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U4 bakruptcy will they find out

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Jul 9, 2009 3:12 am

I have an interesting problem-

  I am set up as a RIA (dropped the seven). I am in the process of hiring a new assistant. I have been really impressed with this person and she come highly recommended. Here is the problem:   I ran a background check and found out she filed for bankruptcy about 8 years ago, but she never reported it on her U4. I spoke to her about and said she was too embarrased to tell her current firm. (it was all medical debt)   I don't want to risk anything so I told her we would need to update it if she came over. My concern is that the regulators will see she never reported it and try to fine her or me. She wants to wait for it to drop off the 10 year mark and just not report it. Her thought is they haven't found out yet, why risk reporting it.   If I hire her and we report the BK, do I have any risk. If I don't hire her and she stays at her firm, will anyone really find out. It seems to me at this point a regulator would need to pull her credit to find out. (maybe Bill Singer can answer this: how do they find out)   I breifly spoke to my lawyer and he thought it was more of a FINRA issue. Since I don't deal with FINRA I should be ok. BUT he is more versed on b/d rules vs RIA rules.   Any thoughts or direction?    
Jul 9, 2009 3:13 am

ps. sorry for my bad spelling. I spent too much time in the arcade as a kid.

Jul 9, 2009 1:18 pm

Is she keeping her licenses when she comes to your firm?

  I'm not in the business of hiring assistants, but you have no problem hiring someone that would ignore rules like that?  Not to judge her, but if it was bankruptcy due to medical reasons I don't see why should would be too embarrassed to report it (at least that is a legitimate reason for me).
Jul 9, 2009 1:48 pm

She would drop her 7, but keep the 63 active. She had a fee sharing arrangement with her previous broker (who recently passed away). She has some wealthy friends and family that would come over and we would split the fee. I haven’t decided if I want to set it up as a solicitor or have her as an IAR. This BK has put a wrench in my idea.

I have known her for about 15 years and I knew she got screwed over by her insurance company but I didn’t realize she filed BK over it. She is a very social “southern belle” type, I can understand why she would have been too embarrassed to tell her firm. I don’t think she understood what the consequences could be.

Jul 9, 2009 2:15 pm

[quote=CALI123]I breifly spoke to my lawyer and he thought it was more of a FINRA issue. Since I don’t deal with FINRA I should be ok. BUT he is more versed on b/d rules vs RIA rules.

  Any thoughts or direction?[/quote]
I can't answer your question, but your attorney should be able to.  If he isn't really conversant with the various regulations that you face as an RIA, you need to find one who is.  It does you no good to have an attorney familiar the laws & regulations that are not applicable to you.

Good luck.
Jul 9, 2009 2:36 pm

I understand her intention, all you needed to say was “southern belle.”

Jul 9, 2009 2:58 pm

Thanks Morphius - Finding a good securities lawyer in my area is a bit tough. I think I will need to speak with a larger firm (like Bill’s Stark and Stark). Even the compliance firm I use seems not sure what to do with this one.  Its either be fully compliant and risk getting a sweet old lady in alot of trouble or ignore it -potentially getting me in trouble. It’s a good amount of AUM, which is why I don’t want to walk away at this point.

Ok, enough for now -these boards are starting to get addictive.

Jul 9, 2009 9:24 pm

Thanks Bill -after reading that I am a bit scared to hire her. How does FINRA find out about things like this? Do they run random background checks on people? The only reason I did a check was because my E&O asked me too. I have know this person for along time and didn’t suspect a thing!

Jul 13, 2009 3:09 pm

I’m not an expert on this, but I think FINRA normally finds out from a firm reporting the person.

  Lets say she is going to a large firm, during the hiring process when they see the bankruptcy and it doesn't match the U-4, they'll have to report it.   Is the AUM worth it?    Hopefully FINRA will be merciful with her - and if it makes business sense, cover the fine yourself.
Jul 13, 2009 3:15 pm

Thinks WB -I am still not sure how to handle this. She has pretty much set her mind up to leaving her current firm as the broker she was working with passed away. The BOM doesn’t want to let her keep her current fee sharing arangement. So she will need to report it at the new firm. While it would add a ton of new assets to me, I am starting to think it may not be worth the headache and drama.

Jul 13, 2009 3:33 pm

Prudence does pay.

Jul 13, 2009 3:44 pm

Maybe I don’t completely understand.  If you are running an RIA, why do you need your assistant to be registered?  If she does need to be registered, you obviously need for her to update her U-4.

Jul 13, 2009 4:58 pm

Maybe I don’t completely understand.  If you are running an RIA, why do you need your assistant to be registered?  If she does need to be registered, you obviously need for her to update her U-4.

  I took it as she is also acting as a solicitor (she had a fee sharing agreement with the other firm).  So she would need to have her license to receive solicitor fees from the RIA.
Jul 13, 2009 5:57 pm

Yup -she would need to keep her 63 active with me. I wonder if Finra looks at 63 holders as much as they do 7’s. Or if it is all database driven -update the u4 and it automatically waives a red flag at someone’s computer.

  Also, as an RIA you still need to update your u4. This is what I was always told. I don't know if FINRA looks at RIA updates or just shares the data with the sec.  
Jul 13, 2009 6:20 pm

I did a search on FINRA’s website regarding U-4 Disclosure, and read something about the maximum fine for late reporting is $300 ($10 per day up to $300).  Ofcourse, I have NO IDEA if this is current information, or still applicable.  But it could be a small matter…or an enormous one (just saying to make your decision easier).

Jul 13, 2009 6:43 pm

I didn’t even think about looking at what the punishment may be. I assumed Finra would tar and feather this woman and then pull her down the street behind their car, then add a 50 kabillion dollar fine.

  I owe you a beer.
Jul 16, 2009 6:48 pm

I drink Stella.  And the consequence could still be bad (I don’t know for sure), but I feel that it would be worth checking out (anonymous phone call to FINRA from out of town pay phone).

Jul 18, 2009 6:14 pm


Yes, they WILL find out. If not as soon as you register, then shortly thereafter.  Not hiring her isn't the answer, unless she can afford to not work or wants to change industries. Here's my 2 pennies:   Just disclose, have her use her SouthernBelle charm and claim "goodness, just didn't realize it was such a big ole thang". The compensatory fine will more than likely be in the $K range - possibly even with a 30 day suspension - but the thing is - it's NEVER going away - so if you want her and she's worth it - hire her, disclose the BK and then respond immediately to any and all FINRA requests for info.  Once done, it will blow itself out - won't be a whole lot of hoopla.  If not, find another SA and move on.  Again, just my thoughts...and as already mentioned - you should find a new lawyer; one who knows YOUR industry. Here's a link to info on non-disclosure.
Jul 19, 2009 6:07 pm

Thanks BOM. Good info. I am leaning on the side of not bringing her over. Even though she would drop her 7, she would show up on broker check. I am worried of someone looking her up (assuming she gets in trouble) seeing a regulatory disclosure and wondering what type of person I am hiring. Seems like this would tarnish all the goodwill I have been working on in my town.

Jul 19, 2009 6:10 pm

One more question. Who fines an RIA. Since an RIA still needs to keep a 63 and update their U4, can FINRA - even though they are no longer the regulator. Or does the SEC step in at this point?