The Form U4 is the basic application for any person seeking to become registered with a FINRA member firm. Although updated in 2009, the U4 is an antiquated document in need of overhaul. In order to consider revisions to the U4, it is important to understand its role in today’s financial services world. Historically, the U4 was an administrative document used by self-regulatory agencies and state agencies for determining whether to grant requests for securities licenses. While the U4 retains this original purpose, that purpose has evolved. All of the information contained within a U4 application is submitted to the Central Registration Depository system, operated by FINRA. According to FINRA, Web CRD® “contains the registration records of more than 4,015 registered broker-dealers, and the qualification, employment and disclosure histories of more than 642,980 active registered individuals.” All of the information contained on the U4 becomes public, but only some of that information is available through FINRA’s BrokerCheck® website (which obtains its information from Web CRD®). Prior to the advent of BrokerCheck®, it was very difficult for a consumer to review a broker’s background. BrokerCheck® changed that. BrokerCheck® serves as “a free tool which is part of FINRA’s ongoing efforts to help investors make informed choices about brokers and brokerage firms.”
Because the U4 serves as BrokerCheck’s template, the U4 must be evaluated in the context of one of its purposes, helping investors make informed choices about brokers. With this purpose in mind, the U4, as well as BrokerCheck®, are ripe for change.
So what information is missing from the U4 that investors would find helpful in making informed choices about brokers? The first glaring absence from the U4 is any question about the applicant’s education. The only context in which education is mentioned is in the instructions to question 12, in which an applicant is asked to provide his employment history for the past ten years. According to the instructions, if an applicant was engaged in “full time education” within the past 10 years, that information should be provided in the employment history section. The applicant is not asked whether he or she finished the sixth grade, graduated from high school or college, or has a graduate school degree. The reason this information is not requested is because the securities industry has no minimum education criteria for the various licenses that permit individuals to manage client assets. To the extent FINRA wants BrokerCheck® to help investors make informed choices, an Education History section needs to be added to the U4. How many people would knowingly trust the management of their life’s savings to a person who did not graduate from high school? Or only finished one year of college? The answer is few, if any. So why hide this information? In order for the U4, as the template for BrokerCheck®, to be relevant in the 21st century, it should be revised in order to require the disclosure of an applicant’s entire education history. Stay tuned for Part II!
Over the past several months, FINRA has received an influx of arbitration case filings related to Puerto Rico bonds. Most cases are filed by Puerto Rico residents. FINRA held various conversations and meetings concerning administration of these cases. After careful consideration, FINRA determined to issue the following guidance:
FINRA will determine venue in the Puerto Rico bond cases in accordance with Rule 12213 of the Customer Code of Arbitration Procedure (the “Code”) which states in relevant part that “the Director will select the hearing location closest to the customer’s residence at the time of the events giving rise to the dispute . . . .” FINRA cases generally are venued where the customer resides, the transactions took place, and the witnesses are located. These criteria all point to Puerto Rico as the appropriate venue.
Accordingly, FINRA will not modify its existing venue rule and procedures absent the agreement of the parties.
FINRA will follow Rule 12213 in assigning venue for the following reasons:
• FINRA’s longstanding rule and policies, which were codified in 2007, were designed for the convenience and protection of customers;
• The solicitations and transactions in these cases took place in Puerto Rico;
• Many Claimants in these cases are elderly and travel to the continental United States would be difficult, burdensome and expensive;
• Many Claimants’ attorneys are located in Puerto Rico and requested venue in Puerto Rico;
• Many named individual associated person Respondents are located in Puerto Rico;
• Almost all potential witnesses are located in Puerto Rico, including non-party witnesses;
• Compelling non-party witnesses located in Puerto Rico to testify at arbitrations in the continental United States may be difficult;
• The total expenses, including Claimant and witness travel, of requiring individuals from Puerto Rico to travel to the United States would be substantial.
