Legal Expert Discusses Form U4 and Youthful Indiscretions
Several years ago while in college I borrowed a friend's driver's license to get into a bar. I was stopped by a police officer, and when he asked me if it was my license I immediately "fessed up." Ultimately I pled guilty and received a $25 fine. Although it was a misdemeanor, the actual statute I was charged with violating is titled "fraudulent use of driver's license to obtain alcoholic beverages." I haven't reported this on my Form U4, but I'm worried that I should have or that it might make me "statutorily disqualified." What do you think?
Question 14B(1)(a) of the Form U4 asks if you have ever "been convicted of or pled guilty or [no contest] to a misdemeanor involving: investments or an investment-related business or any fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion or a conspiracy to commit any of these offenses." I think the key here is that, when the police officer asked you about the license, you did not lie about it. You did not make any "false statement" nor did you "forge" the license. Consequently, I don't think this is the type of "fraud" contemplated by the question. On the other hand, it's possible that FINRA could say you should have reported it and that your failure to do so is, in itself, a violation. As for the statutory disqualification rule (Section 15(4)(B) of the 1934 Securities Exchange Act), if you look at the list of crimes in that Section you can see that the focus is (for the most part) on "theft-type" crimes and "lying-type" crimes (i.e., perjury, making false statements, etc.). The one crime listed that specifically refers to "fraud" pertains to a specific federal crime which doesn't apply to you since you were charged under a state law. Consequently, I wouldn't worry about the statutory disqualification, but I would recommend that you speak with an attorney with expertise in these issues to make sure you carefully review the U4 question and go over all the facts.
I own a small broker-dealer. Times being what they are, I've been close to falling below my net capital requirement a couple of times. I have some investors who are willing to make capital contributions to get me "over the hump," but I'm not sure whether those contributions would count toward my net capital since I'd ultimately have to pay the investors back with interest. Can you provide any guidance?
First, let me say that I'm not an accountant. When it comes to balance sheet issues and questions of assets and liabilities, I recommend making an appointment with your CPA. That said, the SEC recently amended Rule 15c3-1 (the net capital rule) to require that brokerage firms treat as a liability any capital contributed by an investor, who has, pursuant to an agreement, the option to withdraw it. The amendment also requires firms to treat as a liability any capital contribution that's withdrawn within a year of its contribution.
I can't say for certain how the SEC would treat this requirement if the agreement limited the investor's option to withdraw the contribution. For example, if, as part of the agreement, the investor was prohibited from withdrawing the contribution for two years, could the firm avoid treating the contribution as a liability until after the two-year period had expired? A legitimate argument could be made that the firm could do so for that time period. However, without more guidance from the SEC on this topic, I would suggest researching the issue further.
Alan J. Foxman is an attorney with the law offices of Rita G. Dew, P.A.
and a senior consultant with National Compliance Services, Inc.
in Delray Beach, Fla. He can be contacted at: this email address.