May 19, 2014
It is among the most common calls that I get from industry clients. They were involved in some dispute or incident, and the police were called, and something happened but they're not exactly sure what the legal term is, and now they think that they may have to notify their brokerage firm of the event, and they may also have to amend their Form U4, and . . . Well, so it goes. Bill, what the hell do I do and how should I disclose it? Sadly, it's not always an easy question to answer, particularly when the caller is so excited that he or she isn't able to answer some basic questions: Were you arrested? Were you charged? Were you convicted? Did you plead? Were the charges dismissed? In today's BrokeAndBroker.com Blog, we examine an even more tortured fact pattern involving an individual who was charged with a misdemeanor and two felonies and managed to resolve the whole mess on fairly favorable terms -- but then bungled his Wall Street disclosure obligations.
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Craig Henry Leach submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Craig Henry Leach, Respondent (AWC 2013038556901, May 8, 2014).
Leach was first registered on November 12, 2012, with FINRA member firm Fidelity Brokerage Services, LLC ("Fidelity"), where he remained until his August 13, 2013 termination; thereafter, on August 27, 2013, he was registered with FINRA member firm Pioneer Funds Distributor, Inc. ("Pioneer").
The AWC alleges that on March 27, 2013, Leach was arraigned and charged in the Commonwealth of Massachusetts with two felonies and a misdemeanor. Those charges were not related to the securities industry and the AWC asserts that the misdemeanor and one of the felony charges were dismissed in June 2013. The remaining felony charge was purportedly continued without any findings and scheduled for dismissal in June 2014 subject to a finding that Leach had fully complied with his plea agreement.
By The Book
FINRA By-Laws Article V, Section 2(c): applications for registration must be kept current at all times and amendments must be filed within 30 days of learning facts or circumstances giving rise to the amendment.
FINRA Rule 1122: prohibits associated persons from filing information that is incomplete or inaccurate or failing to amend an incomplete or inaccurate filing after receiving notice of the need for the amendment.
FINRA Rule 2010: registered representatives shall observe high standards of commercial honor and just and equitable principles of trade.
Failures To Disclose
The AWC alleges that Leach failed to timely disclose the two felony charges via amendment of his Form U4 while registered with Fidelity. Additionally, on August 27, 2013, when submitting a Form U4 for registration with his new employer Pioneer, Leach allegedly failed to disclose the felony charges.
The AWC further alleges that on August 1, 2013, Leach failed to disclose his arrest or arraignment while responding to queries on Fidelity's annual compliance questionnaire, which covered the year from July 1, 2012 through June 30, 2013. The disclosure of an arrest or arraignment appears to have been required on Fidelity's proprietary questionnaire and is in marked contradistinction to the absence of such a query on the regulatory form U4.
FINRA deemed that Leach's failures to amend his Form U4 and his false statements on the annual questionnaire constituted violations of Article V, Section 2(c) of FINRA' s By-Laws and FINRA Rules 1122 and 2010.
In accordance with the terms of the AWC, FINRA imposed upon Leach a $5,000 fine and a 60-day suspension from associating with any FINRA member in any capacity.
Bill Singer's Comment
For registered persons and industry applicants, a number of valuable takeaways. If you are "charged" with a crime, reference your Form U4 and determine whether that circumstance requires disclosure. Although it is typically best to seek guidance from your criminal lawyer on this issue, be aware that many such practitioners are often unfamiliar with the unique disclosure obligations of the securities industry. On the Form U4 Instructions, you will note that the Explanation of Terms guidance offers this definition:
Charged: Means being accused of a crime in a formal complaint, information, or indictment (or equivalent formal charge).
Your employer may have far more extensive reporting obligations than those of federal, state, or self-regulatory regulators. Be careful to differentiate between what you are required to disclose on a form that is filed with a regulator and a form submitted solely to your firm's compliance/legal departments. An arrest without a charge is not a disclosable matter on the Form U4 but is often an in-house disclosure item, as noted in Leach. A misstatement on an in-house compliance document will only add to your problems.
Finally, your career may be in the balance if FINRA alleges that your failure to disclose was willful: such a finding would deem you statutorily disqualified.