News & Resources

FINRA Hearing Panel Bars Broker for Defrauding Elderly, Blind Customer

On November 9, 2017, FINRA announced an extended hearing panel barred broker Hank Mark Werner of Northport, New York, for fraudulently churning and excessively trading the accounts of his customer, a blind, elderly widow, and for making unsuitable recommendations. The hearing panel also ordered Werner to pay more than $155,000 in restitution to the widow, fined him $80,000 and ordered disgorgement of more than $10,000 representing commissions received for recommending the purchase of an unsuitable variable annuity.

Werner had been the elderly widow’s broker, and that of her blind husband until his 2012 death, since 1995. According to the hearing panel decision, Werner plundered his customer’s accounts by engaging in such an active trading strategy that, when the high commissions he charged were taken into account, it was impossible for the customer to make money. The panel found Werner frequently bought and sold a security within a week or two, and charged exorbitant commissions even though the blind widow’s financial circumstances required that Werner invest her assets with a minimum amount of risk. She was 77 and in ill health when Werner began churning her accounts. Werner engaged in more than 700 trades from October 2012 to December 2015, generating approximately $210,000 in commissions while the customer lost more than $175,000 as a result of his reckless trading. The decision also noted that it was apparent to the Hearing Panel that Werner took advantage of the customer’s vulnerability after her husband died in September 2012.

The hearing panel concluded that Werner engaged in egregious misconduct and is unfit to work in the securities industry.

Legend Securities, Inc., which was also named in an amended disciplinary complaint, failed to respond and accordingly was held in default. The complaint charged that Legend failed to reasonably supervise Werner, which allowed him to engage in churning his customer’s account, and failed to establish, maintain, and enforce an adequate supervisory system to ensure that Werner was subject to heightened supervision. The hearing officer issued a default decision censuring and fining the firm $200,000. Legend voluntarily paid $20,000 in partial restitution to the customer.

Evaluating professional designations utilized by financial advisors

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So, a local financial advisor hands you a business card identifying one or more of the following professional designations: CFP, CFPN, CPFA, CMA, CFMP, CDP, and/or CEA.  Should you be impressed?  What do the letters stand for?  Who are the issuing organizations?  Do the issuing organizations exist?  Were there prerequisites for obtaining the designations?  Were examinations required?  What types of examinations?  Was a college degree required?  Are there continuing education requirements?  Are the continuing education requirements meaningful?  Can you verify the authenticity of the designation?  Does the issuing organization address customer complaints?  Does the issuing organization publish a list of disciplined designees?

Confused?  You should be.  According to records maintained by FINRA, there are more than 150 known so called “professional designations” either in use today by financial advisors, or that have previously been used by financial advisors.  Some of those designations look, sound and feel remarkably similar to each other.  As an example, what is the difference between a CFP and a CFPN?  Are they issued by the same organization?  Are they connected with each other in any way?  They are not.  “CFP” is a designation known as “Certified Financial Planner.”  It is issued by the Certified Financial Planner Board of Standards, Inc.  “CFPN” is known as “Christian Financial Professionals Network Certified Member.”  Though the abbreviations are similar, that is where the similarities end.  The prerequisites for earning the Certified Financial Planner designation are indeed rigorous.  The prerequisites for the “CFPN” designation are less clear.  According to FINRA, one is eligible for the CFPN certification with 10 years of full-time financial experience, signing a “Statement of Faith”, taking three training sessions, and passing a closed-book exam.  Links on the FINRA website to the Christian Financial Professional Network take you to  It is unclear whether this organization still exists, notwithstanding the fact that FINRA’s website states that the designation is currently offered.  Web searches lead to an entity called Kingdom Advisors, which offers what it calls a Certified Kingdom Advisor designation.  According to its website, its designation “allows you to work with someone who has committed and been trained to be a person of character who, from a biblical worldview, serves you with biblical financial advice so that you can confidently navigate financial decisions as a faithful steward.”

It is up to each lawyer to diligently determine the value, if any, to place on certain designations.  Both the American National Standards Institute and the National Commission for Certifying Agencies accredit certain designations.  The following link lists the accredited designations: .  FINRA also maintains a list of designations about which it is aware: .  It behooves any attorney who is referring clients to financial advisors to investigate their backgrounds.  One piece of this investigation is verifying any claimed designation, and assessing its value.  The CFP Board’s website contains a section dedicated to verifying whether one’s CFP designation is in good standing.  It takes about 5 minutes to confirm this particular designation.  Time well spent.

