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Guerra & Partners


“Remember -- Only YOU Can Prevent Forest Fires”

The immortal words of our old friend Smokey Bear.  The phrase is a good way to convey to registered individuals where the responsibility for that individual’s registration status lies, and the risk of failing to appreciate that fact.

In the past several years, I have had the privilege of representing a larger than normal number of individuals in licensing matters before various securities regulators.  A common fact pattern has emerged in these cases:  the registered individual works for a broker/dealer or registered investment advisor.  The broker/dealer or RIA, usually through a registration department, provides assistance to the registered individual in keeping his registrations current and accurate.  That is, after all, one of the back office “services” the broker/dealer provides in exchange for its share of the revenues generated by the registered individual.  In providing this assistance, the broker/dealer will typically communicate with the registered individual to facilitate registration applications and updates to the Form U4.  The registration department will typically ask the individual to review, sign, and return the registration application or Form U4 to the registration department for filing with the Central Registration Depository (“CRD”).  The registered individual frequently believes that the registration department has already verified the information in the application or Form U4, and that all that is required is a cursory glance (if any) and a signature.  The application or Form U4 then gets filed and everybody forgets about it and goes about their regular routines.  Until . . . (you can hear the strike of the match)

Until the dreaded letter arrives from the regulator.  “The State of Florida, Office of Financial Regulation (“OFR”) has recently been notified through the Central Registration Depository of your pending application for registration as an associated person with XYZ Broker/Dealer, Inc.”  The letter goes on to advise the registrant that additional information will be required to complete the application, and then specifies a large number of documents and additional information that the registrant must submit.  Included in the request is a sworn statement (notarized, under oath and under penalty of perjury) by the registrant that he has not conducted any broker/dealer or investment advisory business in the State of Florida for which registration under the Florida securities statutes would have been required during a specified period of time.  If unregistered activity has been conducted, then the registrant is required to provide much detailed information about the unregistered activity, such as how long it was conducted, names of people responsible for allowing it to occur, number of clients serviced and amount of assets managed for them during the unregistered period, and the amount of compensation the registrant derived from the unregistered activity.  (You can already smell the smoke, even if you can’t yet see the fire.)

An issue that sometimes arises, as one example, involves some misunderstanding or miscommunication between the folks in the broker/dealer’s registration department and the registered individual about the status of the individual’s registration, such as “you are now registered and have the green light to conduct securities business” – even though he is not actually registered.  It is simple human error, and it happens more frequently than you might think.  OFR takes the position that the registrant who believed he was registered when he was not actually registered was conducting unregistered securities or investment advisory business in the State.

Maintaining registrations is a given in the securities business.  Conducting unregistered securities or investment advisory business in the State of Florida (and other states) is a violation of the securities statutes (Florida Statutes § 517.12).  The penalties for conducting such unregistered business in the State of Florida (and most other states) can be severe, ranging from notices of non-compliance to suspensions and fines, denial or revocation of the registration, and in extreme cases criminal prosecution.  (Now you can see the fire.  In some cases it is burning rather intensely.)

Under the Florida OFR’s Disciplinary Guidelines, aggravating and mitigating factors are considered in determining the sanction.  Among the factors considered are the individual’s disciplinary history, whether the unregistered activity occurred over an extended period of time, whether the unregistered activity resulted in actual or potential financial gain (and the value of the gain), the number of transactions affected, and whether multiple clients were impacted.  Noticeably absent from the list of mitigating factors is the role the broker/dealer’s registration department played in the registration error.  In many cases, a registrant who conducted such business in Florida without registration will be writing a check to OFR, assuming she wishes to remain in the industry, and must disclose the resulting regulatory action on her Form U4.  Also in many cases, the registrant will incur substantial legal fees to navigate towards a resolution.

As delightful as the Florida OFR staff is to interact with (and they typically are), an OFR action based on unregistered activity is something you will want to avoid.  This is where the “YOU” part comes in.  You are the only one who is responsible for preventing this.  OFR (and other state regulators and FINRA) will always take the position that responsibility for an individual’s registration status falls squarely and solely on the registrant.  Nearly 100% of the clients who retain me in such matters have only the dimmest appreciation for what this really means.  Until it happens to them.  What it means is that it doesn’t matter in the least to OFR whether your broker/dealer or its registration department is at fault for the error.  It means that OFR gives no consideration to how innocent or unintentional the error was, regardless of who made it.  Even when the broker/dealer admits to OFR that it was solely at fault for the error and the registered individual had nothing to do with it and no knowledge of it, the argument invariably falls on unsympathetic ears.  Even in instances in which the broker/dealer admits giving the “green light” to the registrant with an honest belief that he was appropriately registered, even though he was not, OFR will look only to the registrant – not to the broker/dealer – for sanctions.

The takeaway is simple: registered individuals are solely responsible for ensuring they are properly registered in the states in which they do business, and that all information in their regulatory records is accurate.  While it seems reasonable to rely on the registration specialists within a broker/dealer (this is what they do, right?), that reliance is not generally credited by OFR as a defense to an allegation of unregistered activity.  It may seem unfair, but that is just the way it is.  So how does a registered individual verify her registration status?  It’s easy — periodically review the FINRA BrokerCheck website.  Not every week, but perhaps once a year just to be safe.  Look at the state registrations listed to be sure that every state in which you do business (i.e., in which you have clients) reflects “approved” for your registered representative and, if applicable, investment adviser representative registrations.  And certainly after each time you file a new registration application or an amended Form U4, verify that the change you think was made was actually made.  I hear this from almost every client who finds himself in this predicament: “It seems so simple.  Why didn’t anybody tell me I should be doing this?”  Consider this your Public Service Announcement.