FINRA will continue to allow customers with more than one residence to choose venue based on the location of any of their residences. Further, if all parties in an arbitration case agree in writing to a hearing location other than one based on the customer’s residence, FINRA will select that hearing venue.
FINRA will initially provide arbitrators for the cases venued in Puerto Rico from Puerto Rico and from other hearing locations within the Southeast Region and Texas. Counsel for Claimants and Respondents were in agreement that this was the area from which to seek arbitrators to expand the available roster in Puerto Rico.
FINRA has expanded the available pool of arbitrators to serve in Puerto Rico from these states and FINRA will pay their travel expenses. To date, approximately 700 currently eligible arbitrators on the FINRA roster have agreed to serve in Puerto Rico. FINRA continues to expand the available pool of Puerto Rico arbitrators willing to serve. Additionally, FINRA is actively recruiting and training arbitrators who reside in Puerto Rico. As a reminder, parties retain the option to agree to modify the provisions of Rule 12401 to have a sole public arbitrator decide their case, as opposed to a three arbitrator panel, even in cases in which the amount in controversy exceeds $100,000.00.
FINRA arbitration hearings generally are conducted in English. However, FINRA recognizes that Spanish is the primary language in Puerto Rico and that many Claimants are not conversant in English. Therefore, at FINRA’s request, the following firms have agreed to bear the costs of consecutive translation services in the Puerto Rico bond fund cases venued in Puerto Rico in which these firms are a named Respondent and Claimant or Claimant’s witnesses are not fluent in English and translation is necessary: UBS, Merrill Lynch, Santander Securities and Popular Securities. In addition, Oriental Financial Services has agreed to consider bearing such costs on a case-by-case basis upon request. Customer-Claimants should make arrangements directly with counsel for these firms regarding translation services. Please note that the agreement is to bear costs of translation when it is necessary, and any disagreements between the parties regarding interpreter services shall be addressed by the arbitration panels.
The Customer Code of Arbitration, Code of Mediation, Uniform Forms Guide, Resources for Parties Representing Themselves and Filing a Claim–Frequently Asked Questions are available in Spanish on FINRA’s website.
FINRA is providing this information and the translation of the above-mentioned documents in Spanish as a service to the customers who use or would like to use its forum. If you have questions concerning the meaning or application of a particular rule or law, please consult with an attorney who specializes in securities law. The English versions of the FINRA Dispute Resolution Codes serve as the official versions of our rules.
Service of Arbitrators:
Counsel for Claimants and Respondents have agreed that FINRA should not limit the service of arbitrators who have previously served on a case involving Puerto Rico bonds through Award. Parties, of course, have available to them the FINRA rules on causal challenges and the Director’s authority to remove an arbitrator as set forth in Rule 12407.
Costs of Witnesses:
Witness costs will be minimized by setting venue in Puerto Rico, where almost all of the likely witnesses are located. Therefore, FINRA will follow its existing rules concerning witness costs.
The arbitrators will be asked to answer an agreed upon set of disclosure questions submitted by the parties as part of the list selection process in order to alert the parties to possible conflicts.
Please also note that any party may request additional information from an arbitrator whose name appears on the arbitrator ranking form. If a party requests additional information about an arbitrator, FINRA will request the additional information from the arbitrator, and will send any response to all of the parties at the same time.
According to FINRA, the Financial Industry Regulatory Authority, “Concentration risk is real. The sooner you give your portfolio a concentration checkup the better.” We are presently seeing portfolios constructed or managed by Raymond James and UBS Financial Services, concentrated in the precious metals sector or commodities sectors. Examples of the securities seen in these concentrated accounts include European Goldfields, LTD, Gold Resource Corp., Goldcorp Inc., Golden Queen Mining, Ltd., New Gold Inc., Silver Wheaton Corp., Yamana Gold Inc., Market Vectors Gold Miners ETF, Franklin Gold and Precious Metals, Van Eck International Gold Fund and Eldorado Gold. Investors, certified public accountants and estate planning attorneys should be especially concerned when seeing clients with concentrated positions in the precious metals sector or commodities sector, especially when any of these securities are part of the portfolio. Not only should your clients consider having a Certified Financial Planner review the portfolio, they should also consider having an experienced securities arbitration attorney review the portfolio.