Wells Fargo Broker-Dealers Ordered to Pay $3.4 Million in Restitution and Reminds Firms of Sales Practice Obligations for Volatility-Linked Products

On October 16, 2017, FINRA announced that it had ordered Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC to pay more than $3.4 million in restitution to affected customers for unsuitable recommendations of volatility-linked exchange-traded products (ETPs) and related supervisory failures. FINRA found that between July 1, 2010, and May 1, 2012, certain Wells Fargo registered representatives recommended volatility-linked ETPs without fully understanding their risks and features.

Volatility-linked ETPs are complex products that could be misunderstood and improperly sold by registered representatives. Certain Wells Fargo representatives mistakenly believed that the products could be used as a long-term hedge on their customers’ equity positions in the event of a market downturn. In fact, volatility-linked ETPs are generally short-term trading products that degrade significantly over time and should not be used as part of a long-term buy-and-hold investment strategy.

FINRA found that Wells Fargo failed to implement a reasonable system to supervise solicited sales of these products during the relevant time period. However, FINRA found that Wells Fargo took remedial action to correct its supervisory deficiencies in May 2012, prior to detection by FINRA and around the time that the firm was fined for similar violations relating to sales of leveraged and inverse ETPs. In addition, Wells Fargo provided substantial assistance to FINRA’s investigation by, among other things, engaging a consulting firm to determine the appropriate restitution to be provided to affected customers. FINRA took Wells Fargo’s previous corrective actions and cooperation into account when assessing the sanctions in this matter, and encourages member firms to assess their own sales and supervision of volatility ETPs.

In settling with FINRA, Wells Fargo neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Whistleblower Award of More Than a Million Dollars Announced

On October 12, 2017, the Securities and Exchange Commission announced that a whistleblower received an award of more than $1 million for providing the SEC with new information and substantial corroborating documentation of a securities law violation by a registered entity that impacted retail customers.

More than $162 million has been awarded to 47 whistleblowers.  By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.  Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action.

Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.  No money is taken or withheld from harmed investors to pay whistleblower awards.

Barred Broker Charged in Real Estate Investment Scheme

On September 29, 2017, the Securities and Exchange Commission charged a former broker, his company, and his business partner in an alleged real estate investment scheme utilizing high-pressure sales tactics to pilfer $6 million from retirees and other investors while using the proceeds to fund the broker’s lavish lifestyle and start e-cigarette businesses.

The SEC alleged that Leonard Vincent Lombardo, who once worked at Stratton Oakmont and has long since been barred from the brokerage industry by the Financial Industry Regulatory Authority for multiple violations, operated the scheme from behind the scenes at his Long Island-based company The Leonard Vincent Group (TLVG) with assistance from its CFO Brian Hudlin.

According to the complaint, more than 100 investors were defrauded with false claims that their money would be invested in distressed real estate, and some were told their investments had increased by more than 50 percent in a matter of months when in fact there were no actual earnings on their investments.  Lombardo allegedly invested only a small fraction of investor money in real estate and used the bulk of it for separate business ventures into the cigarette industry and personal expenses such as car payments on his BMW and Mercedes, marina fees on his boat, and visits to tanning salons.

TLVG, Lombardo, and Hudlin agreed to settlements that are subject to court approval.  TLVG and Lombardo agreed to pay disgorgement of $5,878,729.41.  Lombardo pled guilty in a parallel criminal case brought by the U.S. Attorney’s Office for the Eastern District of New York.  Without admitting or denying the SEC’s allegations, Hudlin agreed to pay a $40,000 penalty.

SEC Detects Brokers Defrauding Customers

On September 28, 2017, the Securities and Exchange Commission charged three New York-based brokers with making unsuitable recommendations that resulted in substantial losses to customers and hefty commissions for the brokers.  One of the brokers agreed to pay more than $400,000 to settle the charges.

Brokers must make recommendations that are compatible with their customers’ financial needs, investment objectives, and risk tolerances.  An SEC examination of the firm Alexander Capital L.P. detected potential misconduct among certain brokers, and the ensuing investigation has led to the filing of an SEC complaint against William C. Gennity and Rocco Roveccio.  The SEC also issued an order against Laurence M. Torres.

The SEC’s complaint alleged that Gennity and Roveccio recommended investments that involved frequent buying and selling of securities without any reasonable basis to believe their customers would profit.  According to the complaint, since customers incur costs with every transaction, the price of the security must increase significantly during the brief period it is held in an account for even a minimal profit to be realized.

