FINRA Lawyer Blog
Maybe you were caught using a fake ID when you were in college or maybe you got into a heated exchange after a fender bender. Each of these could lead to a variety of criminal charges that vary by state and by prosecutorial discretion. Criminal charges have obvious negative consequences. Many people however – even criminal defense attorneys – ignore the more subtle issue of whether or not a registered representative will have to disclose these indiscretions on FINRA’s Form U4 and publicly display them on BrokerCheck.
What Needs to be Disclosed on Form U4?
The Form U4 requires registered representatives to disclose if they have ever been “convicted of or pled guilty or nolo contendere (“no contest”) in a domestic, foreign, or military court to any felony” or if they have been “charged with any felony.” The Form U4 also requires the disclosure of any conviction, guilty plea or nolo contendere plea for any “misdemeanor involving: investments or an investment-related business or any fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses” or if the registered representative has ever been charged with such a misdemeanor.
What at first blush seems straightforward is actually quite complicated. What if the state, such as New Jersey, does not have felonies or misdemeanors? FINRA defines these terms to help with these questions. For example FINRA explains that, “[f]or jurisdictions that do not differentiate between a felony or misdemeanor, is an offense punishable by a sentence of at least one year imprisonment and/or a fine of at least $1,000.” FINRA’s other definitions and guidance, however, can be less helpful.
What does it mean to be charged?
Here again FINRA provides a definition for the word “charged”. According to FINRA: “Charged: Means being accused of a crime in a formal complaint, information, or indictment (or equivalent formal charge).” The problem with this definition is that many states and municipalities use the term “charged” very differently. For example, a police officer may fill out an arrest report that may ask him or her to designate what crime you have been “charged” with. On more than one occasion, we have seen instances where the arresting police officer indicated that the registered representative was being “charged” with a felony only to have the prosecutor immediately change that “charge” to a misdemeanor. FINRA’s staff agrees that the police officer’s “charge” is not a “formal complaint, information or indictment.” Only a prosecutor can bring formal charges. However, the court paperwork will rarely, if ever, make a clear distinction between the police report charges and the prosecutors’ formal charges. In most cases, it will appear in the records as if the prosecutor decided to merely reducing the initial charge, which would make the initial felony charge still reportable. This can only be resolved (to FINRA’s satisfaction) by obtaining a letter from the court or the prosecutor’s office attesting that the prosecutor never formerly charged the registered representative with a felony. Obviously, this is not an easy task to accomplish.
Which Misdemeanors Involve “False Statement or Omissions” or “Forgery”?
What about the fake ID we mentioned before? This is a particularly tricky issue because different states have various criminal statutes that might apply to the possession of a fake ID. In New York, for example, the prosecutor might charge a person with misdemeanor level, “Criminal Possession of Forged Instrument.” So that would seem to clearly fall under a disclosable forgery. A “forged instrument” however, is defined under New York’s Penal Code as a “written instrument which has been falsely made, completed or altered.” So what if your fake ID was not an altered instrument but just someone else’s license who looked like you? You may still be guilty of violating New York Vehicle and Traffic Law § 509(6) which prohibits “any person at any time possess or use any forged, fictitious or illegally obtained license, or use any license belonging to another person.” Is the charge now not disclosable because you did not alter the ID? In addition, is a New York Vehicle and Traffic law a misdemeanor? What if you lied to arresting officer about your age when you were found with the fake ID.? In some states, that is a separate crime. Are you now back in the world of a disclosable “false statement” misdemeanor? The answer, of course, is that every arrest and criminal charge has its own peculiarities that require an in-depth and individualized analysis.
FINRA provides little guidance on this issue but in one example, a registered representative was accused by FINRA’s Enforcement Department of violating FINRA Rule 2110 by failing to report that he had been charged with a misdemeanor for possessing a “false and fraudulent written, printed and phototoxic evidence of age and identity.” The registered rep reported the misdemeanor at a prior firm, but when he joined a new firm, the compliance officer advised him it was not reportable. Enforcement did not contest this. A FINRA Hearing Panel found that “the applicability of those terms [false statements and omissions] to a fake ID charge is not so clear that it was unreasonable for Smith to rely on the compliance officer’s advice that he was not required to disclose the charge.” See Department of Enforcement vs. Smith.
What About Criminal Records That are Sealed or Expunged?
FINRA’s guidance provides that if, “the purpose of an order to set aside a conviction is to restore the individual to the position he would have been in if the conviction had never been entered; in such case, the conviction is not reportable.” Each state has a different statute for sealing, expunging or setting aside criminal records. FINRA states that any such order should be submitted to the Registrations and Disclosures Department (“RAD”) for review to determine if a conviction is disclosable.
In theory, the guidance above would imply that if a matter has been sealed but not fully expunged then it is still needs to be disclosed. In practice however, RAD staff have verbally advised that fully sealed criminal records, i.e. ones that do not appear on any fingerprint background check, do not need to be disclosed. As such, if a rep has a criminal record that has been sealed it is important to confirm that the court personnel notified all of the necessary agencies to ensure that the records are not reflected in the FBI’s database.
Ultimately, whether a criminal charge requires disclosure is often a complicated analysis. Many criminal defense attorneys are completely unaware of FINRA’s reporting rules and might bargain for a particular charge or adjudication that looks great from the criminal law perspective but could potentially cost their client their career.
Feel free to contact Herskovits PLLC for securities industry regulatory and litigation advice. We can be reached at 212-897-5410, www.herskovitslaw.com