Presidential Candidate Requests Information on Proposed Amendments to FINRA’s Expungement Rules

The Central Registration Depository (“CRD”) and the publicly available online portal, BrokerCheck, comprise FINRA’s registration and licensing system.  Via BrokerCheck, customers, employers, and regulators can access information regarding customer complaints levied against an individual broker.  BrokerCheck plays a key role in allowing customers to evaluate their broker’s track record before making investment decisions.  By the same token, adverse claims can have a devastating effect on a broker’s ability to retain their clients.   

As such, FINRA has established rules for the expungement of certain adverse claims from CRD.  Currently, FINRA Rules 12805 and 2080 control customer complaint expungement proceedings.  Rule 12805 requires that a broker file a Statement of Claim requesting expungement of the customer disclosure.  The panel must:

·    hold a recorded session regarding the appropriateness of the expungement;

·   when applicable, review settlement documents and consider the amount of payments made to any party;

·    provide a written explanation which indicates which of the grounds for expungement under Rule 2080 is the basis for the order; and

·    assess all fees for the hearing against the party requesting expungement.[1] 

Under Rule 2080, grounds for expungement include:

·    the claim, allegation or information is factually impossible or clearly erroneous;

·  the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or

·    the claim, allegation or information is false.[2] 

Following an arbitration award recommending an expungement, the broker must then file a petition in a court of competent jurisdiction to obtain an order confirming the award and directing such expungement.

In December 2017, FINRA published Regulatory Notice 17-42, a proposed amendment relating to requests to expunge customer dispute information.  Regulatory Notice 17-42 would create a roster of arbitrators with specific training and experience to handle all expungement requests.  It would also require:

·       the broker to appear at his or her expungement hearing;

·       unanimous agreement of the three person arbitration panel;

·      expungement requests to be brought within one year of the dispute; and

·       minimum fees for filing expungement requests.[3] 

Since publishing Regulatory Notice 17-42 for public comment, FINRA has not submitted it to the SEC.  As such, the proposed expungement rules are not currently in effect.  In a March 2019 letter to FINRA President and CEO Robert Cook, Senator Elizabeth Warren requested an update on FINRA’s proposed rule changes to its customer dispute information expungement process.[4]  If eventually submitted and finalized, the new process for removing customer dispute information from a broker’s CRD will be more onerous on the broker and likely decrease the frequency with which expungement requests are granted.  Senator Warren’s letter requests, among other things, a timeline for when FINRA will submit Regulatory Notice 17-42 to the SEC for approval.

It is unclear if or when the new CRD expungement rules will be submitted to the SEC and put into effect.  FINRA spokespersons have declined to comment on the substance of Senator Warren’s letter, stating, “We have received the senator’s letter and are working to respond accordingly.”[5] 

Given the uncertainty of the status of FINRA’s expungement rules, it is important that brokers seeking CRD expungement select an attorney capable of guiding them through expungement proceedings under the current and any potential future FINRA rules.  Cosgrove Law Group, LLC has represented numerous individuals in CRD expungement proceedings under the current rules and stands ready to represent brokers in proceedings governed by the proposed amended rules.  If you are seeking expungement of customer complaints from your CRD/BrokerCheck, you may wish to consult with experienced counsel at Cosgrove Law Group.

BY: Max Simpson

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[1] FINRA Rule 12805, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=7229

[2] FINRA Rule 2080, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=8468

[3] Regulatory Notice 17-42, http://www.finra.org/industry/notices/17-42

[4]Letter, Sen. Warren to Cook, March 21, 2019, https://www.warren.senate.gov/imo/media/doc/2019.03.21%20Letter%20to%20FINRA%20re%20Broker%20Expungement%20Data.pdf

[5] Financial-Planning.com, Warren presses FINRA for answers on expungement reform, https://www.financial-planning.com/news/elizabeth-warren-presses-finra-for-answers-on-expungement-reform

FINANCIAL ADVISER TERMINATIONS

It’s what we do here at Cosgrove Law Group, LLC.

              Believe it or not, there are instances in which a broker-dealer seeks out pre-textual reasons for a termination.  Some reasons are more frivolous than others.  For many advisers, an involuntary termination is nothing more than the first chapter of a multi-chapter nightmare.

