WALL STREET AND FELONIES

Each state and jurisdiction has its own criminal laws. Typically, the Penal Code of a given state divides criminal conduct among several categories:

·        Felonies are generally those offenses for which a sentence of imprisonment for more than one year is specified.

·        Misdemeanors tend to be those offenses for which a sentence of imprisonment is less than one year. 

·        Violations are generally typified by a sentence of imprisonment not in excess of fifteen days. 

·        Additionally, there often exists a lesser class of offense defined as a traffic infraction, which is not deemed a violation, misdemeanor, or felony.  

Similarly, the various categories are often subdivided in varying degrees and then further classified in decreasing order of severity from the most severe (Class A) to the less severe (Class B then Class C and so forth as provided by statute).  

Form U-4

The Uniform Application for Securities Industry Registration or Transfer (Form U-4) [Rev Form U-4 8/1999] poses the following "Criminal Disclosure" questions at Item 23 (page 3):  

Don’t assume that when an English word is used in a document that the commonsense, everyday use of that word is the accepted definition. Dreaded legalese frequently raises its ugly head --- and what you thought was a simple, straightforward proposition becomes anything but. Let’s examine some of the definitions ("Explanation of Terms" at page 1 of the Form U-4) that are involved in answering  Item23

The term CHARGED means being accused of a crime in a formal complaint, information, or indictment (or equivalent formal charge).

The term CONTROL means the power to direct or cause the direction of the management or policies of a company, whether through ownership of securities, by contract, or otherwise. Any individual or firm that is a director, partner, or officer exercising executive responsibility (or having similar status or functions) or that directly or indirectly has the right to vote 25 percent or more of the voting securities or is entitled to 25 percent or more of the profits is presumed to control that company.

The term FELONY, for jurisdictions that do not differentiate between a felony or misdemeanor, is an offense punishable by a sentence of at least one-year imprisonment and/or a fine of at least $1,000. The term also includes a general court martial.

The term INVESTMENT–RELATED pertains to securities, commodities, banking, insurance, or real estate (including, but not limited to, acting as or being associated with a broker–dealer, issuer, investment company, investment adviser, futures sponsor, bank, or savings association).

The term MISDEMEANOR, for jurisdictions that do not differentiate between a felony or misdemeanor, is an offense punishable by a sentence of less than one-year imprisonment and/or a fine of less than $1,000. The term also includes a special court martial.

So, where does the Form U-4 leave us in regards to felonies?  Well, there’s quite a bit of misunderstanding concerning this issue.   

First off, there’s the popular misconception that only felony convictions are required to be disclosed.  Item 23A(1)(b) and (2)(b) inquire not just about convictions but also the fact of having been charged  - - - either in your personal capacity or as a control person of a charged organization.  Similarly, note that Item 23B calls for responses concerning misdemeanor convictions and charges.

Does that mean if I was charged with a felony but subsequently convicted of a misdemeanor --- or even pardoned or acquitted --- that I must answer “yes” to Item 23A(1)(b)?  
That’s correct, you must answer “yes.” However, if you were arrested but never charged or convicted with a felony, then there’s no response required.

A second misconception is that the “yes” answers are only required if the event occurred within the last ten years.  There is no such limitation on the Form U-4. Item 23 clearly asks if you have ever been convicted or plead guilty or nolo contendere, or if you have ever been charged with a felony.  Consequently, once charged or convicted of a felony, you must always answer “yes”. 

But doesn’t Item 23 only require the reporting of investment-related felonies or misdemeanors?  
No,  Item 23B(1)(a)  request information about investment-related  misdemeanors and then an additional group of specified crimes, but when you review Item 23A you will find that the inquiry is not directed to certain enumerated felonies  - - - to the contrary, 23A references any felony.

If I’ve never been in the securities industry before is the Form U-4 the first time I will need to disclose my felony history?
That's a good question because it is frequently an important issue and often not anticipated. Rule 17a-3(12)(i)(g): Records to be made by certain exchange members, brokers and dealersof the Securities Exchange Act of 1934 requires that member firms obtain from applicants for first-time registration an employment questionnaire/application (which shall be approved in writing by an authorized representative of the member) disclosing a record of any arrest or indictment for any felony. Consequently, if you’ve never been in the industry before it is very likely that during some initial phase of the interview process --- quite possibly before you are asked to fill-out a Form U-4 --- that a member firm will have some in-house application, which will likely inquire as to your criminal history. You must be prepared to answer such questions honestly as any misstatements may subject you to subsequent regulatory and criminal proceedings.