Broker loses appeal of FINRA fine and suspension for U-4 non-disclosure

Posted by on Feb 24, 2012 in Securities Regulation, Stockbroker issues | Comments(0)

Unfortunately, many brokers treat the form U-4 as a necessary evil. Many view it as a form that stands between them and registration. Of course, the regulators view the form as an opportunity to examine a broker’s background.

And the U-4 is a fluid document. It must be updated with each reportable event. A customer complaint is the standard triggering event, whether it is a complaint letter or an arbitration. In other cases, a broker may be responsible for disclosing a bankruptcy, tax lien or even a credit card judgment. I am sometimes approached by what I call “the grandfather with a half-ounce in college.” You figure it out.

Brokers may not be 100% familiar with the reporting requirements, but they should keep in mind that any felony arrest is reportable. Any misdemeanor which demonstrates a lack of trustworthiness is reportable. Virtually anything out-of-the-ordinary dealing with the broker’s financial life, such as a lien or judgment, is reportable. These disclosures don’t necessarily mean that the broker won’t get registered or will lose their license, but it must be reported.

The problem is that brokers don’t know the rules of reporting that well. And sometimes they get bad advice. The 2nd Circuit Court of Appeals recently upheld a FINRA sanction against a broker for failing to disclose tax liens. The bigger problem is that the Court supported the regulator’s argument that the non-disclosure was “willful” which will cause a statutory disqualification, making it more difficult for the broker to be registered.

The lesson here is that disclosure, no matter how annoying or embarrassing, must be made. Failure to do so could result in repercussions that far outweigh any penalties, if any, that were received at the time of the infraction.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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