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The Effect of California’s Expungement Rules on Registered Representatives and Investment Advisers

By George Miller of Shustak Reynolds & Partners, P.C. posted on Wednesday, November 23, 2011.

Registered representatives, investment advisers and others employed in the securities industry are required to disclose certain prior criminal convictions, including some “expunged” convictions, to the Financial Industry Regulatory Authority (FINRA) or the Securities and Exchange Commission (SEC) in connection with their employment. These disclosure obligations differ depending on the nature of the underlying crime and type of expungement relief obtained.

Not all convictions must be disclosed, however, and some expunged convictions may be totally purged from a representative’s CRD record. While other convictions must be disclosed and cannot be completely removed even if expunged, with the assistance of experienced FINRA expungement counsel, registered representatives often can amend their CRD records to accurately report the nature of the conviction and lessen the potentially negative impact of the disclosure.

Registered representatives are required to register their securities licenses with FINRA and the states in which they do business using Form U4, which requires disclosure of all felonies and certain misdemeanors which the person has been convicted of, pled guilty or no contest to or been charged with in the past. All misdemeanors involving investments or an investment-related business; fraud; false statements or omissions; wrongful taking of property; bribery; perjury; forgery; counterfeiting; extortion; or a conspiracy to commit any of these offenses must be reported on Form U4. Most information disclosed on Form U4, including prior convictions, becomes publicly available through FINRA’s BrokerCheck website within a matter of days. Form ADV, which is similar to Form U4 and used by investment advisers to register with the SEC and the states in which they do business, carries similar disclosure requirements.

Disclosure obligations required in connection with Forms U4 or ADV may change when a broker or adviser obtains expungement relief under the California Penal Code depending on the nature of the underlying conviction and the type of post-conviction relief obtained.

The most common type of post-conviction relief available is a dismissal pursuant to Penal Code section 1203.4 or a closely related statute, 1203.4a. These statutes set forth the rules governing expungement of misdemeanors and some felonies and generally result in a full dismissal of all charges against an individual.

Most relevant to the securities industry, convictions expunged pursuant to 1203.4a generally need not be reported, though the individual circumstances of each case must be considered. Convictions expunged under 1203.4, conversely, typically must be disclosed on Form U4 or Form ADV. Even where a conviction must be disclosed or cannot be removed from a registered person’s CRD record, however, brokers and advisers often can work with an experienced FINRA expungement attorney to have their disclosure language modified to accurately and truthfully describe the nature and severity of the underlying crime and clearly reflect the expunged status of the conviction.

The regulators are constantly refining their disclosure rules to strike a fair balance between investor protection and the privacy interests of registered representatives and investment advisers. There is no doubt some convictions must–and should–be disclosed to protect and inform the public. But in light of seemingly ever-increasing disclosure requirements, registered persons and advisers may find themselves haunted by prior convictions which occurred decades ago and have no bearing on their ability to honestly and diligently serve their clients. These individuals may be entitled to amend their disclosures or purge them altogether not only to ensure their disclosures are complete, accurate and truthful, but also to lessen the potentially derogatory impact of the disclosure on their reputation and business.

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