The Beck Law Firm, LLC 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?

 

UPDATED: Enforcement Appeals. Was: FINRA Hearing Panel Decision Issued in Key Arbitration Case

Feb 21, 2013:  FINRA announced today that a Hearing Panel issued a Decision in the case of FINRA's Department of Enforcement v. Charles Schwab & Co., Inc.  In doing so, the Hearing Panel dismissed two of three causes of the action against Schwab, and found for Enforcement on the remaining cause.  The Panel imposed a fine of $500,000 and ordered that Schwab take specific corrective action.  The Panel Decision was issued today (2/21/13) and is not final.  It may be appealed by either party, or it may be called for review by FINRA's National Adjudicatory Council.  I don't know how the case will finally end, but the ending will be very significant to the industry and investors.  

The Hearing Panel Decision is about 49 pages long, and takes some time to go through.  Here's my attempt at a down and dirty summary based on a quick review (links to the press release and the decision itself are above, so you can access the documents yourself if you are interested):

Recap from 10 Things to Do - Or Not Do - To Help Avoid Regulatory Troubles in 2013

In January 2013, I presented a webinar/teleconference for stockbrokers, investment advisers and principals/managers on ten things to do, or not do as the case might be, to help avoid regulatory problems in 2013.  We looked at some hot topic compliance issues, as well as discussed practical ways to avoid problems that consistently trip up the well-meaning broker.  There were a few folks who registered for the free event but ultimately could not attend, and a few others that asked whether a transcript would be made available.  

Keep reading this post for the transcript from the event and get some insights into some common broker issues, as well as some compliance pointers for 2013.  

Registration Now Open - 10 Things to Do (Or Not Do) To Help Avoid Regulatory Problems in 2013

 

 

I'm pleased to announce that registration for the January 18, 2013 webinar/teleconference entitled, "10 Things to Do (Or Not Do) To Help Avoid Regulatory Problems in 2013" is now up and running.  Watch the video clip to get some more information on this event, and then click go to the registration page now to get registered.  Space is limited, so reserve your spot for this webinar and teleconfernce now, and put January 18, 2013 at 2PM Eastern on your calendar.  This free program will help stockbrokers and financial advisors understand  - and hopefully learn how to avoid - some major regulatory problems that they can inadvertently get themselves into.  By avoiding regualtory and compliance problems, brokers are better able to focus on serving their clients, growing their business, and enjoy their work.  

I hope to see you on the call/webinar on January 18th.  To get your spot, register today.  And, then be sure to check our email newsletter and BDLawBlog for future events in 2013.  

Review of Disciplinary Actions Reported for December 2012

I took a quick read through FINRA's monthly report of disciplinary actions, for actions reported for December 2012 this morning.  We see many typical violations, including trade reporting actions, Form U4 disclosure cases, outside business activity violations and some of the typical conversion of funds cases. A few cases stood out as one for me to highlight.

A CCO submitted an AWC agreeing to be suspended for one month and fined $5000 based on findings that the CCO permitted an individual to function as a principal without being registered as a principal.  The CCO was apparently this person's supervisor, and the individual had responsibility for reviewing and approving the firm's WSP, annual certifications, net capital computations, reviewing correspondence and hiring and training registered reps.  Case No. 2009020534802.  I think the lesson here is obvious: firms need to check to ensure folks are properly registered.

In case 2011025562401, a firm was fined $20,000 (the fine was apparently reduced due to the firm's size, revenues and resources) based on findings that it failed to maintain and preserve certain business related emails sent to its Bloomberg terminal.  FINRA also found that the firm did not have WSPs in place for retention of electronic correspondence to its Bloomberg terminal.  The lesson here: don't just focus on emails through the firm's domain or email system.  You have to look at other places in the firm where communications/correspondence can be received and ensure that the appropriate review and retention policies are in place for those sources as well.

Also in December, FINRA's National Adjudicatory Council issued a decision in case 201002379601 (12/10/12).  A hearing panel had barred a representative who they found to have submitted a falsified reimbursement request to his firm.  On appeal to the NAC, the NAC affirmed the findings of violation, but modified the sanctions, removing the bar and suspended the rep. for 6 months and fining him $5000.  The NAC also assessed costs.  In modifying the sanctions, the NAC seemed to give great credit to the rep.'s statements of remorse along the lines of He's terribly sorry this ever happened, really very sorry about it and it won't happen again, etc.  The NAC also distinguished this case as not a case of conversion of funds but a case of falsification of documents, as I read it.  The NAC found that the rep. fabricated a hotel receipt and verification letter and submitted those docs to his firm for reimbursement for which was not not entitled. It is, in my view, an interesting decision and I expect the rep. and his lawyer would be very happy about the outcome.  Not too many times is a bar dropped to a 6 month suspension.  

An Opening for FINRA Arbitration for RIAs?

Bruce Kelley over at InvestmentNews.com reported last week that FINRA Dispute Resolution wil be opening its arbitration forum to handle disputes involving registered investment advisor (RIA) firms, provided that such RIA agreed to utilization of the forum.

Until now, the arbitration forum was llimited to resolving disputes between investors, broker-dealer firms, and associated/registered people.  Under FINRA's rules, disputes among these parties were available for resolution through FINRA's arbitration and mediation system, and most broker-dealer employment agreements and client agreements require that disputes be resolved in this forum.  While an investor or other party could seek to file arbitration against a RIA or other entity that was not a FINRA member broker-dealer, the suits against such non-member would not be resolved through arbitration.

