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Financial advisors who are devoted to their clients and cautious to avoid any potential customer disputes, complaints, claims, or termination events may be able to maintain CRD and BrokerCheck records that are free of customer dispute, termination, and regulatory disclosures. However, even the most conscientious advisor can run into a personal finance or tax issue, and not all efforts to resolve such issues with the IRS are immediately successful. The IRS judgments and tax liens filed against those with unresolved debt can come at great cost to any FINRA-registered advisor.
FINRA Disclosure Requirements
In Form U4 questions 14K and 14M, FINRA requires its associated persons to disclose information dating back ten years that pertain to tax liens, unsatisfied judgments, bankruptcies, or other “compromises with creditors.” The same applies to any existing financial issue within those categories. Disclosure is also required for the same issues when they relate to organizations, brokers, or dealers that were under the individual rep’s control when the financial issues or events occurred. FINRA Rule 1122 dictates that registrants must not file misleading information with FINRA. FINRA’s bylaws dictate that all registration applications, such as Form U4, must be kept current and that they must be amended within 30 days of the date on which the representative initially learns of any information necessitating a Form U4 amendment.
The two most common situations in which FINRA’s requirement can create an issue are when advisors are either unaware that they’re required to make such Form U4 disclosures or when they are unaware of the consequences of failing to do so. Some advisors who are familiar with the requirement will opt to “roll the dice” and refrain from making the required reporting. Unfortunately for any advisor with such financial issues who does not adhere to FINRA’s reporting guidelines, that failure on their part can lead to dire and career-threatening consequences.
FINRA Enforcement
FINRA has been increasingly loud in voicing its intent to ensure timely and accurate Form U4 reporting. It considers such disclosures to be of critical importance, and it intends to take action against those who are in violation. Through its own comprehensive efforts to seek out and identify advisors who have financial events that have gone unreported, FINRA intends to pursue enforcement action against the offending advisors. The same goes for FINRA broker-dealers, as well — when firms lack procedures sufficient to identify such unreported events themselves, FINRA may bring an enforcement action against the broker-dealer, in relation to its representative’s failure to amend a Form U4 with a required disclosure.
Acceptance, Waiver, and Consent (AWC)
Arguably the most desirable outcome for an advisor in violation is being issued a Letter of Caution. The next best case involves FINRA issuing a Letter of Acceptance, Waiver, and Consent, or “AWC,” which is essentially a settlement agreement between FINRA and the advisor. In signing an AWC, the advisor neither admits nor denies the allegations brought against them. Rather, the advisor must consent to certain of FINRA’s findings regarding the facts underlying the alleged violation, and the advisor must accept sanctions.
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Sanctions generally come in the form of monetary fines, suspensions, or both. While monetary fines for such violations typically fall below $5,000. The duration of a suspension, which can span from weeks to months, likely costs the advisor more in income than the amount of the monetary fine. When it’s all said and done, the advisor is still left with a regulatory mark on the CRD and BrokerCheck.
Statutory Disqualification (SD)
When FINRA makes a determination that the advisor “willfully” neglected to update their Form U4 with the required disclosure in a timely manner, the advisor may receive a statutory disqualification, or “SD.” FINRA has not indicated how it determines whether a nondisclosure was willful, nor has it offered insight as to what information it uses in making that determination. A nondisclosure can be deemed willful, even when the advisor knew of the event but was not aware of the legal requirement to disclose it. Thus the burden of being familiar with the requirement and complying with it comes to rest upon the advisor.
In order for a registered representative to remain with a broker-dealer after receiving an SD, both the representative and the firm must undergo an arduous application process with FINRA. An application must be completed, and the firm’s and representative’s complaints and disciplinary histories are exhaustively reviewed. The firm is then required to place the representative under heightened supervision and to demonstrate to FINRA that it is capable of implementing and executing that level of supervision. Due to the sheer amount of effort required in such an undertaking, most firms will opt to simply terminate the representative’s registration.
Be Proactive
Clearly, the simplest way to avoid scrutiny over a tax or personal finance-related disclosure is to remain compliant at all times and give FINRA no reason to pursue any enforcement action. When an advisor finds oneself in such a situation, it becomes imperative to navigate it safely and strategically in order to mitigate the negative effects and any damage to that advisor’s personal or professional reputation and, worse, their career.
Upon becoming aware of an event that requires disclosure, the advisor must be sure to disclose it within 30 days. When advisors are unsure whether an event is something that must be disclosed, attorneys and compliance departments can be helpful in determining whether the disclosure is required under questions 14K or 14M of Form U4.
Oftentimes, when tax or financial issues are taking place, liens or judgments exist, of which the individual is not even aware. Any advisor who is experiencing tax or financial issues would be wise to take a proactive approach by running their credit report and conducting other research to determine whether there is an event taking place that requires disclosure.
For those who do find themselves subject to a FINRA investigation, hiring an attorney versed in FINRA instigations to represent them will position them to achieve the best outcome possible.