The SEC further claimed that Gennity and Roveccio churned customer accounts, engaged in unauthorized trading, and concealed material information from their customers – namely that the transaction costs associated with their recommendations (commissions, markups, markdowns, postage, fees, and margin interest) would almost certainly outstrip any potential monetary gains in the accounts.  According to the SEC’s complaint, customer losses totaled $683,038 while Gennity and Roveccio received approximately $280,000 and $206,000, respectively, in commissions and fees.

The SEC’s order against Torres found that he had no reasonable basis to believe it was suitable to recommend a high-cost pattern of frequent trading that gave his customers virtually no chance of making even a minimal profit.  Torres also engaged in churning and made unauthorized trades.  Without admitting or denying the findings, Torres agreed to be barred from the securities industry and penny stock trading, and he must pay $225,359.36 in disgorgement plus $25,748.02 in interest, and a $160,000 penalty.

Morgan Stanley Sanctioned $13 Million in Fines and Restitution for Failing to Supervise Sales of Unit Investment Trusts

On September 25, 2017, FINRA announced that it had fined Morgan Stanley Smith Barney LLC $3.25 million and required the firm to pay approximately $9.78 million in restitution to more than 3,000 affected customers for failing to supervise its representatives’ short-term trades of unit investment trusts (UITs).

A UIT is an investment company that offers units in a portfolio of securities that terminates on a specific maturity date, often after 15 or 24 months. UITs impose a variety of charges, including a deferred sales charge and a creation and development fee, that can total approximately 3.95 percent for a typical 24-month UIT. A registered representative who repeatedly recommends that a customer sell his or her UIT position before the maturity date and then “rolls over” those funds into a new UIT causes the customer to incur increased sale charges over time, raising suitability concerns.

FINRA found that from January 2012 through June 2015, hundreds of Morgan Stanley representatives executed short-term UIT rollovers, including UITs rolled over more than 100 days before maturity, in thousands of customer accounts. FINRA further found that Morgan Stanley failed to adequately supervise representatives’ sales of UITs by providing insufficient guidance to supervisors regarding how they should review UIT transactions to detect unsuitable short-term trading, failing to implement an adequate system to detect short-term UIT rollovers, and failing to provide for supervisory review of rollovers prior to execution within the firm’s order entry system. Morgan Stanley also failed to conduct training for registered representatives specific to UITs.

In settling this matter, Morgan Stanley nether admitted or denied the charges, but consented to the entry of FINRA’s findings.

SunTrust Charged with Improperly Recommending Higher-Fee Mutual Funds

On September 14, 2017, the Securities and Exchange Commission announced that it had charged the investment services subsidiary of SunTrust Banks with collecting more than $1.1 million in avoidable fees from clients by improperly recommending more expensive share classes of various mutual funds when cheaper shares of the same funds were available.

SunTrust Investment Services agreed to pay a penalty of more than $1.1 million to settle the charges.  SunTrust separately began refunding the overcharged fees plus interest to affected clients after the SEC started its investigation.  SEC examiners cited the practice during a compliance review of the firm in mid-2015.  More than 4,500 accounts were affected.

According to the SEC’s order, the Atlanta-based firm breached its fiduciary duty to act in its clients’ best interests by recommending and purchasing costlier mutual fund share classes that charge a type of marketing and distribution fee known as 12b-1 fees.  Investors were not informed that they were eligible for less costly share class options that did not charge 12b-1 fees.  The avoidable fees flowed back to SunTrust in the form of higher commissions from the funds.

The SEC’s order found that SunTrust violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7.  Without admitting or denying the findings, SunTrust agreed to pay the penalty totaling $1,148,071.77 as well as disgorgement plus interest on any leftover amount of the avoidable 12b-1 fees that are being refunded to clients.  The firm also agreed to be censured.

When Does “No” Mean “Yes”? With Expungements, Of Course

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Putative financial advisors seeking to enter the securities industry are required to register with the Financial Industry Regulatory Authority, otherwise known as FINRA.  The required registration application is called the Form U4.  Question 14A(1)(b) asks whether the applicant has “ever been charged with a felony.”[i]  Question 14I asks a series of questions about whether the applicant has “ever” been the subject of certain customer complaints or arbitrations.  While these questions are unambiguous, the answers may not be when the applicant has previously had a felony or a customer complaint “expunged” from his or her past.  If an applicant has been charged with a felony, or has been the subject of a customer complaint, can the applicant lawfully deny either occurrence when completing the U4?