David A. Weintraub, P.A. is interested in speaking with Raymond James and UBS clients with concentrated positions in the precious metals sector.
It is ironic that Puerto Rico will serve as host for NASAA’s 2015 Annual Conference. Puerto Rico is ground zero since 2013 for claims of investor losses. Since 2013 hundreds of arbitration claims have been filed by investors in Puerto Rico municipal debt. Most of the claims have been brought by clients of UBS Financial Services. As of this date there have been three FINRA arbitration awards rendered against UBS Financial Services, all in favor of the investor Claimants. Puerto Rico bond investors have filed claims against other firms as well, including Merrill Lynch, Santander Securities, Popular Securities and Oriental Financial Services Corp.
Likewise, investors in the “upper 48 states” have also suffered significant losses investing in Puerto Rico debt. Those investors who have not already retained counsel should have their portfolios evaluated by an experienced Securities Arbitration Attorney. David A. Weintraub, Esq. spent the first
13 years of his career representing Wall Street. He now represents investors asserting claims against Wall Street’s largest firms. He is available to consult with you at your convenience.
On January 22, 2015, Ariel Luis Hernandez appeared in Broward County Court to face two charges of grand theft from an elderly person and misuse of identification. The initial bond of $300,000 has since been increased to $1 million. Broward Judge John “Jay” Hurley ordered him not to set foot on Century Village property or advertise financial services seminars or informational luncheons.
According to FINRA, Mr. Ariel Hernandez, was barred from the financial securities industry in March 2014, based upon allegations that he wired money form a client’s brokerage account to a bank without the client’s permission or knowledge. Mr. Hernandez used his position as a financial advisor to gain the trust of his victims. According to FINRA records, Mr. Hernandez is not currently registered, his previous employment records include: a) Liberty Partners Financial Services, b) Summit Brokerage Services and c) J.B. Hanauer.
According to Pembroke Pines Police, Hernandez forged the signatures of unwitting victims to steal hundreds of thousands of dollars from elderly clients who trusted him with their investment accounts. Three Century Village residents lost over $200,000, Detective Thomas Moran said he expected more victims to come forward.
Pembroke Pines Police Captain, Al Xiques, said “Although this is an economic crime, a white-collar crime, it’s actually one of the most heinous types of crime you can commit…The money was literally what these people were going to live off of for the rest of their lives.”
Attorney David Weintraub is currently representing three of the victims in this case.
On December 22, 2014, FINRA announced that Jeffrey C. McClure has been permanently barred from the securities industry. Mr. McClure, allegedly, wrote himself 36 checks totaling $88,850 drawn from the customer’s bank account, without her knowledge. Through its investigation, FINRA found that from December 2012 to Agust 2014, McClure had access to the checks because the elderly customer had authorized him to pay her rent and other expenses; instead, he deposited the checks amounting to nearly $89,000 to his personal bank account and used the funds for his personal expenses. At the time, Mr. McClure worked for Wells Fargo Advisors, LLC. The affiliated bank that held the accounts, located in Chico, California, has made the customer whole for her losses.
In settling this matter, Mr. McClure neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. FINRA’s investigation was conducted by the Office of Fraud Detection and Market Intelligence and the Department of Enforcement. In a statement, FINRA’s Executive Vice President and Chief of Enforcement, said “FINRA has a zero tolerance policy for brokers who steal form their clients, especially those who are most vulnerable. Rooting out this type of misconduct and removing these kinds of bad actors from the industry is a top priority.”
FINRA Fines Merrill Lynch $1.9 Million Plus Orders it to Pay $540,000 as Restitution to Affected Customers
On December 16, 2014, FINRA fined Merrill Lynch, Pierce, Fenner & Smith Incorporated $1.9 million for fair pricing and supervisory violations in connection with more than 700 retail customer transactions in distressed Motors Liquidation Company Senior Notes (MLC Notes). In addition, Merrill Lynch was ordered to pay $540,000, plus interest, in restitution to affected customers.
