If You Didn't Know But Now Do. If You Hadn't Told FINRA But Did. If You Ask For A Stay But the SEC Doesn't.

June 16, 2021

Among the mysteries of the Universe is whether a revocation of a license is the same as a bar of a license. On top of that puzzler, if something happens but you didn't know about it at the time but you eventually learn about it, does that mean you had failed to timely report what you didn't know had happened but now do? Finally, we are asked to ponder the ethical and legal implications of whether the SEC should stay a determination by FINRA that someone has become statutorily disqualified after that same individual voluntarily reported the facts that prompted FINRA's determination.

The 2009 Revocation

Online FINRA BrokerCheck records as of June 16, 2021, disclose that Paul H. Giles was first registered in 1990, and has been employed since 1999 with Ameriprise Financial Services, Inc. In July 2009, the Insurance Commissioner of the State of California served Paul H. Giles with an Accusation alleging that he had failed to respond to an inquiry concerning then-outstanding tax liens. In September 2009, the Insurance Commissioner issued a Default Decision and Order of Revocation. In the Matter of the Application of Paul H. Giles for Review of Action Taken by FINRA (SEC Order Denying Stay, '34 Act Rel. No. 92177; Admin. Proc. File No. 3-20267 / June 14, 2021) (the "SEC Order")

https://www.sec.gov/litigation/opinions/2021/34-92177.pdf

The SEC Order offers the following background:

Giles represents that he reported the Order to FINRA "as soon as he became aware of it earlier this year," and FINRA states that Giles disclosed it in mid-March of 2021. On March 24, 2021, FINRA sent Ameriprise a notice (the "Notice") that, due to the Order, Giles is subject to a statutory disqualification under Exchange Act Section 3(a)(39). The Notice informed Ameriprise that, unless it provided FINRA with proof that Giles had complied with the Order's sanctions and the sanctions were no longer in effect, Ameriprise "must, by April 12, 2021, either initiate the Membership Continuance process in order to obtain approval for the association [with Giles], or terminate the association." On Ameriprise's request, FINRA extended this deadline to May 3, 2021. ³ Giles now represents that Ameriprise "has indicated it will not" file a membership continuance application on his behalf.
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Footnote 3: Giles represents that FINRA extended the deadline to May 5, 2021, but the record reflects that FINRA extended the deadline to May 3, 2021.

at Page 2 of the SEC Order

Appeal/Motion for Stay

On April 21, 2021, Giles filed an appeal with the SEC for the review of FINRA's Notice of statutory disqualification; and he also filed a Motion to Stay that determination. The parties stipulated that the Notice will be stayed pending the resolution of the motion before the SEC.

SIDE BAR: As set forth on page 4 of the SEC Order [Ed: footnote omitted]:

Under Exchange Act Section 3(a)(39)(F), a person is subject to a statutory disqualification if he or she is subject to an order enumerated in Exchange Act Section 15(b)(4)(H)(i), which in turn describes "any final order of a . . . State insurance commission . . . that . . . bars such person . . . from engaging in the business of . . . insurance." . . .

The Balancing Factors for an Extraordinary Remedy

In considering the Motion to Stay, the SEC noted that a Stay is an "extraordinary remedy," which imposes the burden of proving that such is warranted solely upon the Movant. In adjudicating a Motion to Stay, the SEC noted that it resorts to a balancing test involving [Ed: footnotes omitted]:

whether: (i) there is a strong likelihood that the movant will eventually succeed on the merits of the appeal; (ii) the movant will suffer irreparable harm without a stay; (iii) no other person will suffer substantial harm as a result of a stay; and (iv) a stay is likely to serve the public interest. Although the first two factors are the most critical, our decision depends on balancing all four factors. Thus, a stay may be warranted even if the movant has not shown a strong likelihood of success, as long as the movant raises a "serious legal question on the merits" and shows that the other factors weigh decidedly in his favor. "Because the moving party must not only show that there are serious questions going to the merits, but must additionally establish that the balance of hardships tips decidedly in its favor, its overall burden is no lighter than the one it bears under the likelihood of success standard." . . .

at Page 3 of the SEC Order

It's a "Revocation" Not a "Bar"