Prior Felony Charges

Being charged with a felony is problematic enough when it occurs.  It can remain problematic for years to come, whether in the context of loan applications, housing applications or employment applications.  In the context of the financial services, or securities industry, it is especially serious at multiple levels.  First, the Form U4 is essentially a job application.  In many cases, the Form U4 represents the first step in the application process, with several more steps before an employment offer is extended.  If in step 1, an applicant discloses a felony charge from earlier in life, will that applicant ever see step 2 in the employment application process?  Will the second interview even occur?  Will a hiring manager accept an explanation such as, “It was mistaken identity.  Once the prosecutor realized that I was the wrong guy, the larceny charges were dropped.”  The answer is not likely.  In the securities industry, unlike any other industry or profession, the disclosure of a prior felony charge, regardless of whether it led to a conviction or was voluntarily dismissed by a prosecutor, will be part of one’s permanent public record.  That public record appears on the “BrokerCheck®” portion of FINRA’s website.  It is available to anyone with an Internet connection.  In this illustration, the applicant’s CRD report will permanently reflect that he was charged with larceny.[ii]  The CRD report will also reflect that the charges were dropped.  Indeed, FINRA aggressively promotes to the general public that investors should investigate their broker.  In one advertisement, FINRA writes, “You Check Everything.  So Why Not Check Your Broker?  Start Searching.”  So, from the perspective of a hiring manager, under what circumstances would it be reasonable to hire a person who will forever be forced to wear the “felony badge,” especially when compared with hiring the similarly situated person without it?  The answer is that the otherwise innocent (but perhaps higher risk) applicant will rarely receive the job offer.  That applicant’s “felony badge,” or label, will essentially be a target on his or her back, even if wrongfully charged or even acquitted.[iii]

A dilemma faced by any job applicant is whether to disclose the earlier felony charge.  In the securities industry, the applicant completing a U4 application is required to answer whether he or she has ever been charged with a felony.  It is easy to rationalize that the employer will never discover the 10-year-old felony charge that was dropped two days after being brought.  In most industries, including the securities industry, that would be a mistake.  Every U4 applicant is fingerprinted.  The fingerprint cards are then sent to law enforcement.  The felony charges will thus be discovered by either state or federal authorities.  The intentional misrepresentation of a fact on a U4 will lead to a statutory disqualification from the securities industry.  In other words, don’t let the door hit you on the way out.

The more difficult dilemma is faced by the “innocent felon”—the one whose criminal record has been expunged by a court of law.  Does a judicially granted expungement, or expunction, in the context of an employment application, give one the right to dishonestly answer “no” when the truthful answer is “yes”?  The answer is not always apparent.  Rather, it is a function of (1) the specific language used in the application question, (2) state law, (3) FINRA policy, or (4) a combination of these factors.

In general, if a Walmart job application asks whether an applicant has ever been charged with a felony, under what circumstances could an applicant respond in the negative, when in fact the applicant had been charged with a felony?  The only circumstance in which the applicant could deny the prior felony charge is if the applicant received a judicial expungement, or by some other operation of law.  In order to understand the specific rights conferred by an expungement, one must look at state law.

An example of a licensing application that provides for no wiggle room is the Nebraska State Bar Application.  Questions 21 and 22 of the application, like question 14 of the U4, ask whether an applicant has ever been charged with violations of any law in a criminal context.  Unlike the U4, however, the Nebraska State Bar Application contains the following language: “NOTE: Include matters that have been dismissed, expunged, subject to a diversion or deferred prosecution program, or otherwise set aside.”  Accordingly, given the very specific language on the Bar Application, an applicant would presumably be required to disclose a prior felony charge.[iv]

The U4, unlike the Nebraska Bar Application, does not contain any similar note or instruction.  It is silent.  One must therefore look to applicable law to determine what rights an applicant acquired upon obtaining a lawful, court ordered expungement.  Nebraska’s expungement statute, R.R.S. Neb. § 29-3523, provides a mechanism for obtaining an expungement of a criminal history.  The statute does not, however, describe the rights one acquires upon receiving a criminal history record expungement, or expunction.  Those rights are not always clear.  Accordingly, the Nebraska resident completing a Form U4 may be left with nothing more than FINRA’s guidance on the issue.[v]  Residents of other states must look to their home states’ statutes in order to understand their expungement rights, as well as its limitations.

