Form U4 and U5 Issues Are Top Source of FINRA Investigations

Posted on April 26th, 2021 at 9:29 AM
Form U4 and U5 Issues Are Top Source of FINRA Investigations

From the Desk of Jim Eccleston at Eccleston Law LLC:

The majority of enforcement actions carried out by the Financial Industry Regulatory Authority (FINRA) focuses on advisors who are “bad actors” and have made “clear cut” violations of FINRA member rules and securities laws.  

The National Cause and Financial Crimes (NCFC) Detection Program looks into firms based on “triggering” events or the information that it receives which raises concern. Steven Price, the senior vice president of NCFC, stated the program observes around 25,000 matters that it investigates. 

According to Price, issues in U5 Termination forms filed by member firms, firing advisors, and U4 application forms, hiring advisors, are a significant source of FINRA inquiries into firms and advisors. Other top sources include FINRA, the public, a firm’s employees, customer complaints, arbitrations, or the Securities and Exchange Commission (SEC). 

The most frequent subjects of matters FINRA investigates are investment strategy suitability, misrepresentations, excessive trading, and fraud. 

U5 Issues 

FINRA Regulatory Notice 10-39 governs a member firm’s obligations to provide timely, complete, and accurate information on a Form U5.

Adequate information must be included in the U5 by the firm so that FINRA or some future firm will “be able to reasonably determine what happened.” Frequently, firms may not provide enough information. Firms that fail to clearly state why an advisor has been terminated in a Form U5 can expect to hear from FINRA. When FINRA reviews a Form U5, it wants to know if there was any “true harm” to customers or rule violations. 

Of the 25,000 matters brought to FINRA’s attention each year, about 8,000 move forward to the next stage of the investigation. About three-fourths of the 8,000  are investigated through the National Cause Program. Some cases thereafter move on to a full investigation in which FINRA looks through records and seeks to interview people, including advisors and customers. 

Ten percent or less of the matters are referred to FINRA Enforcement. The regulator prefers to act quickly to solve issues early instead of waiting until they work their way through the enforcement process. To maintain efficiency, FINRA recently created an early identification team. FINRA is developing tools and utilizing technology, namely, artificial intelligence, which will help the regulator become a lot more efficient in identifying violations in the future. 

Disciplinary Actions 

FINRA Enforcement produces at least 700 to 800 disciplinary actions a year, according to Christopher Kelly, senior vice president and deputy head of enforcement. 

FINRA no longer is restricted to keep investigations within regions based on geography because everything can be done virtually now. FINRA depends on its ability to take testimony because it does not have subpoena power like a government agency. In 2020, FINRA took over 700 on-the-record (“OTR”) testimonies, down from the regular 800 to 900 due to the pandemic. 

An enforcement action is not the only tool in FINRA’s toolbox. However, Price notes that enforcement actions are not always the right tool. FINRA can guide the industry in other ways besides enforcement, including public announcements. 

About 95 percent or more FINRA Enforcement cases are settled via a letter of acceptance, waiver, and consent (AWC) agreement with no hearing. There are typically less than 20 hearings a year. 

Eccleston Law LLC represents investors and financial advisors nationwide. Please contact us to discuss any issues that you may have.

Tags: eccleston, ecclestonw law, finra, NCFC, u4, u5

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I cannot thank you enough for your efforts. You have proven to be a valuable resource

Jim T.


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