Although Giles conceded that the Insurance Commissioner's Order was a "final" one issued by a State insurance commission, he argues that it did not "bar" him from engaging in the business of insurance in California but merely "revoked" his license -- and, further, that the Order does not inhibit his ability to reapply for his license. In response, the SEC concedes that it has espoused a fairly liberal interpretation of what might constitute an 15(b)(4)(H)(i) Bar, and allows that it may focus on the "practical effect" of an order regardless of the actual inclusion in a document of the word "Bar":

As we have held, a state order may indicate that the order is a bar, and therefore that the person is disqualified, even if it fails to include the word "bar."15 We therefore, at this stage, reject Giles's contention that the Order is not a bar for purposes a statutory disqualification because the Order uses the word revocation and not bar.
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Footnote 15: Id.; see also Crowdfunding, Exchange Act Release No. 70741 (Oct. 23, 2013), 78 Fed. Reg. 66,428, 66,502 (Nov. 5, 2013) (proposed rules) (stating, in proposing rules regarding statutory language that is "substantively identical" to Exchange Act Section 15(b)(4)(H), that "bars are orders issued by one of the specified regulators that have the effect of barring a person from . . . engaging in the business of . . . insurance . . . , regardless of whether it uses the term 'bar' "); Disqualification of Felons and Other "Bad Actors" from Rule 506 Offerings, Exchange Act Release No. 9414 (July 10, 2013), 78 Fed. Reg. 44,730, 44,740-41 (final rule) (making similar statement in final rule regarding "essentially identical" statutory language).

at Page 4 of the SEC Order

What About "Acosta"?

Not surprisingly, Giles raised the SEC's setting aside of FINRA's determination that Gregory Acosta was statutorily disqualified, which involved a 2018 Accusation by the California Department of Insurance and an ensuing Stipulation and Waiver settlement. In the Matter of the Application of Gregory Acosta for Review of Action Taken by FINRA (SEC Opinion, '34 Act Rel. No. 89121; Admin. Proc. File No. 3-18637 / June 22, 2020)

http://brokeandbroker.com/PDF/AcostaSEC200622.pdf

SIDE BAR: "Gregory Acosta Hands FINRA An Earth Shattering, Precedent Setting, Historic, Stunning Defeat" (BrokeAndBroker.com Blog / June 24, 2020)
http://www.brokeandbroker.com/5291/finra-sec-acosta/

Former Kestra Investment Service, LLC representative Gregory Acosta was notified by the Financial Industry Regulatory Authority ("FINRA") that it deemed him subject to a "statutory disqualification" as set forth pursuant the Section 3(a)(39) of the '34 Act. Pursuant to such a designation, FINRA informed Acosta that he was not allowed to continue his association with Kestra unless that member firm requested and received FINRA's approval for his continued affiliation. In a dramatic and historic decision, the SEC held that it had jurisdiction over the dispute because FINRA's conduct "effectively bars Acosta from associating with any FINRA member." After considering the arguments of Acosta and FINRA, the SEC set aside FINRA's action.

In considering the relevancy of Acosta to the facts raised by Giles, the SEC noted in part that [Ed: footnotes omitted]:

[G]iles argues that the Order does not constitute a bar because we did not treat a similar California order as a bar in Acosta. But in Acosta we had no reason to determine whether the California order constituted a bar. FINRA had based its determination that Acosta was subject to a statutory disqualification on a different statutory provision. Specifically, FINRA found Acosta statutory disqualified not because it determined he was subject to a bar from engaging in the business of insurance but because it determined that the California order was "based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct." The California order in Acosta is also distinguishable because it issued Acosta a restricted license in lieu of revocation, rather than revoking his license outright as California did to Giles's license here. Thus, we find that Giles has not raised a serious legal question on the merits regarding these first two arguments.

at Page 5 of the SEC Order

Right to Reapply

Next, the SEC tackled Giles' argument that the Insurance Order did not constitute a Bar because it did not prevent him from reapplying for the revoked license. In deeming that this reapplication factor raised a serious legal issue by challenging whether the practical effect of the State's action was to impose a Bar, the SEC offered this brief analysis [Ed: footnote omitted]:

While the Order did not preclude Giles from reapplying for a license for a period of time as did the order in Meyers Associates, Giles has not, however, made a strong showing of a likelihood of success on the merits. Under California law, unless an exemption applies, a person without an insurance license "shall not solicit, negotiate, or effect contracts of insurance" and may not "act in [certain] capacities defined in" the California Insurance Code. Thus, because the Order has revoked Giles's license, he cannot engage in many critical aspects of the business of insurance in California. Arguably, then, unless and until Giles's license is reinstated, he remains subject to an order that has the practical effect of barring him from engaging in the business of insurance in California, regardless of whether he can reapply for a license.

at Page 6 of the SEC Order

Balance of Hardships

Having gone down in flames on all of his points, Giles final remedy was to show that the "balance of hardships" is so markedly in his favor that a Stay should be granted. The SEC starts its analysis with inquiring as to the alleged "irreparable harm" that Giles would suffer in the absence of a Stay of FINRA's determination of statutory disqualification. In rejecting Giles' effort to demonstrate irreparable harm, the SEC notes in part that [Ed: footnotes omitted]:

Giles states that he would be "deprived of his livelihood" absent a stay and that he "has spent 30 years building his business and reputation in this industry." But Giles has not demonstrated that he will have to end his association with his current firm absent a stay, let alone leave the industry. Although Giles's stay motion alleges that Ameriprise "has indicated it will not file" a membership continuance application on his behalf, he does not present a declaration from Ameriprise or any other evidence supporting this allegation. And even if Ameriprise-- which successfully requested an extension of FINRA's deadline for terminating Giles--declines to file a membership continuance application on his behalf, he could potentially find another firm to do so. Also, Giles does not seem to seriously dispute that he could find another member firm to sponsor him, stating in his reply brief that, "[e]ven if Mr. Giles could find another member firm willing to sponsor a membership application, he cannot be required to do so." Giles does not argue that FINRA or the Commission would likely deny such a membership continuation application, or that the membership continuation process itself would cause great harm to him. Thus, because the Notice may not even cause Giles to leave the industry, he has not shown that he would be subject to a "certain" or "great" injury, absent a stay.

Even if Giles would lose his employment in the industry absent a stay, "the loss of employment income does not necessarily establish irreparable harm-even when the loss is unrecoverable." For example, unrecoverable loss of income does not rise to the level of irreparable harm if an individual could obtain another job during the pendency of the appeal. Similarly, loss of income does not rise to the level of irreparable harm if an individual fails to show that he or she would be in financial distress absent a stay. Here, Giles has not shown that, absent a stay, he would be unable to obtain another job or be in financial distress. Indeed, he has put on no evidence of his likely financial situation absent a stay. And even his allegations about his likely financial situation lack sufficient detail to demonstrate that he would be unable to find another job or be in financial distress absent a stay.

at Pages 7 - 8 of the SEC Order

At this point, the only avenue left for Giles is to show that the risk of harm to others and the public interest weigh against a stay -- yeah, sure, good luck with that. In rejecting Giles' efforts, the SEC notes in part that [Ed: footnotes omitted]:

Giles also does not contest that he failed to report the 2009 revocation to FINRA for over a decade, even though FINRA rules required him to report license revocations. Giles explains the delay in reporting the revocation by stating that "he was unaware that his insurance license was revoked until recently." But his application for review suggests that he at least knew about the Accusation, which Giles was also required to report to FINRA. In addition, the Accusation informed Giles that his license could be revoked, suggesting that he should have monitored the proceeding to see if he had to report an eventual revocation to FINRA. Also, Giles does not provide details about why he failed to receive the order, such as whether he conformed to his obligation under California law to keep his address with the Commissioner updated.

On the record before us, Giles seemingly fails to appreciate the significance of his conduct. He does not seem to recognize that his failure to respond to the Commissioner's inquiries, failure to respond to the Commissioner's Accusation, and failure to report the Accusation or Order to FINRA suggest a concerning disregard for regulatory oversight. And associated persons' respect for regulatory oversight is critical to FINRA's ability to protect investors, particularly given that FINRA relies upon the cooperation of associated persons and their compliance with reporting obligations when carrying out its self-regulatory functions.

at Page 10 of the SEC Order

Accordingly, the SEC ordered that Giles's motion for a stay is denied.

Bill Singer's Comment

As I read through the SEC Order, I noted that the Insurance Order was dated 2009 -- as in some 12 years ago. As in Obama was President and Joe Biden was Vice President. As in the Great Recession.