            The broker-dealer has 30 days from the date of termination to file the U-5, a disclosure to FINRA that modifies the adviser’s U-4 with information regarding the termination.  The U-5 disclosure includes both narratives and the checking of “yes” or “no” boxes.  Notably, which boxes are checked or not will impact what, if any, information is added to the publicly accessible BrokerCheck Report.

            Once the U-5 is filed, and sometimes before that, FINRA and state regulators will make inquiry as to the disclosure.  Before that, however, potential employers will want to know what is, or will be, on the U-5.  During this early post-termination window, while the adviser is trying to get hired and registered, it is common for the former broker-dealer’s agents to solicit the departing adviser’s clients.  Sadly, these solicitations frequently cross the line between fair competition and tortious interference/defamation.

            It should be obvious from this brief summary that it is critical to retain counsel as soon as you begin to even sense that things are going south with your current broker-dealer.  Sometimes the legal department of the broker-dealer will step in and correct its clients’ improper behavior.  Moreover, there are times when the U-5 language initially intended can be modified to be, while still accurate, less prejudicial or inflammatory in nature.  If all else fails, filing an arbitration claim for compensatory and punitive damages and an expungement is a final avenue of recourse.  Please do not try to navigate these treacherous waters by yourself.

The attorneys of Cosgrove Law Group, LLC represent investment advisors, brokers, and other associated persons nationwide in securities employment and regulatory matters, including U-5 defamation matters. Our attorneys also practice in a variety of other areas of law.  If you have a legal matter or concern, please give us a call and speak directly with one of our experienced professionals.

A Closer Look At Regulatory Action Disclosures On Form U4

Financial advisors who become registered with a Financial Industry Regulatory Authority (“FINRA”) member firm should be knowledgeable about Form U4, as it addresses a broad spectrum of historical events that are required to be reported to FINRA. FINRA has offered some interpretative guidance, some of which is explained below, as it relates to Form U4 actions.

Question 14 of FINRA Form U4 concerns criminal disclosures, regulatory action disclosures, civil judicial disclosures, customer complaints, arbitrations, and civil litigation. To begin with, and perhaps to no surprise, an individual who has been charged or convicted of a felony is required to disclosure that information on Question 14A. Even, an individual who has even been pardoned for a crime must report the conviction, according to FINRA’s interpretive guidance.

Financial advisors should take note that misdemeanors are also required to be reported on Form U4 in certain cases. For example, an individual who has been charged or convicted of a misdemeanor involving investments, fraudulent conduct, or wrongful taking of property would be required to disclose those incident(s).

Question 14C prompts individuals to state whether they have been found to have committed certain types of misconduct by the Commodity Futures Trading Commission (“CFTC”) and Securities and Exchange Commission (“SEC”) including: making false statements or omissions; committing a violation of investment-related statues or regulations; and causing a business to have its authorization to do business revoked or suspended.

individuals are additionally required to report on Question 14C whether they have been found by the SEC or the CFTC to have willfully violated Securities Act of 1933, Securities Exchange Act of 1934, Investment Company Act of 1940, Investment Advisers Act of 1940, Commodity Exchange Act, or Municipal Securities Rulemaking Board (MSRB) rules. Disclosure is also mandated when the individual has been found to have aided and abetted a person’s violative activities, or failed to supervise another person responsible for committing violations in the securities industry.

Similarly, Question 14(E) requires that individuals report if they have been found by a self-regulatory organization to have made false statements or omissions, violated SEC rules; or caused an investment-related business to lose authorizations to conduct securities business. Any suspensions or expulsions from those self-regulatory organizations are required to be reported. Plus, disclosure is necessitated when there have been any findings of federal securities law violations committed by the individual, or someone who the individual supervised or aided.

FINRA confirms in Question 14G that individuals are required to disclose to FINRA when they are notified that they have become subject of a regulatory complaint or proceeding brought on by the SEC, CFTC, other federal agencies, state securities commissioners and self-regulatory organizations. Investigations, according to FINRA, are signaled by the issuance of a Wells Notice to the individual or the individual being notified from FINRA staff that formal disciplinary action has been recommended by FINRA. However, not all things mean an investigation to FINRA. For example, requests for information, regulatory inquiries and subpoenas, per se, apparently do not constitute investigations.

