Take a look at any month's disciplinary notices from FINRA and count the number of disciplinary actions against brokers involving violations related to their Form U4. Odds are good that you'll find at least a handful a month. What's troubling is that these violations are totally preventable. All you have to do to stay out of trouble in this area is to answer all questions on the U4 honestly and accurately – even those that relate to bankruptcy, criminal convictions, criminal charges, and regulatory/disciplinary actions and arbitrations. What most people don't realize is that the federal securities laws impose rather draconian sanctions for violations of rules relating to a Form U4, and while the report may appear to show only a short or mid-range suspension as a sanction, in many cases the reality is that the financial advisor has effectively been barred from the industry.
Section 15(b)(4)(A) of the Securities Exchange Act of 1934 provides that a person who willfully fails to disclose material information (and to the regulators, all questions on the Form U4 are material) on a Form U4 is subject to a statutory disqualification from association with any securities broker-dealer. What does that mean? In a nutshell, if you don't answer the U4 questions truthfully, and you did so willfully, you are essentially barred from association with any broker-dealer, forever.
But what is willful, in this context? The US Securities and Exchange Commission has held that,
“A willful violation under the federal securities laws simply means “‘that the person charged with the duty knows what he is doing.'” It is not necessary to additionally find that Tucker “was aware of the rule he violated or that he acted with a culpable state of mind.” A failure to disclose is willful under Exchange Act section 3(a)(39)(F) if the respondent of his own volition provides false answers on his Form U4. (See In re Robert D. Tucker, Exchange Act Rel. No. 34-68210, November 9, 2012). So, based upon this, it appears possible for a willful finding to be made even if the financial advisor did not intend to provide misinformation on the Form U4, or when the advisor was not aware that failing to provide accurate information was improper.
To overcome this statutory disqualification due to a willful finding, a broker-dealer must sponsor a person through a membership continuation process called an MC-400. But, an advisor may have a difficult time locating a firm to sponsor him or her, and the application process is difficult.
To avoid a regulatory investigation and enforcement action, as well as a statutory disqualification, we recommend that financial advisors fully and accurately complete their U4, and then keep it current at all times. To do so, advisors should consider reviewing their U4 and CRD Snapshot periodically, and consulting with their firm and legal counsel should a situation arise where the U4 may need to be amended.
Remember, read the U4 and its instructions carefully. If you have a question, seek knowledgeable counsel. If you'd like to discuss your situation with an experienced securities regulation lawyer, please contact us.
You can learn more about Form U4 Issues by visiting these other blog posts in this U4 Basics series:
Form U4 Basics: Part 1 – An Overview of the Form U4
Form U4 Basics: Part 3 – Criminal History Disclosures
Form U4 Basics: Part 4 – Disclosure of Customer Complaints, Arbitrations and Litigation
Form U4 Basics: Part 5 – OBAs, Regulatory Events and Terminations
Form U4 Basics: Part 6 – Disclosure Issues Beyond the Form U4
Update April 2021: To learn more about the statutory disqualification and how to avoid it, request your copy of our new free resource, The Financial Advisor's Guide to Arrests, Criminal Charges, and Related Form U4 Issues.
There are no comments for this post. Be the first and Add your Comment below.
Leave a Comment