It does not appear that a formal announcement of this policy has been made yet by FINRA.  When it is, I would imagine it to be straightforward: RIAs that want to resolve their disputes through FINRA's forum, could agree to abide by the arbitration/mediation rules and pay the associated costs.

But should an RIA do this - should it seek to resolve a client dispute through FINRA arbitration?  The answer to that would be case specific, and depend on a variety of factors.  While arbitration can be less expensive and more timely than a lawsuit in court, participants in the forum have less discovery tools available to them.  Discovery is, in my view, more sweeping and thorough in court than in FINRA's forum.  Further, choice of arbitrators may be more limited as well.  And, the litigation itself may be significantly different, inasmuch as motions to dismiss customer claims in FINRA's forum are generally discouraged and not favored until after the client has presented their case in chief.  So, while court or another resolution forum may be more expensive, it may offer more favorable options to an RIA.  

Some RIAs may find that some cases would be appropriate for resolution through an arbitration forum such as this.  But that type of decision should be made with the help of legal counsel and evaluated on a case by case basis.  I'm not knocking FINRA arbitration; sometimes the system works very well and is a good choice for brokers, firms, and investors.  But when it is not mandatory as it is in the broker-dealer world,  we'll have to see where this goes when RIAs are given the choice that their broker-dealer counterparts do not have.

An Open Response to the Headhunter: Why Every Adviser Needs a "Go Bag."

Earlier this week, Danny Sarch wrote an article for the "From the Headhunter" column over at InvestmentNews.com, entitled "Why Every Adviser Needs a "go Bag."  The gist of his column is that financial advisors need to be ready to shift gears and go to a new firm in case something happens at their present firm.  This means, according to Mr. Sarch, that they understand that their retention bonus agreement is not a fixed-term employment contract, that they maintain an updated production list, that they have a "protocol spreadsheet" with client contact lists up to date at all times, and that they have personal cell-phones/communication devices separate from their broker-dealer.  The author likens these steps to a spy having a "go bag" ready with extra passports, cash, and weapons, ready at a moment's notice in case it is needed.  

For several years in college, I was a volunteer firefighter/emergency medic, and I'm quite familiar with having your gear ready to go on a moment's notice.  I get the analogy.  I also think that Mr. Sarch is on to something here, and makes some good points.  But I disagree somewhat with his recommendations, and also think that his list is not complete.

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.  

PCAOB Releases Interim Inspection Report on Audits of Broker-Dealer

It looks like some annual audits of broker-dealers may become a little more difficult, if auditing firms review a report released today by PCAOB and work to ensure that their audits are problem free.  The Public Company Accounting Oversight Board today released a press release and their  interim inspection report announcing its findings from examinations of audits of broker-dealers.  

This inspection program focused on a small number of auditing firms and broker-dealers and is admittedly a very small sample size.  PCAOB identified deficiencies relating to audit procedures related to computation of net capital requirements as well as customer reserve calculations, audits of financial statements, as well as issues with auditor independence.  Much more detailed information is contained within the report.  If you're involved in financial operations - including having some responsibility for your firm's annual audit - you want to take a look at this.  

 

 

Settlement Discount? Not Necessarily So in FINRA and SEC Cases.

I've opined many times here on the blog that sometimes it pays to litigate, rather than settle.  What I mean by that is that in some cases before FINRA or the SEC, while a settlement might be quick, the end result is that the settlement imposes harsher sanctions than could reasonably be obtained after a formal hearing.  In other words, some cases have a "litigation discount" it seems, as opposed to a discount for settling that you might expect.  

Brian Rubin, a former colleague of mine at NASD, and Jae Yoon, both lawyers at Sutherland, recently published their most recent study on the question of settling or litigating.  Their article, Sutherland Study on Litigating Against the SEC and FINRA Shows It Sometimes Pays for Broker-Dealers and Registered Representatives to Take On The Regulators, reveals the results of a pretty intensive analysis.  If you are a rep. or a broker-dealer facing enforcement action by the regulators, I commend this article to you.  Some of the highlights of the study, in my view, are:

* FINRA respondents with a lawyer are significantly more successful than pro se respondents.  The study details that respondents with counsel succeeded in getting 18.8% of charges dismissed, while respondents without counsel had 0% success during the review period.  

* With respect to monetary sanctions, SEC and FINRA respondents were able to obtain lower sanctions against them, when compared to what the staff had sought, in nearly a third of the cases.

* With respect to suspensions from the industry, FINRA respondents were effective in reducing sanctions at hearing in approximately 50% of cases studied.  Importantly, the study notes, when FINRA staff sought a complete bar as a sanction, 75% of respondents convinced a Hearing Panel to impose a lesser sanction.

So what does all of this mean?  To me, it boils down to two things that folks facing a regulatory action need to understand.  First, having a lawyer experienced in securities regulatory cases is critical.  Second, sometimes you have to be willing to stand up and fight.  

Obviously, with respect to the decision of settling or litigating, other factors come into play including resources, publicity, etc.  The decision of whether to settle or litigate is a very important decision that must be made based on the particular facts of the case.  Many times, settling a case is the right thing to do.  But not always.  And sometimes it pays to fight.