FINRA’s guidelines further reveal that when an individual has been subject to an order from a foreign regulatory agency that is later vacated, the individual generally has to report the order because of the advisor’s obligation to report the original findings. Exceptions exist, according to FINRA’s guidelines, where the regulatory agency not only vacates the order, but confirms an intent to make that order have retroactive effect.

Individuals who are the subject of a FINRA Acceptance, Waiver and Consent are also required to disclose this information so long as the AWC concerns findings as to the individual’s misconduct identified in Question 14(E). There are some situations; however, where violations of the rules do not have to be reported, including some “minor rule violations” where the fine is no more than $2,500.00 and the individual does not contest the fine.

Financial advisors and stockbrokers often wonder how to go about making disclosures concerning negative events. If you are in a situation that mandates disclosure, such as a pending regulatory investigation, it is best to consult with an attorney. If you need assistance, you may wish to consult with the experienced counsel at Cosgrove Law Group.

The attorneys of Cosgrove Law Group, LLC represent investment advisors, brokers, and other associated persons nationwide in securities employment and regulatory matters, including U-5 defamation matters. Our attorneys also practice in a variety of other areas of law.  If you have a legal matter or concern, please give us a call and speak directly with one of our experienced professionals.

SEC Affirms FINRA’s Findings of EKN Stockbroker’s Form U4 Violations

The Securities and Exchange Commission (“SEC”) affirmed a Financial Industry Regulatory Authority (“FINRA”) Decision in which EKN Financial Services Inc. stockbroker, Louis Ottimo, was assessed a $25,000.00 fine and two-year suspension in all capacities pursuant to findings that he willfully failed to accurately and timely update his Uniform Application for Securities Industry Registration or Transfer (“Form U4”) to reflect judgments, unsatisfied tax liens, and a bankruptcy filing. (In the Matter of the Application of Louis Ottimo, Admin. Proc. File No. 3-17930 (June 28, 2018).

Back on August 22, 2013, FINRA’s Department of Enforcement filed a Complaint against Ottimo alleging that he, inter alia, violated FINRA Rules 2010, 1122, NASD IM-1000-1, and Article V, Section 2(c) of FINRA’s By-Laws by deliberately failing to disclose facts on his Form U4. An Extended Hearing Panel found Ottimo to have committed the violations, and assessed a $25,000.00 fine and two-year suspension; however, sanctions were not imposed in light of Ottimo being barred by the Extended Hearing Panel for a more serious act: committing securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

On appeal, the National Adjudicatory Council affirmed the Extended Hearing Panel’s findings of Ottimo’s Form U4 violations. Ottimo subsequently appealed to the SEC, who sustained FINRA’s findings with respect to Ottimo’s Form U4 violations.

Ottimo became registered with EKN Financial Services Inc. on March 9, 2009. Because he was registering with a FINRA member firm, Ottimo was obligated to submit a Form U4. Ottimo, like any associated person, was obligated by FINRA rules to keep his Form U4 current at all times. Under FINRA By-Laws Article V, Section 2(c), this meant that Ottimo was required to update his Form U4 within thirty days of learning facts or circumstances giving rise to the need to amend the form.

Question 14.M on the Form U4 prompted Ottimo to disclose whether he had any liens or judgments that were unsatisfied, and question 14.K prompted Ottimo to disclose whether he, or any organization that he controlled, filed a bankruptcy petition within the prior ten year period. The findings stated that after Ottimo commenced employment with EKN Financial Services Inc., he continually neglected to accurately and timely report information on his Form U4 concerning a bankruptcy filing, six unsatisfied civil judgments and seven unsatisfied liens.

Specifically, the findings stated that Ottimo failed to report five of the tax liens issued from January 2010 to April 2010 on his Form U4 until September 2010. In addition, a November 2010 tax lien was not reported by Ottimo on his Form U4 until June 2011, and a June 2011 tax lien was not reported until April of 2012. Evidently, Ottimo’s reporting of the liens occurred well after FINRA’s thirty day time limit for reporting. Critically, Ottimo revealed in a FINRA hearing that he was cognizant about FINRA’s requirements – but he obviously disregarded them.

Further, from March 2008 to April 2010, a total of six civil judgments had been entered against Ottimo, where Ottimo failed to accurately and timely report those judgements. One of the judgments against Ottimo on June 4, 2009 had been vacated on September 9, 2009. Despite Ottimo having amended his Form U4 on four occasions between June 2009 and August 2009, he failed to report that unsatisfied judgment. Notwithstanding the judgement being vacated, Ottimo was still subject to the reporting requirement.

