Though I had prepared these monthly reviews, it seems as if they did not get posted to the blog. So here's a review of selected U4 cases from the fourth quarter of last year.
December 2011
FINRA has published its monthly notice of disciplinary actions for December 2011. The monthly notice reveals numerous cases against individuals for U4-related violations. By my count, FINRA reported about 7 cases for the month. Most of the cases involved willful failures to disclose material information on the U4, or willful failures to amend the U4 to make such disclosures. Regular readers of the blog know that willful findings result in that person being statutorily disqualified from working for a broker-dealer, regardless of the sanctions imposed.
This month’s report details cases against brokers as follows:
* a broker failed to disclose four bankruptcy petitions filed over a ten year period, and never amended the U4 to report any of them. Broker was fined $10,000 and suspended 6 months. Case also included findings that broker improperly borrowed money from a client and denied such borrowing on a compliance questionnaire submitted to the firm.
* a broker failed to disclose four felonies and a guilty plea to one of them by a broker. Broker was fined $5,000 and suspended 9 months.
* a broker failed to report a small claims court judgment ($4,632) as well as an IRS federal tax lien in a timely manner. Broker was suspended 90 days; no fine due to his financial condition.
* a broker failed to disclose an unsatisfied judgment against him and was fined $5,000 and suspended for 6 months. Case also included a charge that the broker failed to timely respond to FINRA information requests.
* a broker failed to disclose a felony charge due to his bouncing a check to a casino to pay off his marker, and who failed to timely update his U4 to disclose a “Wells” letter from the SEC. Broker was suspended 60 days but was not fined due to his financial condition.
* a broker failed to disclose the suspension/revocation of his law license. Broker was barred.
* a broker was suspended, after an appeal hearing, for two years based on findings that he failed to disclose federal and state tax liens, two bankruptcies and three judgments. That case is on appeal to the SEC.
(These are summaries of the highlights of the cases identified in the report, for discussion purposes. See the disciplinary actions for more detailed explanations).
Most of these cases resulted in the broker being statutorily disqualified, meaning they can’t work in the broker-dealer industry again absent obtaining special permission from FINRA and the SEC. The troubling part is that most (but not all) of these issues did not involve disqualifying events. This means that, had the matters been reported on the U4, the brokers would not have been ineligible to be registered under the securities laws. By willfully failing to disclose, they now are disqualified.
November 2011
FINRA has published its monthly disciplinary actions for November 2011, and there are a handful of reported cases that involve U4 issues. Most of the cases are of the typical U4 case variety: failure to disclose liens, judgments and criminal charges, and several of these cases involved brokers who were in the industry but failed to update their U4 to make the disclosures (compare that to a case of a new broker who fails to disclose required information on the initial Form U4). With respect to the cases against individuals, several cases were resolved without FINRA making findings that the violation was willful, meaning that no lifetime statutory disqualification resulted from the action; however, in many cases brokers effectively receive a lifetime bar for what might be described as a minor oversight. In addition to cases against individual reps., there was also a case against a broker-dealer that, among other things, failed to ensure that it timely updated Forms U4 for brokers who were the subject of reportable customer complaints. A few of the U4 case highlights this month are:
Case 2009017746801 – FINRA found that a broker willfully filed a false U4. The broker was terminated from a firm after it discovered issues with respect to his alleged commingling and misuse of customer funds. Following that termination, the broker completed a U4 to join another firm, but answered “No” to the question of whether he had ever been discharged, permitted to resign, or voluntarily resigned after allegations were made accusing him of violations of industry rules or regulations or industry standards of conduct. FINRA asserted that this U4 was false, and that he willfully completed a false U4. Further, FINRA made findings that he commingled and misused customer funds and barred the broker from association with FINRA member broker-dealers.
Case 2009016300801 – FINRA censured a broker-dealer and fined it $150,000 making findings of several violations, including that the firm failed to timely report quarterly information through the 3070 system, failed to maintain complete customer complaint files, and failed to timely update Forms U4s of brokers who had received customer complaints.
U4 issues continue to produce a steady stream of disciplinary cases for the regulators. If you’re a broker, you may wish to be proactive and ensure that your U4 is maintained current, so that you do not find yourself as the subject of a regulatory investigation.
October 2011
A review of this month's notice finds many U4 related enforcement cases including these highlighted below:
Case 201002396401 – a broker was suspended 30 days and fined $20,000 based on findings that he failed to provide sufficient information to his firm to allow it to properly amend his U4 to disclose that he was charged with a felony in connection with a traffic accident, and that the felony charge was later dismissed. The case was not alleged to have been a willful failure so the broker does not become permanently disqualified.
Case 20100248104 – a broker was suspended six months and fined $5,000 based on findings that he failed to amend his U4 to disclose criminal charges against him. The report says that the broker was charged with three felony counts of making false statements to a federally-insured bank for the purpose of obtaining a mortgage loan. The findings were that his conduct was willful, so after the suspension is served, he will continue to be statutorily disqualified.
Case 2010022448601 – a broker was suspended for three months and fined $5,000 based on findings that he willfully failed to amend his U4 to disclose tax liens against him by the IRS and a state. He ultimately amended the U4, but did so only after the liens were discovered by his firm, the notice reports. The findings were that the failure to amend was willful, so the broker is SD.
Case 2010023439901 – a broker was suspended 60 days and fined $5,000 based on findings that he willfully failed to amend his U4 to disclose a tax lien against him. FINRA noted that the broker had previously been disciplined by his form for failing to timely disclose material information to them and update his U4. Since the findings were that the failure to amend was willful, the broker is SD.
Case 2008011725901 is a hearing panel decision involving a broker who was also a principal and officer of his firm. FINRA fined him $15,000, suspended him in all capacities for one year, and barred him for working as a principal. The findings were that the broker willfully failed to disclose info. on his U4, that he willfully failed to update his U4, and that he willfully filed U4s that omitted material information (he apparently made many of the U4 filings/amendments of his own U4 himself as a principal of the firm). The decision explains that the omissions related to seven arbitration cases in which the broker was named, and involved many failures relating to amendments that were required due to these arbitration cases. The panel noted that the broker’s “[f]ailure to maintain his own U4 for more than five years shows that he is incapable of performing the duties of a principal.”
Case 2010023974801 - a broker was suspended for 30 days and fined $2,500 based on findings that he failed to timely amend his U4 to disclose a tax lien against him. The U4 was amended, albeit about two and a half months late. The case was not charged as a willful failure, so the broker will not be SD.
In addition to these cases, FINRA reported other cases involving U4 issues along with other substantive charges. I think that we continue to see FINRA being aggressive in U4-related cases, and aggressive in charging cases as willful misconduct, which results in the draconian imposition of a statutory disqualification. Brokers would be well-advised to insure they know what types of items require reporting on their U4, and that, should a disclosable event occur, that they seek to amend their U4 timely.
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