On December 16, 2019, FINRA released the AWC in Matter No. 2018060843801 (In re Molteni) [click here to read the AWC]. At first blush, the AWC seems to concern a garden variety violation in which the FA failed to amend his Form U4 to disclose two federal tax liens. This doesn’t seem to be the violation of the century, right? Even FINRA’s Sanction Guidelines suggest a regulatory slap on the wrist of a modest fine and 10 day suspension.
So here is where things get interesting. FINRA more or less sanctioned Molteni in accordance with the Sanction Guidelines. They hit him with a $5,000 fine and a 3 month suspension. However, FINRA also found that he “willfully” failed to disclose the federal tax liens. In the world of FINRA regulation, the word “willful” carries an awful lot of weight.
What does it mean to act “willfully”?
According to FINRA, a willful violation of the securities laws means simply that “the person charged with the duty knows what he is doing” and does not require that he also “be aware that he is violating one of the Rules or Acts.” Wonsover v. SEC, 205 F3d 408, 414 (D.C. Cir. 2000). A failure to disclose information on a Form U4 is willful “if the respondent of his own volition provides false answers on his Form U4.” Robert D. Tucker, Exchange Act Release No. 68210, 2012 SEC LEXIS 3496, at *41 (Nov. 9, 2012).
What are the implications of acting “willfully?
Here’s where FINRA drops the hammer. Under Section 3(a)(39)(F) of the Securities Exchange Act of 1934, a person is subject to statutory disqualification if, among other things, he “has willfully made or caused to be made in any application … to become associated with a member of a self-regulatory organization … any statement which 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 … any material fact which is required to be stated therein.” 15 U.S.C. § 78c(a)(39)(F). Article III, Section 3 of FINRA’s By-Laws provides that a person subject to a statutory disqualification cannot become or remain associated with a FINRA member unless the
disqualified person’s member firm applies for, and is granted by FINRA, relief from the statutory
What are the implications of statutory disqualification?
So, although FINRA ostensibly suspended Molteni for 3 months, practically speaking, they barred him for life. Once an individual is subject to “statutory disqualification” that person cannot become or remain associated with a brokerage firm absent special permission from FINRA. You may ask, is it difficult to get “special permission from FINRA? If you asked that question, the answer would be “hell yes.”
If a brokerage firm wants to hire an individual subject to statutory disqualification, FINRA requires the member firm to complete a Membership Continuance Application (called an MC-400 application). If you’ve never seem one of those, click here. Basically, FINRA asks for a ton of information about the disqualifying event, information about how the firm will supervise the individual, and a lot of information about the firm itself. At the end of the day, firms don’t want a headache like this and I don’t blame them. Not only does the firm need to satisfy FINRAs demands in the MC-400 application but the firm also needs to participate in an “eligibility proceeding.”
Very few firms are willing to deal with the road-blocks associated with hiring a disqualified individual. For that reason, Molteni wasn’t suspended for 3 months. In reality, he was barred for life. And that is all because of the word “willful.”
Herskovits PLLC represents individuals and firms in defense of FINRA investigations and disciplinary proceedings. Feel free to view our practice area page here, or simply call us at 212-897-5410.