In addition, Ottimo failed to report a bankruptcy petition for a company he founded and which he served as president, Wheatley Capital Corporation. The findings stated that Wheatley filed for bankruptcy on April 27, 2010, and the bankruptcy petition had been signed and submitted by Ottimo. Ottimo evidently neglected to make the bankruptcy known on his Form U4 until April 19, 2002.

In the Opinion, the SEC confirmed FINRA’s findings that Ottimo’s failure to make timely disclosures of liens, civil judgments and a bankruptcy was violative of FINRA By-Laws Article V, Section 2(c). SEC also found that by way of Ottimo’s Form U4 being misleading and inaccurate, he violated FINRA Rules 1122 and NASD IM-1000-1. And as a consequence of violating FINRA Rules 1122 and NASD IM-1000-1, the SEC confirmed that Ottimo violated FINRA Rule 2010.

Moreover, the SEC concluded that Ottimo was subject to a statutory disqualification because of his (1) willful conduct in neglecting to update his Form U4, and (2) material omissions relating to his Form U4. The SEC turned to Securities Exchange Act Section 3(a)(39)(F), which provides a basis for statutory disqualification when a FINRA member intentionally omits a material fact in applying for association with a member.  Finally, the SEC found Ottimo’s conduct willful given Ottimo’s knowledge of his disclosure obligations and the significance of that information (six unsatisfied civil judgements that totaled more than $440,000.00 and unsatisfied tax liens that totaled more than $260,000.00) to investors, employers and regulators.

Interestingly enough, the SEC reversed a part of FINRA’s fraud findings, and in so doing, set aside the barring of Ottimo and remanded the matter to FINRA to determine what sanctions it deems appropriate. The SEC invited FINRA to reconsider its decision not to impose sanctions against Ottimo for his willful Form U4 violations.

Financial advisors and stockbrokers often question whether to make disclosures concerning negative events. If you are in one of those situations, it is best to be careful versus taking a risk that could possibly end your career in the securities industry. If you need assistance with your Form U4 matter, call (314) 563-2490 today to consult with the experienced counsel at Cosgrove Law Group.

The attorneys of Cosgrove Law Group, LLC represent investment advisors, brokers, and other associated persons nationwide in securities employment and regulatory matters, including U-5 defamation matters. Our attorneys also practice in a variety of other areas of law.  If you have a legal matter or concern, please give us a call and speak directly with one of our experienced professionals.

Hey Brokers--Think Before You Sign the State Consent Order

A state regulator has threatened to bring an enforcement action against you for unsuitability relative to the sale of an annuity and barely exceeding the expected churn ratio in an elderly client's brokerage account. Your sister's younger brother is a top-notch commercial litigator with the biggest law firm in town (“Hot Shot”). He comes to your rescue and goes toe-to-toe with your state regulator. To your disbelief, all you must do to extract yourself from the ugliness is sign a Consent Order requiring you to disgorge commissions and pay a modest fine. Unbeknownst to you (and Hot Shot), you become statutorily disqualified from practicing in the industry for 10 years as the instant the Commissioner accepts and signs the Order.

The following are just a few critical excerpts from FINRA's website regarding industry disqualification and eligibility requirements and proceedings:

“Eligibility Requirements - Article III, Section 3 of FINRA's By-Laws provides that no member shall be continued in membership if it becomes subject to disqualification; and that no person shall be associated with a member, continue to be associated with a member, or transfer association to another member if such person is or becomes subject to disqualification. FINRA's authority to deny the registration and/or membership of disqualified persons or members is set forth in Section 15A(g)(2) of the Securities Exchange Act of 1934. Disqualification Defined - FINRA amended its By-Laws on July 30, 2007 to incorporate the definition of "disqualification" as set forth in Section 3(a)(39) of the Exchange Act.”

