Advisors are often guiding clients through financial nightmares rather than living their own. But a FINRA enforcement action this year demonstrates how easily your career can slip away if you don't properly disclose financial troubles.
Back in April 2007, the IRS filed a lien against an advisor for about $1.1 million, which he acknowledges he learned of about a month later. But he failed to update his Form U4 disclosing the lien within 30 days, as required by FINRA. He also failed to update the form six months later, when he switched broker-dealers, even though he affirmed that the form was accurate when he transferred his licenses and registrations. He claimed he had mentioned the issue to his new employer.
When he ultimately did amend his U4 in February 2008, the advisor wrote that the lien represented unfiled taxes after he'd "suffered major personal market losses on margin, and then proceeded to break my neck in a terrible accident." He explained his tax filings in detail, insisting he owed $89,000 in principal and that the $1.1 million the IRS claimed was owed was "based on improper information that is now properly filed and up to date."
By waiting so long to reveal his personal financial details, a career that began in 1993 may have been dealt a fatal blow. A 2008 FINRA investigation into the matter resulted this year in the advisor accepting a 30-day suspension and $5,000 fine for failing to disclose the lien punctually. His bosses permitted him to resign rather than subjecting him to "termination for cause."
Advisors often run afoul of regulators when their own finances become shaky. Bankruptcy filings were the third most common offense leading to CFP Board discipline from 2008 to 2010 (the most common was misrepresentation, followed by improper disclosure), and the number of disciplinary actions brought because of financial problems has skyrocketed compared with other offenses.
So far this year, FINRA has publicly sanctioned 37 registered representatives and eight broker-dealer firms for, in part, U4 filing issues. Sanctions have ranged from fines to a permanent bar from the industry for advisors who failed to respond to FINRA. If the numbers seem small, keep in mind that these are only public sanctions. Many more registered representatives are likely to have received letters of caution from FINRA, which the regulator will use to impose or increase sanctions if the advisor fails to update a U4 in a timely fashion.
In addition to the regulators, a broker-dealer may also impose its own brand of discipline against an offending registered representative. In an enforcement action earlier this year, an employer fined a registered principal from Pennsylvania $1,500 for failing to amend his U4 in a timely manner. In 2005, the man fell behind on his condo association fees and became the subject of a lien for about $7,500. The advisor also failed to make several credit card payments, resulting in a judgment against him for about $16,000. Although he resolved the debts in April 2006, he failed to disclose them on his U4 until September 2007. After a FINRA inquiry that concluded this year, he agreed to a $4,250 fine and 15-day suspension. FINRA credited the amount he had previously paid his employer against the fine.
Broker-dealers take these matters seriously because they face significant fines if they do not make U4 filings on a timely basis. Recently, FINRA fined a large broker-dealer $1 million for, among other compliance issues, failing to make a timely filing of 190 U4 and Form U5 amendments in 2008 and 2009.
If a problem does arise, don't count on your error and omissions insurance to cover the expenses associated with a regulatory inquiry or action stemming from financial problems. "Depending upon the circumstances, a U4 violation can lead to an individual being excluded from either or both the firm's E&O or fidelity bond," says Andrew Fotopulos, a senior vice president at Starkweather & Shepley Insurance Brokerage in Westwood, Mass. Confirm with your company how well you are covered; you may need to check with the underwriter, as well.
Don't count on privacy, either. The Internet is full of resources that allow regulators, customers and compliance departments a peek into your personal financial life. There are costly programs that can be used to search public records for everything from credit problems to unclaimed assets.
However, a quick Internet search of an individual's name can be quite effective in turning up a copy of a lien or judgment or a newspaper story listing liens. Depending on the size of the community, local news outlets can report everything from bounced checks to evictions, and it is not uncommon for a regulator to cross-check any information discovered against a U4.
A regulator may also discover this information through a customer complaint. On high alert since the Bernie Madoff scandal, regulators take particular notice when an investor writes a complaint letter raising concerns about her investments and suggesting that a financial planner appears to have been motivated by his own financial problems.
During the arbitration process, arbitrators may refer to enforcement any information that they deem could pose a risk to the public, such as an incomplete or false U4. During your next regulatory audit, do not be surprised if production numbers are requested and your supervisors are peppered with questions about your financial fitness.
To help ensure that you're in compliance, monitor all three credit agencies' reports at least annually. If you see errors, dispute them immediately. Consult your compliance department or a securities lawyer for guidance and consider reporting the inaccurate information on your U4, including a detailed explanation.
Not all adverse financial events make it onto a credit report - for example, delinquent promissory loans from prior broker-dealers. Consider creating a Google Alert in your name and the name of your practice, which may alert you if liens, judgments or other activities have occurred without your knowledge. If, for example, an employee stole from you, complaints from local merchants may show up in a local newspaper or website. A Google Alert could forward that information directly to your inbox, giving you the opportunity to deal with the matter before it escalates.
Also be sure you understand your reporting obligations. While the requirement to disclose a bankruptcy, lien or judgment is clear, financial professionals often get tripped up reporting a "compromise with creditors." Unfortunately, there has not been a lot of guidance from regulators over how these should be reported, but a 2009 enforcement action suggests that any compromise with more than one creditor should be reported.
Your professional reputation is of paramount importance. With the economy weak, regulators and employers may be more understanding of financial problems if an advisor has met compliance requirements. Claims of ignorance, however, can damage - or destroy - your credibility with your employer, regulators and ultimately your clients.
Jennifer Woods Burkeis a Jersey City, N.J., attorney and the founder of compliance consulting firm CompliGuide.
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