Form U4 Disclosure Obligations

As members of the securities industry, we have all completed and filed a Form U4 – some of us have done it multiple times. But, did you ever consider how important it is to keep your U4 disclosures current to avoid enforcement action for failing to disclose material information?

Outside Business Activities

Under FINRA Rule 3270, you must report all Outside Business Activities to your firm and receive approval prior to engaging in such activities. Also, it is required that your Form U4 contains all of your approved OBAs.

In recent months, FINRA has been conducting sweep examinations of publicly filed records and looking for undisclosed OBAs. FINRA commonly reviews state filings and the internet in an effort to identify exceptions.

Liens / Judgments / Bankruptcies

Included in the Disclosure Questions of the U4 are questions regarding whether you have any unsatisfied judgments or liens and whether you have filed bankruptcy or made a compromise with creditors.  These are often overlooked and not updated.  For example, if you write-off a portion of your credit card debt with American Express and are able to settle it for a lower amount, you must disclose this on your U4.  If you file bankruptcy or are involved in a short sale of your house that doesn’t cover the full mortgage on it, you must report this on your U4.

Address Changes

When you move from one home to another, one of the last things that you are considering is whether you have updated your residential address history with FINRA; however, you are required to do so.  You must ensure that your residential address history on your U4 is kept current, reporting any changes as they occur.

Criminal Disclosures

The Disclosure Questions on Form U4 pertaining to criminal history ask, “Have [you] ever?” Although the felony may have been charged 15 years ago, it is still required to be disclosed. If you were initially charged with a felony that was later lessened to a misdemeanor, or dismissed, the felony charge still needs to be disclosed.

Complaints

Determining whether a customer communication is a complaint is not always black and white.  It may not always be obvious whether a particular statement is a reportable complaint. Whether it is reportable on Form U4 is dependent upon whether it is a sales practice violation.  Complaints that allege a “sales practice violation” that involve an amount not less than $5,000 in damages are reportable. The term “sales practice violation” is defined in the instructions to the U4 and includes any conduct directed at or involving a customer which would constitute a violation of any rules for which a person could be disciplined by any self-regulatory organization; any provision of the Securities Exchange Act of 1934; or any state statute prohibiting fraudulent conduct in connection with the offer, sale or purchase of a security or in connection with the rendering of investment advice.

Periodic Review and Verification

It is important to always ensure that your Form U4 is kept current and accurate at all times.  To assist in doing this, you should make it a practice to periodically review your Form U4.  It is also important for you to review the Disclosure Questions of your U4 and ensure that you have fully reported and disclosed all reportable events.

Failure to Disclose on Form U4

The following case law demonstrates the importance of U-4 disclosures:

  •  A registered representative in Texas was fined $5,000 and suspended from association with any FINRA member for one month for failing to disclose liens on his U4.
  • A registered representative in Oklahoma was fined $5,000 and suspended from association with any FINRA member for 45 days for failing to update her Form U4 to disclose a civil judgment against her.
  • A registered representative in New York was fined $5,000 and suspended from association with any FINRA member for six months for willfully failing to amend his Form U4 to report a felony charge and its resolution.
  • A registered representative in Virginia was fined $10,000 and suspended from association with any FINRA member for three months for failing to disclose on his Form U4 tax liens filed against him.
  • A registered representative in Connecticut was fined $5,000 and suspended from association with any FINRA member for 30 days for failing to update his Form U4 to disclose an outside business activity.
  • A registered representative in California was fined $10,000 and suspended from association with any FINRA member for eight months for failing to update his Form U4 to disclose that he had filed for bankruptcy protection.

As you can see, what you might think of as a non-issue could end up costing you thousands of dollars in fines and even more when you are suspended.

 

 

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