The Beck Law Firm, LLC Blog

A U-4 Primer: Part Two

Last time, we discussed the general purposes and overall regulatory scheme for the U-4.  Now, let’s talk about some disclosable events and what has to be disclosed.  Generally speaking, the Form U-4 is a very straightforward document, when taken together with the official instructions for completion of the document.  Based upon my own observations, I believe that many folks rush through completing the form and don’t pay attention to the instructions.  Many times, those people get busted for making a misrepresentation or omission on the U-4, and, in the case of a new broker, ruin the prospects of their career before it ever gets going.  So what should you do?  First, read the instructions, which can be found on FINRA’s website and on CRD.  Second, pay close attention when completing the form – anytime you see an italicized word that means it has a special definition for this form – check that out in the instructions.

Here are a few disclosable events where folks commonly get trapped:

Item 13 – Other Business.  An often-overlooked area.  In addition to disclosing outside business activities to your firm pursuant to Rule 3030 – the Form U-4 requires those disclosures as well.  But note that the disclosure here is rather exhaustive, including the nature of the business, your title, start date, approximate number of hours your work per week or month for that business, how many hours during trading hours, and a brief description of your duties.

Item 14A&B – Criminal Disclosure.  Here, question 1(b) of each section does not ask if you have been convicted of certain offenses, only whether you have been charged.  Charged is italicized, and the definitions explain that this means being formally accused of a crime in a formal complaint or indictment.  Even if you were not convicted, you are instructed to disclose the charge for the identified offenses.  Note that there is not a time-limit for these questions, such as within the last ten years; rather, the question uses the word, “Ever.”

Item 14H&I – Civil Judicial and Customer Complaint/Arbitration Disclosure.  Here, applicants are instructed to disclose any investment-related matters under these questions.  Again, investment-related is specifically defined and on the U-4 is much more broad than securities.  According to the definition, it encompasses insurance, real estate, and commodities along with securities.   

Bottom line – read the U-4 and its instructions carefully.  If you have a question, seek knowledgeable counsel.

RANT - No freedom to contract? Should regulators mandate lowest cost options? No, but they are!

FINRA today released news that it fined AXA Advisors $1.2 Million  for what it terms "fee-based account violations," and ordered the firm to return $1.4 million in fees it collected to customers.  See the release  here.  What really bothers BDLawBlog.com about this matter, and similar ones before it, is that FINRA appears to take the position that a firm MUST sell its products to customers at the lowest possible price, regardless of services provided, and regardless of what clients desire.

According to the release, there were several problems at AXA.  First, they marketed their fee-based accounts for investors with at least $50K and who would be planning on trading some, as opposed to pure buy-and-hold investors.  But, AXA allegedly ignored its $50K minimum and let smaller investors into the program.  Moreover, they allegedly provided "inaccurate information to brokers and customers about how fees would be assessed in these accounts."  These seem like valid findings.  But, FINRA also cites to supervisory deficiencies that seem to relate the firm ensuring that only customers for which a fee-based account was "appropriate" were allowed to maintain such an account.  This presumes, of course, that FINRA is the arbiter of who is "appropriate" for a fee-based account.  Apparently, "appropriate" means effecting transactions to clients at the lowest price, regardless of the contracts for services (that includes services beyond the transactions) that clients voluntarily enter with their brokerage firm.

For professional services, most folks don't choose service providers based on the lowest possible cost.  I don't choose a surgeon who advertises the lowest price or provides me with a 110% price difference guarantee.  I don't use an accountant who has a blow-out sale on tax preparation and planning services.  Rather, I hire other service providers based on their knowledge, skills and abilities, and that of their organization.  Likewise, many investors choose their investment rep. in the same fashion.  With these types of disciplinary actions, it appears to me that FINRA apparently does not recognize that an investment rep. provides valuable services to clients beyond the transaction, and apparently uses lowest possible cost as the single factor in determining "suitability."  Following the regulators' logic - to an extreme - full-service shops should simply refer all clients and prospects to discount brokerages, because the investors can pay a smaller commission there. 

