The Beck Law Firm, LLC Blog

Review of September U4-Related Cases

FINRA recently published the disciplinary actions for September 2011.  There are a few cases this month dealing with U4 issues, including two cases against firms for U4 related violations.

First the firms.  In one case, (Case 2010021038901) a firm was fined $75,000 and censured for a variety of violations including net capital, books and records, as well as U4 issues.  FINRA found that the firm failed to ensure amendments to brokers’ Forms U4 were filed to disclose customer complaints and the resolutions to the complaints.  FINRA also found that the firm filed certain amendments late.    In another case, a firm was censured and fined $60,000, and an individual was also sanctioned for a variety of violations found by a Hearing Panel.  The Panel found that the firm failed to make required updates to the Forms U4 and U5 of registered reps. relating to customer complaints, arbitration cases, and lawsuits within 30 days (Case 2008011701203).  

FINRA also sanctioned several individuals for not properly completing their U4.  In one case, a broker submitted an offer of settlement to resolve allegations that he failed to disclose material information on his U4.  Specifically, FINRA found that he willfully failed to disclose felony charges that had been filed against him.  Case 2009018670101.  The broker was suspended for six months and fined $5,000.  But because the findings were that he willfully failed to disclose the information, he was subjected to a statutory disqualification.

In another case (case 2009018582501), a broker was fined $5,000 and suspended for 30 business days based on findings that he failed to disclose on his U4 that he had been charged with three felonies.  The charges were later reduced or dismissed, but FINRA alleged that he did not properly disclose them.  This case did not include a finding of a willful failure to disclose material information.

Finally, another broker was suspended for six months, but not fined due to his financial condition, based on findings that he willfully failed to disclose a felony charge and conviction on his U4. Case 2010023830101.  Given the willful finding, he was also rendered statutorily disqualified.

This month's cases against individuals seemed to all relate to criminal issues, but that is not typical. Prospective brokers and brokers should understand that the criminal background search conducted by the FBI for FINRA is pretty thorough, and often catches criminal records that the broker did not disclose on the U4.  Because of the potential of being statutorily disqualified due to a willful failure to disclose such information, brokers who don’t properly complete their U4 subject themselves to some significant penalties and can jeopardize their ability to work in the securities industry.

 

Momentum Gaining on RIA SRO?

Earlier this week, Investment news reported that support for a self-regulatory organization for registered investment advisers is apparently gaining momentum.  The article highlights many trade groups that have thrown their support behind FINRA as a possible SRO for advisers though some state regulators object to an SRO.  On Monday, Rick Ketchum, CEO of FINRA, testified before a House subcommittee (the Subcommittee on Capital Markets and Government Sponsored Enterprises Committee on Financial Services).  The text of his testimony can be found online here.  As you would expect, Ketchum was in favor a a SRO for RIAs, and for FINRA being an SRO in that arena.  With what appears to be some bipartisan support for an adviser SRO, it's coming, I think.  Just a matter of when.  

Do You Need to Update Outside Business Activity Disclosure Forms?

As Fall temperatures start to come this way, many firms will be gearing up for annual compliance meetings with their brokers as 2011 begins to draw to a close.  At these annual meetings, firms often have brokers complete their annual compliance questionnaires, as well as to make sure that brokers have provided disclosure of outside business activities, U4 amendments, etc.  

Compliance folks putting these forms together should remember that last December, FINRA Rule 3270 took effect, replacing former NASD Rule 3030 relating to outside business activities.  The new rule is more expansive, and it imposes some supervisory obligations on the broker-dealer as well.  For more info. on the new rule, see this post on implications for brokers, and this one for implications for firms.   In light of this rule change, firms will likely wish to update their disclosure forms to capture the expanded scope of the rule.  

FINRA Sanctions Broker-Dealers for Improper "Handling" Fees

FINRA announced yesterday that is fined five broker-dealers for improper handling fees that were charged to customers.  According to the press release, the firms mischaracterized a portion of the commission it earned as handling charges for customer trades. The sanctioned firms allegedly charged handling fees on trades as high as $69 to $99 on an individual trade, with these amounts apparently being in addition to commissions that the firm charged.  FINRA stated that, "In some cases, firms charged a handling fee of almost $100 per transaction and earned a substantial percentage of their revenue from these fees."  FINRA's Enforcement chief explained, in effect, that firms must disclose trade commissions on the confirmations and that firms cannot improperly describe commissions as charges for ancillary services.   

According to FINRA's release, the fnes imposed against the firms ranged from $60,000 to $300,000.  Many of the firms involved in these cases were also charged with additional rule violations.  

I wrote about the prospect of firms facing charges like this back in July, when I highlighted a brief remark about these matters by Rick Ketchum in a speech to attendees at the FINRA annual conference.  Check out that earlier post for more background info.