In New York, when an expungement is judicially granted, “the arrest and prosecution shall be deemed a nullity and the accused shall be restored, in contemplation of law, to the status he occupied before the arrest and prosecution.  The arrest or prosecution shall not operate as a disqualification of any person so accused to pursue or engage in any lawful activity, occupation, profession, or calling.  Except where specifically required or permitted by statute or upon specific authorization of a superior court, no such person shall be required to divulge information pertaining to the arrest or prosecution.”  NY CLS CPL § 160.60.  In other words, if a person is entitled to the statutory sealing of a criminal history in New York, or expungement, it would be reasonable to deny the existence of a prior felony charge when completing a U4.

Florida’s expunction statute, § 943.0585, provides that an expungement recipient “may lawfully deny or fail to acknowledge the arrests covered by the expungement record,” except under certain explicitly defined circumstances.  Those circumstances include candidates for admission to The Florida Bar, those seeking to be employed by the Florida Department of Children and Families, and other categories.  The Florida legislature did not create an exception for applications for securities licenses (the U4) that are filed with FINRA and the Florida Office of Financial Services.  Accordingly, a Florida resident who obtains a lawful, court ordered expungement may reasonably believe they have the right to “lawfully deny” ever having been charged with a felony.  In responding to the question of whether the Florida applicant has ever been charged with a felony, it would not be surprising that Florida applicants would check the “no” box.  Moreover, it would be reasonable for the Florida applicant to believe that he or she does not need to ask for FINRA’s permission, through its Registration and Disclosure Department, to answer “no.”  After all, the entire point of conferring the expungement is to provide individuals with a fresh start, or clean slate.  Being forced to ask FINRA for permission to lawfully answer “no” is tantamount to letting the cat out of the bag—both FINRA and the prospective employer will have information to which they are not entitled.  That is manifestly unfair to the individual who obtained a lawful expungement.  Furthermore, there exists the risk that FINRA will not uniformly apply its unpublished criteria for determining whether one can deny the existence of a felony charge.

In Connecticut, an individual who receives a judicially granted erasure of criminal records “shall be deemed to have never been arrested within the meaning of the general statutes with respect to the proceedings so erased and may so swear under oath.”  Conn. Gen. Stat. § 54-142a.  The Connecticut Supreme Court noted that one entitled to an erasure shall be “placed in the same position he would have occupied had he not been arrested.” New Haven v. AFSCME, Council 15, Local 530, 208 Conn. 411, 544 A.2d 186 (Conn. 1988).

Galligan v. Edward D. Jones & Co., 2000 Conn. Super. LEXIS 3041, 2000 WL 1785041 (Conn. Super. Ct. Nov. 13, 2000) involved a financial advisor who was terminated by Edward D. Jones & Company, a Missouri based broker-dealer.  Mr. Galligan claimed that he was terminated after denying on his U4 that he had previously been convicted or pled guilty or no contest to certain drug related charges.  Pursuant to Conn. Gen. Stat. § 54-142a, Mr. Galligan claimed that his criminal record had been erased, and that as a matter of law, he was entitled to deny that the arrest ever occurred.  In the context of denying Edward D. Jones’s Motion for Summary Judgment on the claim for wrongful termination, the court applied Missouri law in holding that two exceptions to Missouri’s employment-at-will policy existed under these facts.  First, the court held that a jury could find that Mr. Galligan was terminated for his refusal to perform an illegal act.  Under these facts, the “illegal act” was the employer’s effort to compel Mr. Galligan to check the “yes” box when he believed he was entitled to check the “no” box on the U4.  Second, the court held that a jury could reasonably find that the “discharge [was] because the employee participated in acts that public policy would encourage….”[vi]  This case clearly illustrates how quickly one can lose their career by what is perceived to be an inaccurate or misleading answer to a U4 question.  These scenarios will only continue, given the lack of uniformity among the various state statutes, and the difficulty of interpreting those statutes in the context of U4 applications that can conceivably be submitted to more than 50 states and territories.[vii]

As another example of the disparity, West Virginia’s expungement statute provides that upon expungement, “the proceedings in the matter shall be deemed never to have occurred.  The court and other agencies shall reply to any inquiry that no record exists on the matter.  The person whose record is expunged shall not have to disclose the fact of the record or any matter relating thereto on an application for employment, credit or other type of application.”  W. Va. Code § 61-11-25.