Through its investigation, FINRA found that Merrill Lynch’s Global Credit Trading Desk purchased MLC Notes issued by General Motors Corporation, prior to its bankruptcy, from its retail customers at prices below the prevailing market price. The Credit Desk, after accumulating small lots of discounted MLC Notes, sold these Notes to other broker-dealers at a higher price, within the prevailing market price. Accordingly, in 716 instances, Merrill Lynch purchased MLC Notes at prices that were not fair to its customers. In fact, out of the 716 customer transactions 510 of them had markdowns in excess of 10 percent.
In addition, FINRA found that Merrill Lynch did not have in place an adequate supervisory system to detect whether the firm’s Credit Desk executed customer transactions at a fair price. Specifically, the firm lacked post-trade best execution or fair pricing reviews or failed to conduct fair pricing or best execution post-trade reviews. As part of the sanctions, Merrill Lynch is also ordered to submit three reports over the next 18 months regarding the effectiveness of the firm’s supervisory system with respect to the pricing of retail customer transactions executed by the Credit Desk.
In a statement, FINRA said “…We expect firms to adhere to their fair pricing obligations to customers when transacting in lower-price or distressed securities. Even after factoring in the nature of the market for these types of instruments, the markdowns charged were simply unacceptable, as was Merrill Lynch’s failure to conduct post-trade fair pricing or best execution reviews for customer transactions executed on the Credit Desk.” On the other hand, Merrill Lynch neither admitted nor denied the allegations, but consented to the entry of FINRA’s findings.
FINRA Expels NSM Securities, Inc. and bars Niyukt Raghu Bhasin from Association with any FINRA Member
In November 2014, FINRA announced that it had submitted an Offer of Settlement in which NSM Securities, Inc. was expelled from FINRA membership, and Niyukt Raghu Bhasin was barred from association with any FINRA member in any capacity. Without admitting or denying the allegations, the firm and Bhasin consented to the sanctions and to the entry of findings that the firm, acting through and at the direction of its founder, owner, President and Chief Executive Officer (CEO) Bhasin, derived most of its revenue from actively and aggressively trading stocks in the commission-based accounts of its retail customers.
The findings stated that Bhasin prioritized his firm’s profits over the duties owed to its customers and chose not to establish, maintain and enforce a supervisory system tailored to the firm’s business. Instead, Bhasin fostered a culture of non-compliance that resulted in widespread sales practice violations, numerous customer complaints, related reporting violations and cold-calling abuses. The firm, through Bhasin, failed to establish, maintain and enforce a system, including written supervisory procedures (WSPs), to supervise its core activity, an active and aggressive investment strategy. The firm, through Bhasin, failed to monitor for, detect and prevent churning, excessive trading, related violations of Regulation T, and unsuitable investment recommendations, and failed to adequately review electronic correspondence, adequately handle customer complaints, and place certain brokers who were the subjects of multiple customer complaints and arbitrations on heightened supervision. The firm’s culture of non-compliance that Bhasin fostered harmed the firm’s customers, as the lax to non-existent oversight of its brokers resulted in significant sales practice abuses. As a result, the firm willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The findings also stated that in implementing Bhasin’s active and aggressive trading strategy, and in order to generate commissions, the firm committed multiple violations of Regulation T and the related NASD®/FINRA rules governing the extension of credit. Specifically, the firm, acting through its brokers, made a practice of allowing customers to buy securities in cash accounts where the cost to buy the securities was met by the sale of the same securities, known as free-riding. The findings also included that the firm’s active and aggressive trading strategy, as developed and instituted by Bhasin, led to numerous customer complaints. The firm, through Bhasin, failed to report and failed to timely report customer complaints to FINRA, and failed to disclose and/or timely disclose material facts on its brokers’ Uniform Applications for Securities Industry Registration or Transfer (Forms U4) or Uniform Termination Notices for Securities Industry Registration (Forms U5).
