side of the compliance/regulatory ledger, Erickson's misconduct seemed to have been motivated by his sincere desire to protect his customers against losses from what he saw an "an imminent market downturn." In keeping with his well-intentioned unauthorized trades, Erickson did not financially benefit from the sales and the customers did not incur any transactional fees. As to the one and only one complaint that was presented to the brokerage firm, that customer was made whole.
Keep in mind that the 2019 AWC is citing unauthorized trading that took place barely two weeks into 2016. Why it took FINRA some three years before it settled its charges in September 2019 is somewhat of a mystery. That mystery deepens when we factor in that the employer FINRA member firm filed Erickson's Form U5 in October 2016 and filed an amended Form U5 in November 2017. As such, by November 2017, FINRA knew that Erickson was statutorily disqualified in September 2016 and had engaged in $5.3 million in unauthorized trades in January 2016. Just what did FINRA need to investigate for several years?
The U5
Other than the assertion that Hornor, Townsend & Kent, LLC. had terminated Erickson, the 2019 AWC makes no mention whatsoever that he had been statutorily disqualified in 2016. Also, note that the alleged unauthorized trades took place in the second week of January 2016, but Hornor, Townsend & Kent, LLC. only got around to filing Erickson's Form U5 in October 2016, about 9-plus months after the cited trades. Why the delay? Keep in mind that when the firm filed the amended Form U5 on November 29, 2017, that was a year after it had terminated Erickson's registration and some 23 months after the cited unauthorized trading.
FINRA Sanctions
In accordance with the terms of the 2019 AWC, FINRA imposed upon Erickson a $7,500 fine and a nine-month suspension from association with any FINRA member in any capacity. Ummm . . . is Erickson still statutorily disqualified and, if so, why doesn't the 2019 AWC reference that 2016 event?
Bill Singer's Comment
"After Being Suspended"
As of September 13, 2019, FINRA online BrokerCheck records disclose a more expansive explanation about Erickson's 2016 termination; namely, that Hornor, Townsend, & Kent, Inc. had "discharged" him on October 27, 2016, based on allegations that:
Registered representative was discharged from the member firm after being suspended by FINRA from association with any member firm for a period of 10 months, and fined $15,000 pursuant to a Letter of Acceptance, Waiver and Consent for failing to disclose or failing to timely disclose 35 judgments and liens totaling almost $319,000 on his Form U4.
Eureka! So that's why the firm "discharged" Erickson in October 2016! Why the hell didn't the 2019 AWC spell that simple fact out for us? Of course, still mumbled, jumbled, and sort of lost in the shuffle is the question as to whether Erickson was deemed statutorily disqualified via the September 2016 AWC. If that is the case, then Hornor, Townsend, & Kent did not discharge Erickson because he was "being suspended by FINRA" but in consideration of his disqualification.
The January 2016 Market Break
Talk about no good deed going unpunished. By way of a visit down memory lane, consider the following closing prices for the Dow Jones Industrial Average (numbers in parentheses reflect increase or decrease from prior close):
1/21/2016: 15,882.681/20/2016: 15,766.74 (-249.28)1/19/2016: 16,016.02 (+27.94)1/15/2016: 15,988.08 (-390.97)1/14/2016: 16,379.05 (+227.64)1/13/2016: 16,151.41 (-364.81)1/12/2016: 16,516.22 (+117.65)1/11/2016: 16,398.57
If we net out the Dow Jones Industrial Average's close on both Wednesday, January 13th and Thursday, January 14th, the index moved down a net of 137.17 points; however, if we also factor in the Friday close of January 15th, the Average had shed another 390.97 points for a net loss over those three trading days of 528.14. Although the Index recovered 27.94 points by Monday, January 19th, it would get hammered another 249.28 points on Tuesday, January 20th. Simply gauging the difference between the January 12th close of 16,516.22 and the January 20th close of 15,766.74, the Average was down a net of 749.48 points, or about 4.5% during that period.
Against that background, we now consider Respondent Erickson's 494 unauthorized sales amounting to $5,317,233.32 in proceeds. As stated in the 2019 AWC, he effected those unauthorized liquidations "because he anticipated an imminent market downturn." In re-framing the cited misconduct against the realities of the contemporaneous market, it all doesn't seem so inappropriate and, in fact, it appears that Erickson was motivated by good intentions. To that extent, perhaps FINRA's decision to not Bar Erickson reflects the regulator's similar appraisal. On the other hand, note that in my presentation I still characterize Erickson's well-intentioned sales as "unauthorized" because, in fact, that's the cold, hard truth of the matter. As I often note, the road to Hell is paved with good intentions, and no good deed goes unpunished.
Perhaps in another multiverse, FINRA would have a rule permitting unauthorized transactions if and when a registered rep believed that such trades would best serve a client's interest. But we live in this plane of existence and the rules in this reality are that a rep cannot enter unauthorized trades no matter the intention. If a decision is made to enter a trade with prior authorization from a customer, such should be signed-off on by a duly appointed supervisor or compliance officer. This is not a decision best left to a rep's sole discretion.
Customer Disputes
Finally, by way of further background, BrokerCheck discloses the following events:
One "Customer Dispute - Closed-No Action / Withdrawn/Dismissed/Denied" involving a 2008 complaint that was denied in 2009.Four "Customer Dispute - Settled" matters involving customer complaints from 2009 - 2017, which were settled for $13,006.40; $22,992.40; $15,873.53; and $35,000. As to said settlements, Erickson only contributed to the $35,000 settlement in the amount of $24,000.