FINRA rules require brokers to make extensive and often intrusive disclosures (vis-à-vis a broker's Central Registration Depository ("CRD") record) concerning their work and disciplinary histories. These disclosures are publicly available through BrokerCheck, an online database that the public may use to vet a potential broker. For the most part, these required disclosures work to protect investors from controversial brokers.
But when it comes to the disclosure requirements surrounding a broker's criminal history, FINRA rules have gone too far, particularly as they relate to misdemeanor theft charges and convictions. Most of these petty crimes, which, again, are publicly available, have no "investor protection" benefit, and do nothing but serve as a constant reminder of an embarrassing mistake that has no bearing on a broker's fitness to competently manage investments.
Under FINRA rule 8312(2)(A), FINRA may release to BrokerCheck any information reported on Forms U4, U5, U6, and Form BDW. In other words, anything a broker puts on any of these forms, with very limited exceptions, will appear on the broker's publicly available BrokerCheck record.
There are two categories of crimes that FINRA requires brokers to disclose: felonies and misdemeanors. With respect to the former, FINRA requires brokers to disclose any felony conviction or charge on their Form U4 (see Form U4 question 14A). Felony convictions and charges generally involve serious crimes, so arguably, potential main street investors should be privy to a broker's felony criminal involvement.
The waters get muddied, however, when you consider FINRA's requirement that brokers also disclose any misdemeanor convictions or charges that relate to truthfulness (for instance, fraud or bribery) or theft. Now, through the lens of a staunch investor protection advocate, one can maybe understand how misdemeanor convictions that relate to truthfulness or theft are relevant to a broker's ability to manage investment accounts. But charges of such conduct?
And when you consider the types of "crimes" that wind up on a brokers' record as a result of this rule, it borders on the absurd. For example, suppose a broker, 25 years ago and long before he or she worked in the financial services industry, was convicted of misdemeanor shoplifting for stealing a bag of Skittles from a mini-mart as part of a college "dare."
Under the rules, that broker must report the Skittles theft conviction on his or her Form U4, which would then cause the offense to be reported on his or her BrokerCheck record.
Taking the example a step further, suppose that same broker was merely charged with stealing the Skittles, but it was later learned that the store clerk misidentified the broker as the culprit causing the charges to be dropped. Absurdly, FINRA rules require that the broker disclose the charge, even though the broker was never convicted of the Skittles theft.
Despite the silly results that the FINRA reporting requirements can cause with respect to disclosure of criminal convictions and charges, the mechanisms in place to potentially remove such a disclosure, true to FINRA form, are obscure.
According to FINRA's "Interpretive Questions and Answers" relating to criminal disclosures (available here), FINRA has the authority to remove a conviction from the broker's record if the broker obtains a criminal court order expunging the criminal conviction. Expungement of a criminal conviction renders the offense as though it never happened. The criminal court destroys the record so that no one (not even by court order) can obtain it.
As a general rule, most petty misdemeanors can be expunged so long as the broker files the correct documents with the criminal court in which he or she was convicted.
If the broker earns a criminal expungement, he or she may submit the order granting expungement to FINRA. FINRA may then remove the conviction from the broker's record.
The problem with earning expungement of the conviction is that, technically, there is no way to erase the charge. So even though a broker can potentially obtain an order from a judge that literally destroys any record of the conviction, FINRA, in all its wisdom, may nevertheless keep the fact that the broker was charged with the crime at issue on his or her record.
So despite the fact that no state or federal court, bureau, or enforcement agency can find reference to an expunged conviction let alone disclose it to the masses, FINRA can nevertheless deem disclosure of the charge pertinent to protect investors against the perils of investing with a former Skittles thief.
For more information about this topic or related topics, please Email Attorney Patrick Mahoney.
**This article is intended for informational purposes only and does not constitute legal or investment advice. Any views expressed are those of the author only.**