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Don't Overlook Your Obligation to Keep Your Form U-4
Current and Accurate
imple housekeeping it is not. Reps who fail to accurately complete and update their Forms U-4 face disciplinary action, including a permanent bar in egregious cases. The U-4 attestation that reps must sign provides:
I swear or affirm that I have read and understand the items and instructions on this form and that my answers
(including attachments) are true and complete to the best of my knowledge. I understand that I am subject to administrative,
civil or criminal penalties if I give false or misleading answers.
To be fair, Form U-4 is not light reading and can be confusing. But reps who plead ignorance usually fail to escape disciplinary action. Likewise, attempts to shift the responsibility to someone else normally fail. For example, one disciplinary decision rendered by the NASDR's National Adjudicatory Council ("NAC") affirmed a hearing officer's decision rejecting the broker's claim that he had relied on his attorney to submit the missing information. The rep was barred, though prior disciplinary history was considered to be an aggravating factor.
Normally, discipline is based upon a violation of NASD Rule 2110, which is a "broad ethical principle". Importantly, to violate this rule, a rep need not omit material information intentionally. Instead the NASDR needs to prove only that the information was incomplete or inaccurate.
Why the fuss? Another disciplinary decision described the answer best:
A Form U-4 is fundamental to the business and integrity of the securities industry. It is used by all the self-regulatory
organizations, including the NASD, state regulators, and broker-dealers to monitor and determine the fitness of securities
professionals, and serves as a vital screening device for hiring firms and the NASD against individuals with suspect history.
The candor and forthrightness of applicants is critical to the effectiveness of this screening process.
The NASD's Sanction Guidelines divide the offense into three categories. They are: 1) late filing of forms or amendments; 2) failure to file or filing false, misleading or inaccurate forms or amendments; and 3) egregious cases. Egregious cases involve matters such as: repeated failures; failure to disclose or failure to timely disclose a statutory disqualification or a customer complaint; or failure to disclose or failure to timely disclose information which delayed regulatory investigation or termination for cause. The sanctions range from a fine to the rep of $2,500 (for the most minor violation due to a late filing) to a complete bar.
In my survey of disciplinary decisions, I found several bars. Consider the rep who was a licensed attorney. He failed to disclose that the Florida bar association was investigating him for misconduct, and he failed to disclose that the Florida bar association had disbarred him. NASDR's NAC did the same. Similarly, another bar resulted when a broker committed numerous wrongs, including not disclosing the existence of a NASDR investigation.
Moreover, a recent disciplinary decision, Department of Enforcement v. Salinas, is notable because it highlights how brokers can dig a deeper hole for themselves in attempting to conceal, again and again, their reportable event.
Mr. Salinas' problem started with a reportable event - his sister had sued him in court for fraud and conversion in connection with the sale of securities - which Salinas failed to report. But Salinas ultimately failed to report that material information three more times! First, in addition to her lawsuit, the sister also had filed a regulatory complaint with NASDR. Salinas failed to disclose to the NASDR investigator the existence of the court action. Second, the U-4 required Salinas to disclose that the NASDR was investigating the matter, for which he received notice twice. But Salinas failed to disclose that fact. Third, Salinas was submitting a membership application to the NASD in connection with a new position. But Salinas failed to disclose the court action on the application. The hearing panel found that all four omissions constituted a "pattern of concealing". Salinas was ordered barred.
In conclusion, reps must not mislead on their U-4s. Accord "the form" the highest level of respect.
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Sponsored by James J. Eccleston. This Web site contains material of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment adviser when building and protecting your wealth.
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