The Beck Law Firm, LLC Blog

Broker-Dealer Enforcement Roundup

FINRA has published the notice of disciplinary cases for April 2013 online.  A few cases I think are worthy of discussion.  

In one case, a firm agreed to settle an action through an AWC and was censured and fined $150,000.  The findings included that the firm failed to establish and maintain an adequate supervisory system for supervising a representative's written communications in a foreign language when none of the firm's supervisory folks were fluent in that foreign language.  FINRA also found that the firm failed to supervise employee trading at other firms, and failed to have an adequate information barrier program in place, among other things.  Case No. 2011025644101.

In another case, FINRA made findings that a firm offered private placement, allegedly exempt from registration under Regulation D, to individuals just a few days after an initial phone call with the offeree. Such contact was deemed to be general solicitation and the firm properly failed to supervise the sale of the offering, among other things.  The firm was censured and fined $25,000.  Case No. 2011025614701.

Of course there were also the typical cases we come to expect each month including improper use of discretion, forgery, selling away, undisclosed outside business activities, trade reporting, etc.

Further, FINRA issued a separate press release earlier this month on some AML cases.  By now, firms should understand that AML compliance continues to be an area of focus for regulators.  Forewarned is forearmed.

Finally, the SEC recently issued an opinion in an appeal to the SEC for review of a FINRA enforcement action.  The Commission affirmed FINRA's findings of violation and sanctions.  In this case, FINRA barred a broker based on findings that he willfully failed to disclose an injunction entered against him, as well as the revocation of his CPA license, on about 36 Forms U4 filed with about 34 different employing firms over a 6+ year period.  The SEC here again discussed the willfulness concept under the securities laws, and the resulting statutory disqualification that flows from such a finding of willfulness (for more on the wilfullness concept, see the posts under the category of Form U4 issues - you'll find a topical index on the right-hand side of the blog).

 

The U4: Is it Really a Permanent Record? Random Thoughts on Form U4 Expungements.

Back a long time ago in elementary school, I remember a teacher who would try to threaten my class into good behavior, by announcing to the class that if we were not well-behaved, we would get in trouble and it would go on our "permanent record."  As we got a little older we recognized that there was no such thing as a permanent record that would follow us around in life pointing out various problems including our 3rd grade problems.  But later, if you wind up working in the broker-dealer world, you discover that the teacher was right after all: there IS a permanent record and it can cause a lot of problems and can cost a broker clients and income whenever an improper disclosure is made and sticks around on the Form U4 or Form U5.

Probably a couple of times a month or more, I get calls from brokers needing information on trying to get something removed from his or her Form U4, to take it off of their "permanent record" so to speak. Sometimes it is a customer complaint or arbitration matter or some type of disclosure put on a Form U5 by a firm that the broker thinks is defamatory.  More times than not, I tell the caller that I don't think that I can help them as I don't think there is a valid way to remove the offending disclosure from the CRD record and Form U4. Sometimes, however, we find good cases that are appropriate to run through the expungement process.  

If you're thinking about considering pursuing an expungement case, here are a few things to consider. This is an example of some of the points that an experienced securities lawyer would want to discuss with a prospective client about a possible expungement matter:

1.  Is the disclosure true?  Firms, and brokers, have an obligation to disclose certain information on their U4 and U5, and the disclosure should be true.  If the disclosure is not truthful, then it needs to be reviewed closely.  If, however, it is completely true and you are involved in the situation, getting the disclosure expunged simply because you don't like it on your record is probably not possible.  

2.  What evidence do you have to show the falsity of the disclosure?  The better the evidence, the better chances of getting the matter expunged, or at least amended to a more accurate, and hopefully more favorable, disclosure.  If the disclosure is client-related, can you meet the test of FINRA Rule 2080, and show that the disclosure was either: a) factually impossible or clearly erroneous, b) that you were  not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or c) the claim, allegation or information is false.

3.  What is the disclosure costing me?  When you think about this, think in terms of reputation and money. Is the disclosure hurting your reputation?  Are competing brokers pointing out the disclosure and using that to land clients that shy away from you due to the disclosure?  In terms of money, how has the disclosure affected you?  Has it cost you revenue?  Has it cost you the chance to grow your business?  What is it doing to  your book of business, and how will it affect that value, and your marketability in the future?

4. How would your life be better or worse if you were able to get the disclosure expunged or changed?

5.  What is it worth to you, in terms of time and money, to try to change the disclosure or get it expunged from your record completely?  Consider this:  I heard of a broker who has what he believes is an improper disclosure of a significant arbitration case on his Form U4.  The broker didn't want it disclosed as he or she was not named as a respondent, but the firm insisted that the broker was "the subject" of the arbitration, despite the fact that the broker was not involved in the transactions that formed the basis for the investors' claims.  The case is now over and the broker's U4 can be updated to show that the investors got nothing on their claims, but the disclosure remains.  The broker believes that the disclosure has already cost over $20,000 in missed revenue already, and that number will likely increase.  What would it be worth to you in terms of time, reputation and money to seek expungement if this were you?  How could expungement affect your future client engagement and revenues?

It may be that, after considering these items, you don't think it's worthwhile to seek expungement or an amendment to an existing disclosure.  Or you may believe that it is critical to pursue any option available to you to clean up your record.  Whatever works for you is fine, but make an informed decision, and don't let inaccurate disclosures needlessly affect your career.  If you don't stand up for yourself, who will?

 

Disclosure Obligations Beyond The U4 and ADV.

