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What is the Effect of a FINRA Form U4 or U5 Disclosure?

By George C. Miller, Esq. of Shustak Reynolds & Partners, P.C. posted on Wednesday, June 13, 2018.

Representatives of broker-dealers, investment advisers and securities issuers must complete a Form U4 (titled “Uniform Application for Securities Industry Registration or Transfer”) to register with FINRA and the various states and other jurisdictions in which they do business. The Form U4 requires applicants to list, among other things, basic contact information, employment histories, fingerprint information, requested examinations (e.g., Series 7, 63 or 65), professional designations, education, outside business interests or activities, criminal convictions and civil judgments and liens. Failure to provide a complete and accurate response to any question on Form U4 constitutes grounds to deny an application and, in some circumstances, could result in a statutory disqualification, which effectively prohibits a representative from registering with FINRA. 

Both registered representatives, and the firms with which they do business, are required to timely submit an amended Form U4 to disclose new “material” issues or events. Material events include certain client complaints, bankruptcies, outside business activities and investments, criminal charges and convictions, and many other categories. A failure to timely update Form U4 (updates generally must be submitted within 30 days of the triggering event) may subject individual representatives and their firms to fines and, potentially, more serious discipline, including a suspension or complete bar from affiliating with a FINRA member firm in any capacity (essentially, a bar from working in the brokerage industry). Most of the information on Form U4, including criminal convictions, bankruptcies and client complaints, appears automatically on FINRA’s publicly-available BrokerCheck website. There are, however, certain categories of information that do not appear on BrokerCheck, including a representative’s non-securities related employment history, FINRA examination scores, and certain prior criminal convictions. 

FINRA Form U5 (titled “Uniform Termination Notice for Securities Industry Registration”), meanwhile, terminates a representative’s affiliation with a FINRA member firm or jurisdiction. Form U5 is most often filed to effect a “full termination” of the representative from the firm and all jurisdictions in which they are appointed to do business. Terminations are classified as (1) voluntary, meaning the representative has left the firm on their own accord with no allegations of wrongdoing against them; (2) involuntary/terminated, meaning the firm has terminated the representative, often following allegations of misconduct; or (3) “permitted to resign” which is somewhat of a middle-ground option permitting a representative to resign from the firm prior to an involuntary termination. When a representative is terminated from a firm, or permitted to resign after allegations of misconduct have been made, firms are required to describe on the Form U5 the circumstances leading to the advisor’s termination or resignation.  

Form U4 or U5 update and disclosures often trigger FINRA inquiries, investigations and disciplinary proceedings.  In an involuntary termination, representatives are virtually guaranteed to receive a letter from FINRA inquiring of the circumstances surrounding their termination and requesting relevant documents. FINRA inquiries do not necessarily result in the initiation of a formal investigation or enforcement proceeding, but most investigations and enforcement proceedings begin with an inquiry.  It is, therefore, critically important for terminated representatives, or representatives facing a new material U4 disclosure, to consult with counsel early on in the process. 

Shustak Reynolds & Partners, P.C.  focuses its practice on securities and financial services law and complex business disputes.  We represent many broker-dealers, registered representatives, investment advisors,  investors and businesses. For more information, contact Erwin J. Shustak, Managing Partner [email protected], or call 800.496.5900 ext. 109.

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