Putting convictions into perspective

Dec 4, 2011 @ 12:01 am

Registered representatives, investment advisers and others employed in the securities industry are required to disclose certain prior convictions, including some expunged convictions, to Finra or the SEC in connection with their employment. These disclosure obligations differ, depending on the nature of the underlying crime and type of expungement relief obtained.

But not all convictions must be disclosed, and some expunged convictions may be totally purged from a rep's record in the Central Registration Depository, which is maintained by the Financial Industry Regulatory Authority Inc. Although most convictions must be disclosed and can't be completely removed, even if expunged, registered reps — with the assistance of counsel — often can amend their CRD records to lessen the potentially negative impact of the disclosure.

Registered reps, of course, are required to register their securities licenses with Finra and the states in which they do business by completing Form U4 (Uniform Application for Securities Industry Registration or Transfer). Questions 14A and 14B of that form require registered persons to disclose all felonies and certain misdemeanors the person has been convicted of, pleaded guilty or no contest to, or been charged with in the past.

Misdemeanors that must be disclosed are those involving investments or an investment-related business, fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion or a conspiracy to commit any of these offenses. Most information disclosed on Form U4, including prior convictions, becomes publicly available through Finra's free BrokerCheck website within a matter of days.


Similar to Form U4, the Securities and Exchange Commission and state securities regulators use Form ADV to register investment advisers with the SEC and the states in which advisers conduct business.

The form consists of two parts: Part 1 requires financial advisers to disclose information about their business, ownership, clients, employees and disciplinary history, including prior convictions. Part 2 requires advisers to prepare a “narrative” brochure detailing, among other things, the types of advisory services that they offer, fee schedules, disciplinary history, and educational and employment background.

All disclosures submitted in connection with Parts 1 and 2 are publicly available online via the SEC's Investment Adviser Public Disclosure website. If an investment adviser also is a registered rep of a securities firm, his or her BrokerCheck disclosures will appear automatically through the IAPD system.

Only felonies or misdemeanors occurring within the previous 10 years are required to be disclosed in connection with Part 1A of Form ADV. It is less clear, however, which prior convictions must be disclosed under Part 2.

Part 2 requires advisers to disclose “material” legal or disciplinary events — for example, prior convictions that would be important to an existing or prospective client's evaluation of the adviser.

Certain convictions occurring within the past 10 years, such as misdemeanors involving the wrongful taking of property, are presumed to be material and almost always must be disclosed.

But when more than 10 years have passed since the date of a conviction, the conviction must be disclosed only if it is so serious that it remains material. Where a conviction is deemed not to be material, it need not be disclosed.

Form ADV establishes a four-factor balancing test to determine whether a prior legal or disciplinary event is material. These factors include (1) the proximity of the adviser to the advisory function, (2) the nature of the infraction that led to the disciplinary event, (3) the severity of the disciplinary sanction, if any, and (4) the amount of time that has elapsed since the date of the disciplinary event.

Determining whether to disclose a prior event is a critical issue; it may not be possible to purge a disclosure from an adviser's IAPD records, even if the underlying conviction need not have been disclosed in the first place.

In sum, registered reps generally must disclose all felonies and certain misdemeanors, while registered investment advisers typically are required to disclose only those felonies and misdemeanors that occurred within the previous 10 years or that would be considered material to an existing or prospective client's evaluation of the adviser. In California, these disclosure obligations may change when a broker obtains expungement relief under the state's penal code, depending on the type of relief obtained.


There are several forms of expungement available under the California Penal Code, the most common of which are dismissals of prior convictions pursuant to sections 1203.4 or 1203.4a.

Expungement is most often granted under Penal Code Section 1203.4, which governs misdemeanors and some felonies for which probation was served. Under this statute, where a defendant has fulfilled all conditions of probation and hasn't been charged with any new offense, he or she may petition the court to issue an order withdrawing a prior plea of guilty or no contest, entering a plea of not guilty and permanently dismissing all charges and accusations against the defendant.

If the petition is granted, the defendant shall be “released from all penalties and disabilities resulting from the offense of which he or she has been convicted.”

There are, however, exceptions to this rule.

Most relevant to the securities industry, a 1203.4 dismissal typically won't excuse the registered rep or investment adviser from disclosing the conviction when registering his or her securities licenses with the state(s) in which the adviser conducts business (assuming, of course, that the conviction is the type which must be disclosed on Form U4 in the first place).

As set forth in section 1203.4a, “the order [dismissing the conviction] shall state, and the probationer shall be informed, that the order does not relieve him or her of the obligation to disclose the conviction in response to any direct question contained in any questionnaire or application ... for licensure by any state or local agency.” As a result, registered individuals are typically required to disclose convictions expunged under section 1203.4 notwithstanding the fact their prior conviction has been dismissed for all other purposes.


Section 1203.4a, a statute closely related to 1203.4, doesn't contain this exception. This section governs the expungement of convictions for which probation wasn't served, and is most often granted in connection with less severe misdemeanors.

Although the circumstances surrounding every case are different, when a registered rep or adviser obtains expungement under this statute, he or she may not be required to disclose the expunged, conviction on Form U4, as there is no exception requiring disclosure to a state licensing agency. The registered individual also may be able to remove a previously disclosed conviction from his or her records in its entirety.

Even where a conviction must be disclosed or can't be removed from a registered individual's CRD or IAPD records in its entirety, registered reps and advisers often can work with counsel to modify the disclosure language to accurately describe the nature and severity of the underlying crime, and clearly reflect the expunged status of the conviction.

Finra and the SEC are continually refining their disclosure rules to strike a fair balance between investor protection and the privacy interests of registered reps and investment advisers.

There is no doubt that certain convictions — particularly those involving investments, theft or fraud — generally should be disclosed to protect the public. To that end, in the past decade, the regulators increasingly have expanded the disclosure obligations of registered reps, advisers and their firms.

As a result, now more than ever, registered individuals may find themselves haunted by convictions that occurred decades ago and have no bearing on their ability to serve their clients honestly and diligently. These individuals may be entitled to amend their disclosures or purge them altogether under Finra and SEC rules, and California's expungement laws.

Doing so not only ensures that the registered individual or adviser makes a complete, accurate and truthful disclosure to the public, but also lessens the potentially derogatory impact of the disclosure on his or her reputation and business.

George C. Miller is an associate attorney in the San Diego office of Shustak Frost & Partners PC.


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