Maryland Criminal Procedure Code Ann. § 10-109 defines one’s post-expungement rights in connection with employment applications.  Pursuant to Maryland law, a “person need not refer to or give information concerning an expunged charge when answering a question concerning: (i) a criminal charge that did not result in a conviction….”  Maryland’s statute, like Nebraska’s statute, is not as clear as the statutes in Florida, New York, Connecticut and West Virginia.  The expungement statutes in those states transform criminal records into nullities, thereby giving one the right to deny that the event ever occurred.  Notwithstanding the Maryland statute’s ambiguity, a Maryland expungement recipient would be reasonable in concluding that he or she may deny the existence of a prior felony charge on a U4 application.  However, simply because this position might be reasonable, adopting it may be akin to “cutting off your nose to spite your face.”  In the financial services industry, the employer is likely to learn of the expunged charge through the fingerprint search process.  The U4 applicant therefore has a dilemma—whether to stand on principle and deny the existence of an expunged event, or simply disclose the event, knowing that it will ultimately be revealed in the fingerprint search.[viii]

It should be noted that some states do not have statutory expungement mechanisms for the expungement of non-conviction records.[ix]  Other states have expungement mechanisms that confer limited rights.  As previously noted, Florida’s expungement statute carves out specific circumstances under which one may not deny the existence of an expunged record.  Missouri’s expungement statute, § 610.140 R.S.Mo., precludes one from denying the existence of an expunged offense “when the disclosure of such information is necessary to complete any application for: (1) A license, certificate, or permit issued by this state to practice such individual’s profession….”  Because the U4 serves as an application for a securities license within the state of Missouri, one could not deny the existence of a prior criminal record.  Each state’s statute is unique.

The Uniform Collateral Consequences of Conviction Act

            At present, those state statutes providing mechanisms for the expungement of non-conviction records are a hodgepodge.  The same is true for mechanisms for the expungement of conviction records.  With respect to the expungement of conviction records, which is also relevant for purposes of the U4 application, the state of the law may be changing.  In 2010, the National Conference of Commissioners on Uniform State Laws approved and recommended for enactment the Uniform Collateral Consequences of Conviction Act.[x]  Because of the growth of the convicted population in the United States, millions of people are released from incarceration, probation and parole supervision every year.  A Department of Justice study estimates that if the 2001 imprisonment rate remains unchanged, 6.6% of Americans born in 2001 will serve prison time during their lives.[xi]  An even greater percentage of Americans will be convicted of crimes but not imprisoned.  And an even greater percentage will be charged with felonies.  This entire population, a high percentage of which is comprised of minorities, is subject to question 14A(1)(b) of the Form U4.  An April 2013 report by the U.S. Government Accountability Office noted that from 2007 to 2011, there have been no substantial changes in the number of minorities and women in management in the financial services industry.  The representation of minorities in senior management level positions is only 11 percent at financial firms.[xii]  According to Maxine Waters, U.S. Representative of California and author of Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), although the lack of inclusion of women and minorities is not limited to the financial services industry, that sector is the worst offender.  One must wonder whether one cause of this is the inclusion of question 14A(1)(b) on the Form U4.  How many minorities never seek employment in the financial services industry because they will be compelled to disclose felony charges, even though they may have been dropped or expunged?

The reality for any U4 applicant is that a state and/or federal fingerprint search is likely to uncover any prior criminal charges.  The day of reckoning will come when the applicant will be required to explain why the “no” box was checked when the perceived correct response was “yes.”  Before checking the “no” box in reliance upon a court ordered expungement, any applicant should consult with legal counsel in order to understand what rights were acquired from the expungement, and the practical consequences of exercising those rights.

Prior Customer Complaints

            Question 14I of the U4 contains a series of queries regarding prior customer complaints and how they were resolved.  FINRA Rule 2080 provides a mechanism for the expungement of customer complaints.  Rule 2080’s predecessor, Rule 2130, is discussed in NASD[xiii] Notice to Members 04-16.  Unfortunately, neither Rule 2080 nor NASD Notice 04-16 contains a definition of “expungement.”  The recipient of an expungement, therefore, will simply have information removed, or expunged, from the CRD system.  The individual is without guidance as to any additional rights that may have been acquired from the expungement.  For instance, if the individual changes jobs within the securities industry and is required to complete a new U4, may the individual deny the existence of the expunged customer complaint?  What if the individual applies for employment outside the securities industry?  Can the individual deny having been the subject of the expunged matter?  Again, availing oneself of the apparent right to say “no” when the answer is actually “yes,” carries risk.


