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You Can’t Escape the Past

When a financial advisor is contemplating a move to a new firm, they may question whether they should, or should not, disclose negative events from their past on Form U4. If there is ever any question about whether a disclosure to a prospective employer should be made, it’s almost always better to err on the side of caution and make the disclosure.

This is especially important in today’s hypervigilant compliance environment. Sometimes, a failure to disclose even the most mundane or long-forgotten youthful indiscretions could lead to career-damning consequences, essentially costing the advisor their job and possibly being banned from the securities industry.

Take Jeff, a young advisor from a wirehouse in the Northeast, hired by his firm in mid-2015 after being paid a sizeable recruiting deal. At 38 years old and producing in excess of $1.4 million dollars annually, he was considered one of the firm’s best advisors—until he was called into his manager’s office where he was met by members of the compliance department.

A post-hire check by the firm revealed that he failed to report that he had been found guilty of writing a bad check for $300 in his early 20s—a felony in the jurisdiction where he went to college. While he eventually made full restitution and was able to enter and complete a pre-trial intervention program, he was still required to disclose the matter to his firm. He did not.

To make matters worse, seven years earlier he was near foreclosure on his condominium and failed to report that he arranged with the lender to sign back the unit, walking away from the balance of his mortgage (a deed in lieu of foreclosure).

Despite the fact that Jeff’s compliance record was otherwise clean, he was terminated on the spot for failing to disclose these incidents.

Finding Out the Hard Way

Prior to 2015, FINRA would bring direct actions against advisors who falsified or failed to set forth reportable events on their Form U4. In FINRA’s new Rule 3110(e), heightened burdens were placed on broker/dealers to monitor both new and existing employees on an ongoing basis. What that means is that today, firms are required to do more in-depth background checks and reviews on all of their advisors or suffer the consequences. Moreover, within 30 days after a new U4 is filed, the b/d must “verify the accuracy and completeness of the information” provided by the advisor on the form.

From a practical perspective, firms are now digging deeper into a prospective advisor’s past, and firms expect that advisor to be completely honest and forthright when providing information.

In Jeff’s case, the termination, and the circumstances causing it, became a black mark on his record. Subsequently, he was unable to obtain employment with any other top or even second-tier firm and was forced to accept an offer from a small local b/d. And, he’s responsible for repaying the unforgiven significant portion of the recruiting bonus he had received from his former firm in 2015.

What’s “Reportable”?

The reportable events that warrant disclosure can include being charged with a felony or certain types of misdemeanors that involve investments, investment-related businesses, fraud, wrongful taking of property, perjury and other similar offenses that go to the good character of an advisor.

Issues surrounding bankruptcies and compromises with creditors (occurring within 10 years of filling out the Form U4) will not disqualify an advisor from being licensed or affiliating with a firm, but they must be disclosed.

Any civil litigation settled for more than $15,000 and any civil judgment must be disclosed, as well as any types of liens and judgments or regulatory actions related to other professional licenses.

While this seems pretty straightforward, many advisors still don’t make the necessary disclosures. Many believe that what was thought to be a minor transgression—such as pleading guilty to shoplifting while in college, passing a bad check, being arrested for possessing a small amount of cocaine or declaring bankruptcy many years ago—need not be reported. But the operative word in the Form U4 for these events is “ever”—as in, “Have you ever been charged with a felony?” Even if the charges were dismissed, they still must be disclosed.

We have worked with too many terminated advisors who failed to report an expunged drug arrest from their early 20s because they were assured by the court (or their attorney at the time) that the offense “was off their record.” For purposes of an advisor’s Form U4 disclosure obligations, these events stay with the individual like a bad haircut that never seems to grow out.

A financial advisor’s failure to disclose material events from their past—regardless of the amount of time that has elapsed or the perceived inconsequential nature of the offense—could very well derail their career. Extreme care and transparency about one’s past must be top of mind when completing or supplementing Form U4. If there is any question as to whether an event should be disclosed, it is good practice to consult with an attorney who practices in this area of law. But, when in doubt, always disclose.


Mindy Diamond is president of Diamond Consultants of Morristown, N.J., a nationally recognized boutique search and consulting firm in the financial services industry.

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