FINRA found that Bhasin willfully failed to disclose material facts or information on his own Form U4, and willfully filed false and misleading amendments to his Form U4. The firm, through Bhasin, also filed an untimely and inaccurate Form U5 for its former chief compliance officer (CCO). FINRA also found that the firm, through Bhasin, failed to institute adequate procedures for cold-calling prospective customers. As a result, the firm, through its brokers and other representatives, initiated telephone solicitations to persons whose numbers were on the firm’s do-not-call list and/or the national do-not-call list.
On October 27, 2014, FINRA announced that it had censured and fined Merrill Lynch Professional Clearing Corp. (Merrill Lynch PRO) $3.5 million for violating Regulation SHO, an SEC rule that established a regulatory framework to govern short sales and prevent abusive naked short selling. FINRA also censured and fined its affiliated broker-dealer, Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), $2.5 million for failing to establish, maintain and enforce supervisory systems and procedures related to Regulation SHO and other areas.
In addition to curtailing naked short selling, among other things, Regulation SHO also aims to reduce the number of instances in which sellers fail to timely deliver securities. Regulation SHO requires a firm to timely “close out” any fail-to-deliver positions by borrowing or purchasing securities of like kind and quantity. Additionally, Regulation SHO permits firms to reasonably allocate fail-to-deliver positions to its broker-dealer clients that caused or contributed to the firm’s fail-to-deliver position.
FINRA found that from September 2008 through July 2012, Merrill Lynch PRO did not take any action to close out certain fail-to-deliver positions, and did not have systems and procedures in place to address the close-out requirements of Regulation SHO for the majority of that period. FINRA also found that from September 2008 through March 2011, Merrill Lynch’s supervisory systems and procedures were inadequate and improperly permitted the firm to allocate fail-to-deliver positions to the firm’s broker-dealer clients based solely on each client’s short position without regard to which clients caused or contributed to Merrill Lynch’s fail-to-deliver position.
FINRA Fines Citigroup Global Markets Inc. $1.85 Million and Orders Restitution of $638,000 for Best Execution and Supervisory Violations in Non-Convertible Preferred Securities Transactions
On August 26, 2014, FINRA announced that it had fined Citigroup Global Markets Inc. $1.85 million for failing to provide best execution in approximately 22,000 customer transactions involving non-convertible preferred securities, and for related supervisory deficiencies for more than three years. FINRA also ordered Citigroup to pay more than $638,000 in restitution, plus interest, to affected customers.
In any customer transaction, a firm or its registered persons must use reasonable diligence to ensure that the purchase or sale price to the customer is as favorable as possible under current market conditions. FINRA found that one of Citigroup’s trading desks employed a manual pricing methodology for non-convertible preferred securities that did not appropriately incorporate the National Best Bid and Offer (NBBO) for those securities. As a result, Citigroup priced more than 14,800 customer transactions inferior to the NBBO. In addition, Citigroup priced more than 7,200 customer transactions inferior to the NBBO because the firm’s proprietary BondsDirect order execution system (BondsDirect) used a faulty pricing logic that only incorporated the primary listing exchange’s quotation for each non-convertible preferred security. As securities trade on multiple exchanges, Citigroup missed the prospect of a better price for that security on an exchange other than its primary listing exchange.
FINRA also found that Citigroup’s supervisory system and written supervisory procedures for best execution in non-convertible preferred securities were deficient. Citigroup failed to perform any review of customer transactions in non-convertible preferred securities executed on BondsDirect or manually by the trading desk to ensure compliance with the firm’s best execution obligations. The firm failed to conduct these supervisory reviews even though it had received several inquiry letters from FINRA staff. Moreover, while many of the transactions in question were identified on FINRA’s best execution report cards, the firm only attempted to access its best execution report cards once during the relevant period.
In concluding this settlement, Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.