Question 14A(1)(b) on the Form U4 is antiquated.  It serves no legitimate business purpose, especially in view of the fact that an affirmative answer, regardless of the underlying circumstances, will forever appear on an applicant’s public CRD (assuming the applicant ever gets through the hiring process), or BrokerCheck® record.  The public disclosure of a felony charge that was dropped serves only to embarrass.  If indeed such public disclosure served any legitimate business purpose, it would be adopted by the legal community, the public accounting community and the medical community.  Finally, because expungements are neither universally available nor uniformly defined, there will always be confusion in trying to answer questions 14A(1)(b) and 14I of the U4.  Although it makes sense for question 14A(1)(b) to be removed in its entirety from the U4, a reasonable compromise would be for the otherwise useless responsive information to be removed from one’s BrokerCheck® report, and be relegated to the non-public section of Web CRD®.

[i] Questions 14A(2)(b), 14B(1)(b), and 14B(2)(b) also ask about prior charges, but in other contexts.

[ii] 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.”  The publicly available BrokerCheck® report is essentially a watered down, or redacted version of the Web CRD® report.  The Web CRD® report is a publicly available document, but is only available from state regulators, such as the Florida Division of Securities.

[iii] Lawyers, certified public accountants and physicians do not wear this very public target.  As an example, The Florida Bar’s website only discloses an attorney’s ten year disciplinary record.  There are numerous attorneys admitted to The Florida Bar with felony records.  They have been admitted (or allowed re-admission) because their backgrounds have been thoroughly vetted by The Florida Bar.  That aspect of their background, unlike in the securities industry, is not placed on public display on the Bar’s website, or anywhere else.  The Florida Bar does not have a BrokerCheck® equivalent.

[iv] Query whether a Nebraska Bar applicant, who has obtained a lawful expungement in a state whose statutes explicitly provide that the receipt of an expungement is absolute, can argue that disclosure to the Nebraska Bar is not required?  Can the Nebraska Bar applicant rightfully treat the expunged charge as a nullity?  Or has the applicant just added a year or two to the licensing process?

[v] On March 5, 2015, FINRA released Form U4 and U5 Interpretive Questions and Answers.  FINRA was asked whether one is required to report a conviction which was ultimately pardoned.  From FINRA’s perspective, FINRA is the sole arbiter of whether an item is reportable.  Any court order granting a pardon is required to be sent to FINRA’s Registration and Disclosure Department for review.  FINRA employees within that department then determine whether the item must be disclosed on the Form U4.  Because this interpretation requires one to disclose a prior felony conviction or charge to both FINRA and a prospective employer, it is inconsistent with the legislative intent of those states that have enacted laws recognizing the right to both privacy, and a fresh start, where a judge has explicitly ruled that the prior charge or conviction may forever be considered a nullity—as if it had never occurred. See, e.g., NY CLS CPL § 160.60 and Fla. Stat. § 943.0585.

[vi] It should separately be noted that regardless of the statutory “erasure,” Mr. Galligan answered the U4, question 22, correctly.  He was only charged with a misdemeanor, and the charge did not involve the investment related business, fraud, false statements or omissions, wrongful taking of property, or bribery, forgery, counterfeiting or extortion.

[vii] Typically, an individual would sign a single U4 application.  That application is then sent to each state in which the applicant wishes to be registered.

[viii] In the event the employee is later terminated after refusing to disclose information about the criminal charges, the employer may be subjected to criminal charges.  Md. Criminal Procedure Code Ann. § 10-109(b)(1).

[ix] Idaho, Montana, North Dakota and Wisconsin do not have statutory provisions for expungements of non-convictions.

[x] The Uniform Collateral Consequences of Conviction Act was first put into law in Vermont.  The Act was signed into law on June 10, 2014.  Uniform Collateral Consequences of Conviction Act (Added 2013, No. 181 (Adj. Sess.), § 1, eff. Jan. 1, 2016).  With respect to expungements of non-convictions, §§ 7603 and 7606 apply.  Section 7606, signed into law in 2012, provides, “In any application for employment, license, or civil right or privilege or in an appearance as a witness in any proceeding or hearing, a person may be required to answer questions about a previous criminal history record only with respect to arrests or convictions that have not been expunged.”

[xi] Thomas P. Bonczar, Prevalence of Imprisonment in the U.S. Population, 1974 – 2001, at 1, Bureau of Justice Statistics Special Report (Aug. 2003, NCJ 197976), as cited in Prefatory Note to Uniform Collateral Consequences of Conviction Act.

