BD Law Blog - by Georgia Securities Lawyer Joel Beck

SEC Alleges Investment Adviser Misrepresented Assets Under Management

On December 29, 2011, the SEC instituted an administrative proceeding against an investment adviser and its principal alleging federal securities laws violations.  The SEC alleged that the adviser (acting through its principal) misrepresented the amount of assets under management to gain business, as well as allegedly made false and misleading statements on the Form ADV.  For example, the SEC alleges that assets under management were reported as growing from $27 million to $200 million, though the actual assets under management were never more than $3 million.  The SEC also alleged that marketing material for a fund was misrepresented, including returns for the fund for time periods before the fund commenced operations. The respondents in the case will have an opportunity to file an answer and to dispute the charges against them, that, at this point, are only the SEC's allegations.

Accurate reporting on Forms ADV (as well as the broker-dealer equivalent forms, Form BD and U4) are critically important.  Be sure that your ADV, BD and U4 are completed accurately and completely.  

Review of September U4-Related Cases

New blog post reviewing FINRA's September 2011 disciplinary cases involving U4 issues is online now over at www.u4review.com.  The link to that specific post is here.  

U4Review.com Now Live!

I'm pleased to annouce that a new site, www.u4review.com, is now live.  This new site will focus on all things U4-related, with emphasis on U4-related disciplinary actions against brokers and the serious ramifications that those can bring.  The new site also provides details on a new service, the U4Review, designed to provide an affordable and efficient way for brokers to get help with their U4 disclosure questions, with a goal of helping those brokers avoid disciplinary consequences for failing to disclose required information on the U4, or misrepresenting such required information.  Be sure to click on over and check it out.

Coming Soon: U4Review by The Beck Law Firm, LLC

Over the past several years, one of the most common questions I get from stockbrokers, or prospective stockbrokers completing their first Form U4, is whether this or that gets reported on their Form U4, when it should be reported, and how it has to be reported.  Brokers are concerned about U4 questions dealing with criminal charges and convictions, customer complaints, arbitration claims, bankruptcies, and other matters, and often have questions about whether to disclose these items, and how to do so.  Over the years I’ve also observed that brokers are also typically unaware of the significant penalties they can face when they fail to disclose information properly on their U4.

Soon, The Beck Law Firm, LLC will offer the U4Review, to answer these questions in a quick and affordable manner, while providing brokers with sound advice on their U4 issues.  I'm working on the details now, and will roll those out online at a new site, www.u4review.com.  You can check that out later this month, or stayed tuned here on BDLawBlog for more info. 

 

FINRA Sanctions Goldman Sachs for U4 Updating Failures

FINRA recently announced that it sanctioned Goldman Sachs with a censure and fine of $650,000 based upon findings that the firm failed to update timely the Forms U4 of two individuals, and failed to have in place a reasonable supervisory system, including procedures, relating to Form U4 updating, in violation of industry rules.  The action was a settled action, wherein the broker-dealer neither admitted nor denied the allegations, but consented to the imposition of certain findings and the imposistion of the sanctions.

Under the FINRA Bylaws, a Form U4 must be updated timely (within 30 days) to disclose when an individual has been notified that he or she is the subject of a regulatory investigation.  This reporting requirement is generally triggered when the individual receives a "Wells" letter from a regulator.  In this case, two individuals received "Wells" letters from regulators, but the Forms U4 were not amended timely, despite the fact that officials at the firm knew of the issuance of the "Wells" letters.  It appears, based on the language in the AWC, that the firm simply did not have procedures and systems in place to make sure that information was shared with the appropriate departments to ensure reporting obligations were fulfilled.   

What strikes me most about this case is the amount of the fine.  Certainly Goldman Sachs can afford the fine, but was it reasonable?  Was this fine amount appropriate in that it involved late reporting on Forms U4 for only two folks?  Back in October 2007, I posted about UBS being sanctioned by FINRA for late reporting.  According to FINRA's press release announcing that action,   the regulator "censured and fined UBS Financial Services, Inc. (UBS) $370,000, for making hundreds of late disclosures to FINRA's Central Registration Depository (CRD) of information about its brokers, including customer complaints, regulatory actions and criminal disclosures. Those reporting violations occurred over a three-year period, from January 2002 through December 2004.  The firm also failed to disclose a significant number of customer complaints and filed late and inaccurate notices concerning the termination of certain brokers' relationships with the firm."

Note the differences here:  Goldman Sachs had reporting problems with respect to two registered folks.  UBS reportedly had problems with "hundreds of late disclosures."   Goldman gets fined $650,000, while UBS was fined $370,000.  It doesn't seem to add up, until you consider that the regulators are increasing sanctions across the board, and in a post-Madoff (and other regulatory embarrassments) environment, it appears that some cases are made to be an example for us all. 

