Pursuant to Article V, Section 3 of the FINRA By-Laws, member firms are required to file Form U5 no later than 30 days after terminating an associated person’s registration. FINRA Regulatory Notice 10-39 reminds firms of their obligation to provide “timely, complete and accurate information” on Form U5.
It is the policy of FINRA that “[t]he accuracy of the Form U5 filing is critical to the effectiveness of a self-regulatory organization that relies heavily on candor and truthful representations.” See DOE v. Wall, Disciplinary Proceeding No. 2007009472201 (internal citations omitted) attached as Exhibit 3. FINRA, “which cannot investigate the veracity of every detail in each document filed with it, must depend on its members to report to it accurately and clearly in a manner that is not misleading.” See In the Matter of Robert E. Kaufman, 51 S.E.C. 838 (1993), aff’d, 40 F.3d 1240 (3d. Cir. 1994). Accordingly, the truthful disclosure of information on Form U5 is “crucial to the integrity of the securities industry’s public disclosure system and FINRA’s and other regulatory authorities’ investigatory efforts.” See DOE v. McCrudden, Compl. No. 2007008358101 quoting Dist. Bus. Conduct Comm. v. Nichols, Compl. No. C01950004, attached as Exhibit 5. Therefore, Form U5 requires an appropriate signatory of a member firm to verify “the accuracy and completeness of the information contained in it prior to filing with FINRA.”
Regulatory Notice 10-39 reminds firms that they “may be subject to administrative and civil penalties for failing to provide complete and accurate information on Form U5 in a timely manner.” See Exhibit 2. As such, member firms and representatives may be subject to enforcement actions by the FINRA Department of Enforcement for filing a false U5. Id.
Claims brought by the DOE based on such misconduct typically allege violation FINRA Rules 1122 and 2010 and sometimes include violation of FINRA By-Law Article V, Section 3.
FINRA Rule 1122 provides that:
No member or person associated with a member shall file with FINRA information with respect to membership or registration which is incomplete or inaccurate so as to be misleading, or which could in any way tend to mislead, or fail to correct such filing after notice thereof.
FINRA Rule 2010 provides that:
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
For filing false, misleading, or inaccurate U4 or U5 forms or amendments, FINRA’s Sanction Guideline recommends consideration of a monetary fine of $5,000 to $146,000 against the responsible principal and/or firm, and suspension of the responsible principal in all supervisory capacities for 10 to 30 business days. See FINRA Sanction Guideline, attached in pertinent part as Exhibit 8. For claims against an individual, the Sanction Guideline recommends consideration of a monetary fine of $2,500 to $37,000 and suspension of the individual in all capacities for 5 to 30 business days. Id.
In determining the appropriate sanctions, FINRA’s Sanction Guideline proposes the following considerations: 1) nature and significance of information at issue, 2) whether failure resulted in statutorily disqualified individual becoming or remaining associated with a firm, and 3) whether respondent member firm’s misconduct resulted in harm to a registered representative, another member firm, or any other person or entity. Id.
For example, in the enforcement action of DOE v. Wall, the Panel found that William Wall, in his capacity as president of Wall and Company Securities, Inc., filed a Form U5 that was misleading and omitted material information regarding the facts and circumstances surrounding the termination of the subject registered representative, including reporting that the termination was “voluntary.” See Exhibit 3. In addition, Wall falsely reported that there was neither an internal review nor a FINRA investigation of the registered representative at the time of his termination. Id.
As a result, FINRA fined him $15,000, suspended him from associating in any capacity with any member firm for three months, and suspended him from associating in any principal capacity with any member firm for nine months. Id.
In DOE v. McCrudden, the Panel found that Vincent McCrudden induced his former firm to file a false Form U5 regarding his termination. See Exhibit 5. Even though he was discharged, he induced his former firm into filing a U5 that reported the termination was “voluntary.” Id.
While the Hearing Panel sanctioned him $12,500 and suspended him for 35 business days, the National Adjudicatory Council affirmed the Panel’s findings but increased the fine to $50,000 and the suspension to one year for his “egregious misconduct.” Id.
The NAC found that the false U5 prevented potential employers from making informed decisions and undermined FINRA’s investigation. Id.
Additionally, Merrill Lynch and Transamerica have signed Letters of Acceptance, Waiver and Consent stemming from allegations that related to failing to timely and accurately file Form U5s. Merrill Lynch consented to censure and fines of $75,000, $500,000, and $175,000 for three separate investigations finding that Merrill Lynch failed to timely and accurately amend Form U5s to include customer complaints. See January 13, 2015 AWC No. 2013037137602, attached as Exhibit 9. Transamerica consented to censure and a fine of $50,000 related to allegations that it violated By-Law Article V, Section 3 and Rules 1122 and 2010 by filing a false U5 which failed to disclose that the registered representative had been charged with a felony prior to termination. See January 20, 2015 AWC No. 2012034686802, attached as Exhibit 10.
In addition to enforcement claims by the DOE, registered representatives have also included allegations related to violations of Rules 1122 and 2010 in expungement cases against former firms. However, there is no evidence that inclusion of such claims results in any additional relief beyond. See FINRA Award in Bekins v. J.P. Morgan, Case No. 14-02729 (October 28, 2016) (granting expungement and noting all other claims were settled prior to hearing), attached as Exhibit 11; FINRA Award in Stancil v. First Citizens Investor Services, Inc., Case No. 14-03574 (May 20, 2016) (awarding Claimant $985,000 and expungement relief, however, there were a number of claims and there was no explanation of the decision), attached as Exhibit 12; and FINRA Award in Sawyer v. HSBC Securities (USA) Inc., Case No. 13-00266 (November 21, 2013) (granting expungement relief only) attached as Exhibit 13.
In conclusion, the accuracy and completeness of Form U5s plays an important role not just in FINRA’s investigations but also for potential employers making hiring decisions and investors deciding whether or not to use a particular broker. FINRA By-Law Article V, Section 3 and FINRA Rules 1122 and 2010 are violated when a false Form U5 is filed with FINRA. Accordingly, firms, principals, and individuals that file or induce the filing of false Form U5s are subject to enforcement actions by FINRA, which may ultimately subject them to fines and suspensions. As discussed herein, those files can range from $5,000 to $146,000 against the responsible principal and/or firm, and suspension of the responsible principal in all supervisory capacities for 10 to 30 business days, and against individuals can range from $2,500 to $37,000 and suspension of the individual in all capacities for 5 to 30 business days.