[xii] Doreen Lilienfeld and Amy Gitilitz Bennett, Will Dodd-Frank’s Diversity Mandates Go Far Enough? Law 360, cited in U.S. Magistrate Karen Wells Roby, Diversity and Inclusion: The Financial Services Sector and Dodd Frank, ABA Section of Litigation, 2015,

[xiii] National Association of Securities Dealers, now known as FINRA, or Financial Industry Regulatory Authority.


The Ten Hour Expungement

What on earth is a ten hour expungement? It is the approximate number of hours it should take a competent attorney to expunge an auction rate complaint from a registered representative’s CRD. Contrary to popular belief, the CRD is not engraved in stone. Rather, the CRD is intended to be a document that accurately reflects a registered representative’s relevant personal history. It is not intended to be a wall upon which all mud sticks.

So why focus on auction rate complaints? Beginning in March 2008, the CRD system was flooded with U-4 and U-5 amendments reflecting customer complaints related to frozen auction rate positions. While the reporting of many of these customer complaints was appropriate, often it was not. In those instances where reporting may have been inappropriate, the complaining customer was generally happy with his or her registered representative(or “associated person”, as referred to in FINRA lingo), but unhappy with the registered representative’s firm, or the auction rate market in particular. Indeed, the customer whose complaint lead to a reportable event may still be doing business with the registered representative whose CRD reflects the same customer’s complaint. In those cases, it is more likely than not that the customer would agree that his or her complaint based on events from years ago was not about the registered representative, but rather, about the registered representative’s firm, the product, or some other event.

Where the complaining customer is still doing business with the selling registered representative, the likelihood of obtaining an expungement is significantly increased. Moreover, the value of a clean CRD cannot be overstated. Pursuant to FINRA Rule 2080, FINRA will expunge a CRD if:

(A) the claim, allegation or information is factually impossible or clearly erroneous;
(B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
(C) the claim, allegation or information is false.

Demonstrating one of these factors is not especially challenging with the customer’s cooperation. If a customer is willing to sign an affidavit stating that the reportable event is “clearly erroneous”, or that the registered representative “was not involved in the alleged investment related sales practice violation”, obtaining a court order to this effect is realistic. All one needs to do is (1) obtain a customer affidavit; (2) file a complaint in court, naming FINRA as a party; and (3) schedule a hearing to have an Order directing an expungement entered into the public record. If the registered representative’s position regarding expungement is reasonable, and the customer’s affidavit is not contrived, there is a strong likelihood that FINRA will not contest the expungement. Once the Order directing the expungement is entered, the Order is forwarded to FINRA in order to effectuate the expungement. While this is not the only route leading to an expungement, it is the opinion of this lawyer that it is an efficient route.

FINRA’s website contains examples of expungement orders that FINRA finds acceptable for each of the three criteria provided above. Those orders can be found at:
Assuming that the court Order contains the “magical” language that FINRA requires, expungements are clearly within reach.

So Why Bother to Spend Time and Money on Expungements?

There are several reasons one would want to clean up a CRD. First, not only is the CRD a matter of public record through FINRA’s broker check system, a more complete version of the CRD is a matter of public record through various state regulators. The more complete version of the CRD contains the names of complaining customers, whereas the broker check version does not. There are other differences as well. However, because the CRD is a matter of public record, the presence of a complaint on a CRD is information that is available to both current and prospective clients. That information may prove embarrassing, or even threaten an existing or prospective client relationship.

Second, the presence of customer complaints on a CRD may threaten a registered representative’s relationships with referral sources. Those referral sources, such as lawyers and CPA’s, may be reluctant to refer to registered representatives with complaints on their CRD.

Third, the presence of customer complaints on a CRD may impact a registered representative’s ability to find new employment. Prospective employers may have policies limiting new hires to those with clean CRD’s. Prospective employers may also be less inclined to offer transitional compensation (forgivable loans) to registered representatives with complaints. Alternatively, the loan amount may be less generous.

Finally, customer complaints may impact one’s ability to transfer state licenses. Various states routinely ask for additional information before approving the transfer of licenses from one firm to another. It is the registered representative’s responsibility to do everything within their power to maintain their ability to change firms, and in turn, transfer registrations.


Any registered representative interested in an expungement should not delay pursuing it. It is conceivable that FINRA’s rules could change at any time, thereby limiting the availability of expungements. Additionally, if a customer’s cooperation is needed for the expungement, it is better to seek that cooperation while the relationship with that customer is healthy.

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