Registration & reporting

Registration

To register with FINRA, a person must complete and file Form U-4, officially known as the Uniform Application for Securities Industry Registration or Transfer. Firms usually streamline the process and help new employees complete the form. Applicants must provide a considerable amount of background information, including:

• 5-year residential history
• 10-year employment history*
• Outside business activities**
• Financial disclosures (bankruptcies and compromises with creditors)
• Any felony history (including charges)
• Any securities-related misdemeanor history (including charges)
• Items subject to statutory disqualification

*Member firms must independently verify an applicant’s previous three years of employment history, which is typically confirmed by communicating directly with the applicant’s previous employer(s) by phone or email.

**An outside business activity (OBA) is any instance in which a registered person makes compensation outside of their firm. For example, a registered representative driving for Uber on the weekends would be considered an OBA. Representatives must report the existence of OBAs in writing to their firm. If the employing firm believes they’re engaging in activity detrimental to the firm, they can deny the OBA. Although firms maintain the right of denial (meaning they can tell an employee not to engage in the OBA), representatives are not technically asking for their permission when they notify their employer in writing. It’s only a problem if they hear back after submitting the OBA notice!

Certain actions in a person’s past may prevent them from working in the financial industry. While any criminal-related event must be reported on form U-4 (even if it was a charge that was dropped), only convictions (including guilty and ‘no contest’ pleas) may prevent a career in the securities field. Known as statutory disqualifications, the following events related to criminal activities and/or rule violations could lead to a registration application being automatically denied:

• Conviction of any felony in the last 10 years
• Conviction of a securities-related misdemeanor in the last 10 years
• Denials, suspensions, or revocations of registration, or permanent barring from the industry imposed by another securities regulator (e.g., the SEC) or SRO (e.g., the OCC)
• Proof of false statements made to securities regulators or SROs
• Temporary or permanent injunctions*
• Findings by the SEC or an SRO that a person
  • Willfully violated the law
  • Willfully aided another person while they violated the law
  • Failed to supervise another person while they violated the law

*An injunction is a court order prohibiting a person from performing a specified activity. For example, a court imposes an injunction on an individual from working in the securities industry.

One of the first things your firm may have requested at your initial employment was disclosure of past criminal convictions (or even arrests). This is the main reason why; if a felony or securities-related misdemeanor exists, it may prevent you from working in the industry. In some circumstances, a firm may apply for an exception and attempt to register a person with a previous disqualifying event. For example, a broker-dealer may feel a felony conviction eight years ago may be forgivable and ask for an exception. This process is known as an Eligibility Proceeding. The request is filed with FINRA, and then forwarded to the Securities and Exchange Commission (SEC). The SEC ultimately determines if an exception is granted.

To verify the information filled out on the U-4, firms conduct background investigations on their new hires. FINRA rules require firms to investigate the good character, business reputation, qualifications, and experience of every representative they plan on registering. In addition to the background check, fingerprints will be collected and sent to the Federal Bureau of Investigation (FBI). While many firms perform the fingerprinting process while the applicant completes the U-4, FINRA rules require fingerprints to be filed within 30 days of U-4 submission. If the FBI considers the fingerprints to be illegible (unreadable), the firm may re-submit an applicant’s fingerprints up to three times. Fingerprints must be kept on file at the broker-dealer’s principal place of business for at least three years. All firm employees are subject to the fingerprinting process unless all of the following apply:

• The person does not sell securities
• The person does not have access to client securities and/or assets (e.g., cash positions)
• The person does not have access to the firm’s books & records
• The person does not supervise any person that engages in the activities listed above

If a person’s fingerprints are legible, the FBI performs a background check on the applicant, and the results are typically sent to FINRA within a few days. From there, firms can access the background check and confirm the information provided by their new hires is consistent with the FBI’s findings. This process verifies their background information and ensures the employee isn’t wanted for any outstanding crimes.

Once the information on the U-4 is confirmed by background check, the employee signs the U-4. In addition to vowing the information on the form is correct, the person’s signature approves a pre-dispute arbitration agreement embedded in the U-4. As we learned in a previous chapter, this prevents representatives from suing their employer unless allegations of harassment or discrimination exist.