How the hell was it only in 2021 that FINRA first become aware of the 2009 Order?

As the SEC Order notes on Page 2, Giles apparently reported the Order to FINRA in mid-March 2021 "as soon as he became aware of it . . ."

So . . . if Giles had kept his mouth shut would FINRA and/or Ameriprise have ever become aware of the 2009 Insurance Order?

What are we to make of the 12 years during which the Insurance Order hid in the regulatory shadows?

What does that say about the state of Wall Street regulation that no one seemed to have been aware of the Insurance Order in 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, and 2021? Yeah, it's a little over-the-top to print out all those separate years but it does make the point! Is there no centralized regulatory database among the various banking, insurance, and securities regulators? Don't compliance departments conduct routine background checks? I'm not sure what scares me more: A "yes" or a "no" answer.

The SEC response to that 12-year passage of time is somewhat disconcerting. Rather than lambaste Wall Street's regulators and in-house compliance departments for not remaining vigilant about disclosures in the public record, the SEC takes the opportunity to engage in a fairly cynical and off-putting comment in Footnote 49 of the SEC Order:

Giles cites Jeffrey Ainley Hayden, Exchange Act Release No. 42772, 2000 WL 649146 (May 11, 2000). In Hayden, a self-regulatory organization failed to bring disciplinary charges against the applicant until "approximately fourteen years after the first act of misconduct and over six years after the last incident," even though it received notice of the misconduct about five years before it brought charges. Id. at *2. Here, Giles does not allege that FINRA was aware of the Order but declined to act upon it. Indeed, he does not dispute that he failed to report the Order to FINRA until recently. He points out that the Order "has been publicly available since it was issued in 2009," but he does not explain how FINRA could have learned about it. Also, unlike in Hayden, FINRA has not brought disciplinary proceedings here. Instead, FINRA has determined that Giles is and has been subject to a statutory disqualification since the issuance of the Order in 2009. If anything, FINRA's delay in discovering the Order seems to have benefited rather than prejudiced Giles, as he has been able to continue associating with a FINRA member firm for many years since he allegedly became subject to a statutory disqualification.

He points out that the Order "has been publicly available since it was issued in 2009," but he does not explain how FINRA could have learned about it. How absurd and ironic an observation! That's the impressive state of Wall Street regulation? The SEC doesn't think that the industry's self-regulatory-organization should be aware that an individual working at one of its member firms has become statutorily disqualified -- and remained so for 12 years?

Moving along from the sublime to the ridiculousness, the SEC's above-footnote suggests that if FINRA had attempted to file a disciplinary Complaint against Giles for not timely disclosing the 2009 Insurance Order, the SEC would have deemed the filing as untimely and prejudicial per Hayden. On the other hand, given that Giles appears to have voluntarily put his own head into FINRA's noose, that's okay because he walked into it and the SEC opines that Hayden doesn't apply.

Does the SEC not countenance the troubling message that it is sending? If Wall Street's regulators don't discover something that might result in your being barred from the industry, keep your mouth shut because our ignorance may "have benefited rather than prejudiced" you.

Given the somewhat unique facts in Giles perhaps it would have been wiser for FINRA and the SEC to have fully considered that Giles had, in fact, voluntarily disclosed the 2009 Insurance Order to Ameriprise and FINRA. Does that mean he should be rewarded for the belated update? No -- but given the SEC's penchant for "weighing" factors, maybe that approach might have made more sense with the facts at hand. Perhaps, FINRA should have "gone off the record" with Giles and explained that the Insurance Order likely deemed him statutorily disqualified and he probably should not have been in the biz for the last 12 years but you are and now you have a problem but your problem has now become our problem. Tell ya what -- howasabout we all agree that there are "exceptional circumstances" afoot here and you help us help you? We're thinking that we talk to Ameriprise and get them to immediately file an MC-400 Application, and, we promise to have our Staff expedite the application and our consideration of the request.

What was likely needed here from FINRA was some creativity (on or off the record). Instead, we get what we usually get: Inflexibility and inside the box thinking. All of which provides another embarrassing look behind the curtain, where we find that FINRA isn't an all-powerful wizard but merely an inept regulator trying to stay alive in pandemic times.