An arbitration claim was recently filed against my former brokerage firm by one of my institutional clients. The complaint involves practices of the firm and doesn't allege that I did anything wrong, but because I happened to be the rep on the account, my name is mentioned in the complaint. I've been told I have to disclose this on my U4 but here's the thing: I'm now an investment adviser representative with a registered investment advisory firm and I don't have a U4. Do I have to disclose this and, if so, how?
— B.P., Oklahoma
Your question actually brings up three related issues. First, since March 2002 investment adviser representatives (IARs) have had to file Form U4s when they become registered with a registered investment advisory firm (an RIA). Since then, whenever an answer to one of the questions needed to be changed, an amended U4 had to be filed just like for registered representatives of broker-dealers. Your situation would normally require a "yes" answer to question 14I(5) which asks: "Within the past twenty-four (24) months, have you been the subject of an investment-related, consumer-initiated, written complaint... which: (a) alleged that you were involved in one or more sales practice violations...." You may say that the claim merely names you as the representative on the account and doesn't allege that you "were involved in one or more sales practice violations." However, in May 2009 the SEC approved revisions to the Form U4, which now requires reporting allegations of sales practice violations against registered persons in a civil lawsuit or arbitration in which the registered person is not a named party. (See FINRA Notice to Members 09-23). Formerly, firms were not required to report an alleged sales practice violation against a broker, unless the registered person had also been named as a defendant or respondent. You may wonder why this would apply if the complaint doesn't specifically allege that you did anything wrong, and you may be right. However, you would, in most cases, have to make the disclosure first and then seek to dispute the update through FINRA's dispute process. (See Notice to Members 10-34). But you're in luck. Your RIA only deals with institutional clients and is SEC registered. Under Rule 203A-3 of the Investment Adviser's Act of 1940, an "investment adviser representative" is defined (in part) as someone who has more than five clients who are natural persons. Since that's not the case for you, you are excluded from the definition and need not be registered. Please note that this only applies because your firm is both SEC-registered and only deals with institutional clients. If your firm winds up having to transition in the future to state-registered, the exemption may not apply. In any case, presently you don't have to file a U4, and therefore there is nothing to amend. Your old brokerage firm would have to file an amended U5 on you reporting the arbitration.
My RIA firm charges a fee for a bundle of services, some of which I provide almost immediately and some of which could possibly take more than six months to provide. Would this violate the requirement not to charge more than $500 and more than six months in advance in order to avoid having "custody" of client funds?
— C.L., Minnesota
In my opinion, when it comes to providing several different services for one bundled fee, as long as one or more of those services are started within six months, you would not be violating the requirement to not charge more than $500 and more than six months in advance. Just make sure, however, that the services are actually bundled together under that fee. If the services could be seen as separate—individual services with separate fees attached to each one—it could create problems. For example, you'd want to avoid charging $500 for service #1, $1,000 for service #2 and $1,250 if they're bundled together. In that event, you can separate the services and the costs. In other words, the services should be offered only as a bundle.
Alan J. Foxman is an attorney in private practice in Boca Raton, Fla.
He also works as an independent contractor with National Compliance Services
Inc. in Delray Beach, Fla. He can be contacted at this email address.