After the U-4 is signed, the firm will submit it to FINRA’s Central Registration Depository (CRD). The CRD is an extensive database containing information on registered representatives across the industry. Customers can gain access to some U-4 information on their representatives by using FINRA’s BrokerCheck (you might even be in there right now). Additionally, the CRD contains information on FINRA member firms, which are financial firms registered with FINRA (e.g., [broker-dealers).

Occasionally, the U-4 must be updated when previously provided information becomes inaccurate or outdated. This could be for harmless reasons like name* or address changes, which require an update within 30 days of the change. Other times, the update may disclose an event that could lead to being terminated. If an event involving a statutory disqualification occurs while the representative is already registered, the U-4 must be updated within 10 days of the event. For example, a representative being convicted of a securities-related misdemeanor while registered would fall into this category. In many of these scenarios, the event leads to the representative’s registration being revoked and termination from employment.

*Most name changes are filed because of marriage. Although a name change must be reported, a change in marital status is not reportable. Therefore, a representative who gets married but makes no change to their name is not required to update Form U-4.

When a representative’s employment ends at a firm, the firm must submit Form U-5 to FINRA within 30 days. If FINRA terminates the registration due to a rule violation, the registration is considered ‘revoked’ (this is bad!), On the other hand, a person’s registration is considered ‘canceled’ when they voluntarily resign, quit, or retire. Revocation of a license is punitive (a punishment), but cancellation is not. The reason for termination is not disclosed unless it relates to an unethical or illegal event.

Section 7 of Form U-5 requires the employing firm to disclose if their former representative was subject to any of the following at or prior to termination:

• Investigation or discipline imposed by an SRO for unethical or illegal activity
• Investigation by the firm for unethical or illegal activity
• Criminal proceedings involving any felony or securities-related misdemeanor
• Pending arbitration or litigation involving the representative

After a person’s registration is revoked or canceled, FINRA maintains regulatory power over them for two years. Let’s assume a person quits their securities-related job and their registration is canceled. Suppose their former firm receives a legitimate customer complaint alleging fraud soon after they left. FINRA can still revoke the person’s license (if within two years of termination), effectively preventing them from re-entering the industry at a future date.

Form U-6 is filed if a representative or firm is subject to disciplinary action or a reportable event occurs. Reportable events include criminal convictions and financial disclosures (bankruptcy and compromises with creditors). Additionally, the results of disputes facilitated through arbitration are disclosed on this form. Like the U-4 and U-5, the information supplied on the U-6 is available on BrokerCheck.

Reporting

FINRA Rule 4530 requires member firms to file reports when certain circumstances that typically involve legal or ethical violations. A filing must be made by a member firm promptly (but no longer than 30 days after the event) if the member firm or any of its representatives:

• Are found to have violated any securities, insurance, commodities, financial, or investment-related laws or regulations
• Is the subject of a written customer complaint alleging theft or misappropriation of funds/securities
• Is the subject of a written customer complaint alleging forgery
• Is named as the defendant or respondent in any proceeding brought by a regulatory body or self-regulatory organization (SRO)
• Is denied registration, or expelled, enjoined, directed to cease and desist, suspended, or otherwise disciplined by a securities, insurance, or commodities industry regulatory body or SRO
• Is indicted, convicted of, pleads guilty or no contest to any felony or securities-related misdemeanors
• Is a director, controlling stockholder, partner, officer or sole proprietor of, or an associated person with a broker-dealer, investment company, investment advisor, underwriter, or insurance company that was suspended, expelled, or had its registration denied or revoked by a regulatory body or SRO
• Is a defendant or respondent in any securities, insurance, or commodities-related arbitration or litigation involving a judgment or settlement exceeding $15,000 (for a representative; it must exceed $25,000 if involving a member firm)
• Becomes subject to a statutory disqualification
• Is subject to firm-imposed internal discipline involving suspension, termination, or imposition of fines exceeding $2,500*

*This reporting event involves a firm disciplining a representative.