I'm in favor of protecting investors.  Certainly.  But investor protection is not about overriding the free market and mandating the way in which services are provided and fees charged.  It just ain't right, and that's my $0.02. 

A U-4 Primer: Part One

Lately, many hits to BDLawBlog.com have come from searches for information on Forms U-4, statutory disqualifications and disclosable events.  Seems like a lot of folks have the Form U-4 on their mind, so I thought I’d do a series on the Form U-4, what you need to know, and what you need to do with respect to it. (We’ve earlier posted about the little known statutory disqualification relating to U-4 violations - see link below)  And, for the firm side, we’ll talk about supervisory obligations relating to U-4 matters, too.  Here in part one, we’ll discuss its ultimate purpose and the typical rules applicable for this document.  In subsequent parts, we’ll discuss disclosable events, and regulatory violations relating to the U-4, and a supervisor/firm’s obligations relating to reporting and supervising.

The U-4, also known as the Uniform Application for Securities Industry Registration or Transfer, is the predominant vehicle by which regulatory bodies (FINA, the states, and exchanges) screen candidates for registration and registered folks for new or continued registration.  It is also one of the primary sources of information for a broker’s Central Registration Depository (CRD) record.  It contains personally identifiable information about each broker or candidate such as name, SSN, physical characteristics, address history, work experience, and education.  Beyond these basics, brokers are required to self-report information relating to customer complaints, arbitration claims, regulatory proceedings, bankruptcies, certain criminal history, certain civil litigation and liens and judgments, etc.   

The primary regulations relating to the Form U-4 come from FINRA.  Article 5, Section 2 of the FINRA (formerly NASD) Bylaws require that any person applying for registration with FINRA submit an application (the Form U-4) and that the application be kept current, by amendment, at all times.  This Bylaws section grants folks up to 30 days to amend their Form U-4 after learning of the facts giving cause to make an amendment.   FINRA historically enforces this requirement by pursuing violations of Rules IM-1000-1 and 2110 against applicants and brokers who fail to honestly report information on the U-4, or fail to timely amend their U-4.  Unfortunately, in a rather draconian scheme, a “willful” failure to report information on the Form U-4 can have disastrous consequences, including a permanent statutory disqualification.  Read about that HERE.    Stay tuned for Part Two.

The Wheels Turn Slow, But They Turn

In December 2002, the SEC filed a Complaint in US District Court for the Northern District of Georgia (BDLawBlog's home district) alleging that four insurance salesmen from Florida defrauded senior citizens by selling them into a ponzi scheme relating to pay telephones.  The Commission alleged that the four made material misrepresentations and omissions to investors and violated various section of the federal securities laws.  In January 2003, three of the four consented to permanent injunctions from violating the securities laws.

Last Friday, the SEC announced that the District Court entered a Final Judgment requiring all four to disgorge their sales commissions, with interest, and to pay a civil fine.  Each were ordered to disgorge commissions ranging from about $73,000 to about $156,000, and each were given an additional $50,000 fine as well.  See the SEC release  here. 

What's interesting about this case is that it is so uninteresting - it is so typical.  I don't know any of the salesmen, but I'd bet if I could interview them, their story would be the normal one:  "I didn't know I had to be registered to sell this; I didn't know it was s fraud; I didn't know that my customers would be ripped off; I didn't know that getting a commission of 20-22% was a red flag; I didn't know that the investments were not fully insured as the issuer told me, etc., etc."  Many people understand that if it appears too good to be true, it is, but these guys apparently didn't get that. Had they been brokers, their firms would undoubtedly been named in various arbitration claims and firms could have been taken to the cleaners for the actions of their agents.  Have you  double-checked your firm's 3030/3040 policies and procedures?  Importantly, have you reiterated those to the troops lately?  Might be a good time.

The Summer is Over - More Regulatory Activity On The Way?

All has been quiet on the regulatory front the past month or so, particularly from FINRA.  There has been a dearth of press releases, announcements and other regulatory activity, some say.  Summer is over, vacations are completed, so can we now expect things to heat back up on the regulatory front?  If this year is to be like the last several, then yes, we can.