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Being an investment advisor comes with a lot of responsibility. Not only do you have to keep up with the latest market trends and changes, but you also need to make sure that you’re staying compliant.
As a financial advisor, you’re required to file a Form U4 with FINRA. This form asks for disclosure of any “reportable” events based on when they occurred. This could include anything from a misdemeanor arrest to a customer complaint. The purpose of these disclosures is to ensure that investors have access to information that could potentially impact their decision to do business with a particular firm or individual. By disclosing reportable events on the Form U4, FINRA helps to promote transparency and protect investors from potential harm.
Now you may be wondering whether it’s really necessary to reveal any minor or long-forgotten transgressions on your Form U4. After all, do they really need to know about that bad check you wrote more than 20 years ago?
Unfortunately, the answer is yes.
Regulators and future employers really want to know about all of your past mistakes — no matter how small or juvenile. In fact, when advisors neglect to report an event or file an incomplete Form U4, FINRA is more than prepared to investigate and impose very serious, sometimes career-ending, sanctions.
While the Form U4 is primarily used by FINRA to keep records of all of its members, it’s also used to pinpoint advisors who fail to update or disclose reportable events in a timely manner. FINRA will take such measures as conducting in-depth searches of social media pages and state filings to detect infractions, and it ranks its brokers based on the number of negative disclosures on their Forms U4 and CRD records.
Even with strict enforcement of Form U4 reporting, year after year, AdvisorLaw defends advisors and representatives who fail to comply. Most frequently, Form U4 investigations are triggered by advisors’ failure to report:
- outside business activities
- bankruptcies, liens, and judgments
- criminal charges, including misdemeanors
- customer or investor complaints
- terminations listing a type other than “Voluntary”
Disclosures can be a burden both to your reputation and your business. It’s important to make sure they’re accurate and complete so that you can avoid any potential issues with FINRA.
Inaccurate Or Incomplete Disclosures
If you don’t keep your disclosures up to date, an inaccurate or incomplete Form U4 could lead to an investigation. The consequences of such an investigation could range from a slap on the wrist to the loss of your license — depending on the severity of the offense. An event that’s no longer relevant may not need to be disclosed, but it’s critical that you consult with an attorney if you’re unsure about what needs to be reported.
It’s important to note that even events that occurred a long time ago could be reportable, if they’re still ongoing (e.g., if you’re still serving probation for a crime committed). If you’re unsure about whether an event needs to be disclosed, it’s always best to err on the side of caution, and disclose it. You can then provide additional information in the comment section, explaining why you believe the event is no longer reportable.
Updating Your Form U4 Disclosures
You should update your Form U4 whenever there are changes in your disclosure status — that is, whenever a reportable event occurs or is resolved (e.g., when a criminal case is dismissed or tax lien is resolved). Remember, it’s always better to over-disclose than to under-disclose when it comes to your FINRA disclosures!
Clean Up Your Form U4
FINRA’s current eagerness to eliminate “high-risk” brokers through Rule 4111 means that advisors who plan to stay in the industry for the long term have to be proactive about removing meritless complaints or reparable disclosures from their Forms U4 — immediately. Whether the heat comes from FINRA, the SEC, securities litigators, or simply from a single lost potential prospect, there is no upside to ignoring reportable events — especially those with the opportunity to be expunged.
If you’re interested in resolving tax liens, expunging negative customer complaints or criminal disclosures, or amending the language on a termination disclosure, consult AdvisorLaw. We have extensive experience in the industry’s regulatory space and a thorough understanding of business, tax, and securities law.
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