Q: I was previously registered with a brokerage firm, but I’ve been out of the industry for over a year after having been terminated by my prior firm. I was looking to get back into the business but FINRA filed an action and claimed I was statutorily disqualified because I didn’t report a bankruptcy when I was still in the industry. That failure to report the bankruptcy was the cause of my termination, by the way. I have two questions. How can FINRA bring an action against me when I’m not even in the industry and haven’t been for over a year? And how can a simple failure to report a bankruptcy cause me to be statutorily disqualified?
A: FINRA can file an action anytime within two years of the date of termination, according to Article V, Section 4(a) of FINRA’s by-laws. The misconduct also has to have begun while a rep was associated with a member firm.
A person can be statutorily disqualified if, among other things, the person “has willfully made or caused to be made in any application for membership or participation in, or to become associated with a member of, a self-regulatory organization, . . . any statement which was at the time, and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, or has omitted to state in any such application, . . . any material fact which is required to be stated therein,” according to section 3(a)(39)(F) of the Securities Exchange Act of 1934.
Failing to timely update a Form U4 is grounds for statutory disqualification if the failure was “willful” and the omitted information was “material.”
A willful violation of the securities laws means “intentionally committing the act which constitutes the violation.” In other words, it means that the person simply knows what he or she is doing. Unlike in criminal law, a finding of willfulness does not require that the person acted with a “culpable state of mind.” It doesn’t even require that he be aware of the rule that he violated. FINRA has said that a failure to disclose is willful as long as the person “of his own volition provides false answers on his Form U4.”
A fact is considered to be “material” if there is a “substantial likelihood that a reasonable regulator, employer, or customer would have viewed it as significantly altering the total mix of information made available.” The National Adjudicatory Council has held that “essentially all of the information that is reportable on the Form U4 may be considered material.” A bankruptcy petition has specifically been determined to be material information that must be reported on a Form U4.
