It is a nasty thing when one becomes statutorily disqualified. It means either leaving the industry, permanently, or having to file an MC-400 and trying to convince FINRA that you should be permitted to remain in the industry, albeit subject to heightened supervision and extra scrutiny from FINRA.  I have previously blogged about statutory disqualification, and the long and short of it is that it’s a minefield, very, very difficult to navigate.  I feel like I know as much about statutory disqualification as anyone in the industry, yet, I keep a copy of Reg Notice 09-19 handy on my desk because at least a couple of times each week I find a need to refer to it to ensure that my understanding of what triggers a statutory disqualification, and the consequences of being statutorily disqualified, is correct.  Even so, I still call FINRA’s Registration and Disclosures group regularly with questions, as 09-19 is hardly a model of clarity.

One thing that is quite clear, however, is that a finding of willfulness typically triggers a statutory disqualification. Many, many registered representatives have discovered this sad fact for themselves as they have dealt with the dozens, if not hundreds, of Enforcement cases FINRA has brought over the last few years involving failures to update Form U-4 in a timely manner to reflect an unpaid tax lien.  If that failure is not willful, the sanctions are pretty benign, maybe a $5,000 fine and a relatively short suspension.  On the other hand, if the failure is deemed to be willful, in addition to those sanctions, the respondent is also deemed to be statutorily disqualified, with all the nastiness that entails.  As defense counsel, when engaged to handle one of these cases, the battle line is typically drawn at the issue of willfulness (as the cases are pretty easy to settle absent willfulness).

The problem is, it is difficult to figure out exactly when FINRA will deem a failure to report a tax lien in a timely manner to be willful, and when it will not. I can personally attest that I have had a variety of clients tell essentially the same story to FINRA – I did not know about the lien, or I did not know I had to report the lien – yet come away with widely different outcomes.  On one end of the spectrum, I have had FINRA take no formal action, and choose to content itself by issuing a Cautionary Action letter.  In the middle, I have had FINRA take formal action, but agree the violation was not willful.  Finally, on the other extreme end of the spectrum, FINRA has taken formal action and deemed the violation to be willful.  It can be extremely frustrating to make the same argument over the same set of facts, but get different results.

This whole issue was teed up for me again recently when I read a blog post by Bill Singer, tireless author of Broke and Broker, a wonderful blog for anyone in the securities industry, who pointed out a recent FINRA settlement involving a failure to disclose a tax lien in which there was no finding of willfulness.  His point, and one with which I wholeheartedly agree, was why doesn’t FINRA give any real guidance on this subject?  You can read case after case and still not be able to get a firm handle on those particular set of facts that will cause FINRA to conclude that it must charge willfulness under those circumstances.  Given the crushing impact that a willfulness finding can have, due to the statutory disqualification that ensues, I think FINRA owes a duties to its members to spell this out with abundant clarity.

Finally, one more thing about statutory disqualification: FINRA could care less that a finding of willfulness renders a registered representative SD’d.  As the Department of Enforcement recently put it in a brief it filed in one of my cases,

statutory disqualification is not a FINRA sanction; it is a status that flows as a matter of course from predicates enumerated in the Exchange Act. If [Respondent] believes that statutory disqualification is an unduly harsh outcome for willfully violating U4 reporting requirements, he should address his grievances to the SEC and Congress. The SEC and the NAC surely would not want FINRA hearing panels to engage in the equivalent of jury nullification by declining to find willfulness where it has been proved.

What an outrageously callous remark for the staff to make. At least one hearing panel, over a decade ago, had the courage to state the obvious:  “A finding of willfulness, though not an element of the offense under Rule 2110, has serious collateral consequences.”  That FINRA staff consciously disregards these consequences, however, potentially career-ending consequences, just blows me away.

Clearly, the existence or non-existence of a statutorily disqualifying event is relevant.  And I know this because the Sanction Guideline for inaccurate U-4 cases includes as one of the Principal Considerations “[w]hether [the] failure resulted in a statutorily disqualified individual becoming or remaining associated with a firm.”  The fact that whether someone is SD’d or not is expressly pertinent to the determination of the appropriate sanction necessarily means it is not just a material fact, but an important one.  For FINRA simply to pretend it doesn’t care that its charging decision will dictate whether or not a respondent gets SD’d, or that such a finding isn’t a “sanction,” is both short-sighted and unfair.