Section 604 of the Sarbanes-Oxley Act expanded the definition of statutory disqualification in Section 3(a)(9) of the Securities Exchange Act of 1934 by both creating and incorporating Exchange Act Section 15(b)(4)(H) so as to include persons subject to a Final Order of a state securities commission if the Order is based upon the violation of a statute or regulation that prohibits fraudulent, manipulative, and deceptive conduct. Because the list of disqualifying events prior to this expansion fell within the ambit of the obvious—such as convictions, bars, expulsions, and revocations—many members of the industry as well as the legal community remain dangerously unaware of the implications of the final state order. So, for example, while you may have neither “denied or admitted” a state enforcement section's allegations, and unsuitability is likely more a matter of negligence than deception, the Consent Order implicitly admitting you were engaged in churning could very well qualify the Final Consent Order as one based upon deceptive conduct.

No one is going to try to revoke anything from you after the Consent Order is issued. You just automatically revoked it yourself by operation of Federal Law. Once your member firm files the appropriate U-4 disclosure regarding the Consent Order, or the state enters it in to the CRD system, FINRA RAD will fax a letter to your Chief Compliance Officer politely informing your firm that it can file an MC-400 Application or “immediately terminate its association with [you].” Your firm will then have to decide if you are worth it, and you might have to hire an attorney other than Hot Shot.

One final word of caution--and I have seen this too many times--the disqualifying Final Order provision is not limited to Orders issued by your home state or even by a state in which you are registered. So don't blow off a Show-Cause Order from Alaska just because you don't have any clients there. When you default and Alaska issues a Final Order against you for something you didn't even do—you will be in the very unsavory position of having to “unring” that bell or persuade your firm to “sponsor” you through FINRA's Membership Continuation process.

“Article III, Section 3(d) of FINRA's By-Laws permits a disqualified person or member to request permission to enter or remain in the securities industry. Procedural Rules 9520-27 set forth procedures for a member to sponsor the proposed association of a person subject to disqualification or for a member to obtain approval to remain a member notwithstanding the existence of a disqualification. These actions are referred to as "Eligibility Proceedings."

Generally speaking, a person who is subject to disqualification may not associate with a FINRA member in any capacity unless and until approved in an Eligibility Proceeding. If a person is currently associated with a FINRA member at the time the disqualifying event occurs, however, the person may be permitted to continue to work in certain circumstances, provided the employer member promptly files a written application seeking permission to continue the employment in an Eligibility Proceeding. A member subject to disqualification also may be allowed to remain a member, in certain circumstances, pending the outcome of an Eligibility Proceeding, provided the member promptly files an application requesting approval of its continued membership.

Once it becomes aware of a statutory disqualifying event (related to the member or a disqualified person), the member is obligated to report the event to FINRA. In the case of a disqualified person, the Firm must either file a Form U5 if it wishes to terminate the individual's association or file a Form MC-400 application if a member wishes to sponsor the association of a disqualified person. The member should file any MC-400 application when it amends the Form U4 and it must amend the Form U4 within 10 days of learning of a statutory disqualifying event (see Art. 5, Sec. 2(c) of the FINRA By-Laws). The MC-400 application requests information about the terms and conditions of the proposed employment, with special emphasis on the proposed supervision to be accorded the disqualified person.”

FINRA SD12003 is just one of the many cautionary tales I could tell. The broker in that case purchased three (3) collateralized debt obligations his firm promoted through an auction rate securities market that his firm sponsored for a municipal client in Massachusetts in 2006. The broker entered into a Consent Order with the Massachusetts Securities Division in 2008 in which he agreed to pay a modest fine and be suspended for six (6) months. Mr. Broker returned to work with a new firm in August of 2008 after Massachusetts allowed him to re-register with the state. Everything went just swimmingly until presumably a year later, his firm received “the letter” from FINRA. According to FINRA Registration and Disclosure, Mr. Broker was out of the game when the state Consent Order was entered by the Director of the Massachusetts Securities Division.

Mr. Broker's new firm filed the MC-400 application in January of 2010. FINRA's Member Regulation staff opposed the application. A hearing was held before the National Adjudicatory Council¹ 18 months later, in September 2011. The National Adjudicatory Council (“NAC”) issued its opinion in favor of Mr. Broker the next year. Get the picture? So--consult with an attorney trained in state and FINRA disciplinary matters before you sign a state consent order.² Do not rely solely upon your brother-in-law or even your firm's compliance department. Same goes for you compliance officers!

1  These are fairly uncommon and very serious. I represented an applicant in one and we prevailed.

2  David Cosgrove is the former Commissioner of Securities and has represented brokers in MC-400 proceedings since 2007. He represents brokers and broker-Dealers throughout the United States.