Most stockbrokers and financial advisers know that they have certain disclosure obligations and must answer questions to disclose certain events on their registration forms such as the Form U4 for registered representatives and the Form ADV for registered investment advisors.  Often these forms get reviewed once a year at renewal times, or when there is a triggering event such as a disciplinary action.  It is important to keep these forms current so as to avoid enforcement action for failing to disclose material information.

Some brokers and advisers might not remember or be aware of disclosure obligations beyond the U4 and ADV.  If you are an insurance agent, you might have disclosure obligations.  And if you have a professional designation, you might have more disclosure obligations as well.  For example, in Georgia, an insurance agent has to notify the Commissioner of any change to the information included in his or her application, and must do so within 30 days.  Also, CFP (R) certificants must report to the Board of any professional suspension or bar within 10 calendar days upon receipt of notification of such action.  There are also requirements to report certain criminal convictions as well.

The point is this:  Don't just think about the U4 and ADV when considering your disclosure obligations. Review your other licenses, including insurance, as well as the requirements for any professional designations that you hold. Failing to do so could result in unintended consequences.

Attorney Joel Beck helps stockbrokers and financial advisers protect their #1 investment, their careers.  If you're a broker or adviser who needs help, contact Joel at 678-344-5342 or visit him online at www.thebeckfirm.com.  

The Red Flag Series: Stockbroker Compliance

This is the third post in the Red Flag series.  In the securities compliance and regulation area, the "red flag" language is used quite often.  Typically, it is used in terms of making sure that broker-dealer firms and supervisors respond appropriately to red flags.  In that regard, it is pretty heavily focused on supervision, or the lack thereof.  But individual brokers or registered reps. should also be aware of the red flags that wave in front if them.  Recognizing them, and responding to them appropriately, can help keep a rep. out of trouble, or can work to minimize problems when possible.

This is certainly not a complete or exhaustive list of red flags that a broker might see, but it is a good starting point.

First, reps. should be careful not to sign things without reading them.  U4s and applications, compliance attestations, and other things change from time to time, and the information asked on them change as well.  While you may not think you have anything to report to the regulators or your firm, the items asked on these forms do change, and you should review these documents carefully to ensure you appropriately and adequately completed it before signing.  Each year, numerous brokers are disciplined because they failed to read and understand U4s and other registration docs, or they failed to disclose items that required disclosure.  

Second, brokers should view any regulatory examination or investigation as a red flag.  If you get a letter or phone call (or an in person visit) from FINRA, the SEC, or a state seeking information, be careful. Consider consulting experienced counsel early on for advice and guidance, and assistance in getting the exam resolved in the best manner possible.  In my view, the earlier you get an attorney involved, the better.  The seriousness of this matter is far too much to cover in a short blog post.  For more info. on these, download my free ebook, A Stockbroker's Guide to Regulatory Investigations from www.brokerdefender.com.    

Some other red flags that come up are these:

* Getting solicited by someone outside of your firm to engage in a business activity, whether that involves selling something that is characterized as not being a security, or something else.  Remember that the outside business activity and selling away rules have teeth, and violations can lead to some significant sanctions.

* Having a client tell you to sign something on their behalf  to speed something up, to get an application submitted in time, or whatever. Don't do it.  Ever.  It's just that simple.

* Another red flag is a customer who wants to limit information given to you, or a client that is difficult to work with.  If they are refusing to communicate with you, won't share basic background information, including suitability info. about them, then it will be difficult for you to ensure that you're making suitable recommendations for them.  If they don't trust you, you might need to consider showing them to the door and letting them work with another broker at another firm.  Such a choice might prevent arbitrations, complaints, and regulatory exams.

*Discretion.  Be wary of customers who want you to use discretion in their account, but have not signed written discretionary authority for you and have not had the broker-dealer approve their account as discretionary.  These clients might, after a purchase turns south, conveniently tell a different story, leaving you in a bind with your firm and the regulators.  

*Authorization.  If you are dealing with a couple, understand that each person is different.  While one individual might be able to act for both in a joint account, absent trading authorization, a broker should be careful about accepting trade instructions from one client for an account of another.  If that's how the clients want to operate, get the right trade authorizations completed and approved by the firm.  The same goes for trusts, business accounts, etc.

There are more red flags, and you can find a lot more information about common broker issues, rule violations, and more by using the categories section on the right side of the blog. 

 

Criminal Expungements in Georgia

I was sitting in an arraignment session at state court last week and overheard part of a not-too-quiet discussion between two folks as they were passing by.  It seemed that one person had been charged with some type of misdemeanor criminal offense, and she was receiving advice from the person with her.  It seemed that she was told by her companion to just plead nolo and get the matter over with, and then have the case expunged later so it would not show up on her record.  That's a nice thought, I suppose, but here in Georgia, it don't work that way.  Put simply, if you are convicted, including cases where a guilty plea or a nolo plea (nolo contendre) is made before the conviction, the charges are not eligible for expungement.  

Georgia has strict laws governing when expungements can be made (See O.C.G.A. 35-3-37 and expungements are typically reserved for cases that are dismissed before an indictment or accusation is filed against the individual.  So, in many circumstances, expungement is not an option for most folks under current law.  This means that it is very important to have the criminal case resolved in the most favorable manner possible.  To do this, I recommend engaging criminal defense counsel who will zealously represent you and fight for your rights.  And, of course, the earlier you engage counsel, the better.

If you're a securities industry professional (for example a stockbroker or investment adviser) charged with an offense here in Georgia, understand that you may have a disclosure obligations on your Form U4 and may be required to disclose the charge against you, even if it results in no conviction.  For more information on U4 matters, see the other posts in the U4 category.

 

2011 Fourth Quarter: U4 Disciplinary Cases

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:

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

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.

 

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.