From Ulmer’s Broker-Dealer Law Corner Blog
By Alan M. Wolper
I have written a few times about FINRA’s ceaseless interest in bringing cases against registered reps who fail to update their Form U-4 in a timely manner to disclose the fact that a tax lien has been filed against them. Or several tax liens. The problem with these cases is not so much the sanctions that FINRA imposes, as they tend to be fairly modest, e.g., a fine of $5,000 or less plus a suspension, maybe of 30 or 60 days in length. No, the problem is that FINRA often likes to characterize these failures as “willful,” which results in the registered rep being statutorily disqualified from continuing to work in the securities industry, necessitating the filing of a MC-400 application to seek FINRA’s approval to remain a registered rep notwithstanding the modest nature of the rule violation.
Well, this week, FINRA accepted a very interesting AWC from J.P. Morgan Chase, which included a $1.1 million fine, as a result of the fact that JPMC failed to update the Forms U-5 of 89 former registered representatives, over a six-year period, to disclose the fact that these RRs were the subject of an internal review concerning allegations that they had misappropriated or transmitted “proprietary Firm information,” took customer information in connection with the transfer to another broker-dealer, or violated some “investment-related banking industry standard of conduct.” A repeat violation for the firm, too.
Eighty-nine failures to update Form U-5 in a timely manner, over six years. But, guess what? FINRA did not consider this to have been willful! Thus, unlike all those poor RRs who failed maybe ONCE to update their U-4 to disclose a tax lien who FINRA insisted did act willfully, and were, thus, statutorily disqualified, that was not the case of the firm here.
And, look, this was hardly a ticky-tack AWC. JPMC paid $1.1 million, and for good reason, it seems. The misconduct that JPMC failed to disclose was serious. Thirteen of the RRs had “misappropriated funds from banking customers.” Another five misappropriated funds from JPMC. Other RRs were alleged to have “engaged in structuring or other suspicious activity, falsified, forged or altered bank-related documents, engaged in unauthorized trading, made unsuitable recommendations, engaged in selling away or undisclosed outside business activities, and borrowed from customers.” A vertiable murder’s row of sales practice violations.
On top of that, because the firm failed to make these disclosures, by the time FINRA found out about the alleged misconduct, it had lost jurisdiction over more than 30 of the RRs (because more than two years had elapsed), thus precluding it from taking any disciplinary action against them. Another 36 RRs who are still in the securities industry had already changed broker-dealers, preventing both FINRA and the new employers from adequately reviewing their applications for registration.
I cannot even begin to tell you the number of times I have argued with some FINRA Enforcement lawyer, or a hearing panel, about the issue of willfulness. It is, sadly, abundantly clear that there is zero consistency from case-to-case, from lawyer-to-lawyer. It always comes down to “prosecutorial discretion,” which is vast and nearly unassailable. What does that mean in real life? It means it is impossible to predict with any real sense of accuracy how a case is going to be charged, and the inability to make that determination spells trouble for respondents, who remain at FINRA’s mercy.
I don’t want to over-generalize anything from one AWC, but let’s just say that there are those among us who are of the view that at least one thing IS predictable, and that is disparate treatment by FINRA between big BDs and small BDs, or, similarly, between big BDs and individuals who work for small BDs. I didn’t handle this case for JPMC, so I don’t know what transpired during the negotiations that led to the AWC. Which means I don’t know if FINRA initially wanted to charge the extended failure here to update the RRs’ Forms U-5 as willful and was later convinced to change its mind, or if, for some reason, FINRA never characterized the failure as willful. Regardless, it is fascinating to speculate what FINRA would have done if this was a small firm and not JPMC.
 According to the AWC, while all the RRs were registered with JPMC, most were associated with the firm’s bank affiliate.