 

Most Popular Posts for 2009? All things U4.

It seems that, more than any other topic, folks searching the internet through the major search engines in 2009 came to BDLawBlog.com seeking information on the Form U4.  Unfortunately, there is a certain mystique to the form.  I think this may be in part to misunderstandings by many about the requirements of the Form U4, as well as a lack of understanding of the significance of this regulatory filing.  Ultimately, the U4 is a straightforward document, but it must be read in conjunction with its instructions, and the definitions in those instructions.  And, importantly, registered folks must familiarize themselves with the information required to be disclosed on the U4, and make sure to timely amend the disclosures when appropriate.

If you have questions about the U4, here are a few resources for you.  To begin with, check out the other U4 related posts here at BDLawBlog.com.  Be sure the read the several part primer on the U4, as well as the post about the little known lifetime bar.  Yeah, its not stuff you'll talk about over dinner or drinks, but if you are a registered representative, this one document can have a significant impact on your ability to continue to work in your chosen field.

FINRA's site contains the current version of the Form U4, and the instructions for the U4 (a separate document) here.  

FINRA's site also details the statutory disqualification process and answers questions about statutory disqualifications (some disqualifications arise as a result of improperly completed U4s).  Find that information here.  

Review of FINRA Disciplinary Actions for May 2009 - Several U-4 Cases

I just finished reading through FINRA's monthly report of disciplinary actions for May.  The cases were routine and ordinary, but one stood out as different.

Without admitting or denying the findings, a broker settled allegations that he "altered customer telephone records at his member firm by deleting or inaccurately updating the numbers to slow down other registered representatives at his firm that he believed would be assigned to call his customers after he resigned."  FINRA found that by changing customer telephone numbers, the broker caused his firm to create and maintain inaccurate books and records. He was suspended for 30 days and fined $5,000.  (FINRA Case #2007009372601).  I think you see the lesson here.  And if you're considering changing firms, chalk this one up in the list of things not to do.

I also noticed that there were several Form U-4 cases, wherein a broker would be suspended and fined, or barred, for material misrepresentations or omissions of fact on the Form U-4.  These are easy cases for the regulators to investigate and prosecute, and they do them often.  Now, with the recent revision to the Form U-4, and the requirement to make additional filings for the new questions, there may be at some point in the future a more broad review of Form U-4 disclosures (or non-disclosures) by the regulators. 

I've written may times about U-4 issues, and the draconian punishment imposed if a broker is found to have "willfully" omitted or misrepresented something on the Form U-4.  Brokers should understand the regulatory significance of this document, and ensure that they have accurately completed the document.  If you have questions about the U-4, take a look at these posts here. 

FINRA and SEC Amend Rules for Forms U-4

FINRA announced today in Regulatory Notice 09-23 that the SEC has approved proposed changes for Forms U-4 and U-5, as well as rules relating to FINRA's BrokerCheck disclosure system.

There are a few changes to the forms, but it appears that the significant changes are these:

** New questions on the forms will require firms and brokers to report arbitration claims and litigation actions that involve sales practice allegations against a broker, even when the broker is not named as a party to the arbitration or litigation.  While new forms are apparently already on CRD now, the effective date for the new disclosure questions is November 14, 2009.

**  The new threshold for disclosure of reporting settlements of customer complaints will be $15,000, up from $10,000.  The effective date for this change is May 18, 2009.

Compliance and registration folks should thoroughly review this Regulatory Notice for information on when and how updates for Forms U-4 must be filed to respond to the new questions.

FINRA, SEC Ponder Changes to Forms U-4 and U-5

The SEC is now taking comments on a proposal by FINRA to change the Forms U-4 and U-5.  The significant changes add additional questions or language to existing questions to require additional reporting of customer complaints and arbitration claims involving a broker.  The major change would require reporting of arbitrations and civil litigation involving allegations of sales practice violations by a representative even though the representative is not named as a party in the arbitration or lawsuit.  Currently, if an investor only sues the broker-dealer and not the broker, the broker does not report the case on his or her Form U-4.  The proposed changes also increase the threshold for reporting settlements of customer complaints from $10,000 to $15,000.  And, the proposed changes add more questions regarding the existence of any statutory disqualification.  Because of these additional questions, if the changes are approved, all firms would be required to resubmit Forms U-4 on all of their representatives. 

FINRA Fines UBS for Late Reporting

FINRA today announced that it fined UBS Financial Services $370,000 for late reporting of matters on Forms U-4 and U-5.  Timely reporting has been a somewhat hot - or at least lukewarm - topic over the past several years, and I suspect it will stay that way.