U4 Reporting and OBA Reminders

ESI Compliance

Field Notice 2020-42 October 15, 2020

Form U4 Reporting Reminders

FINRA takes timely reporting of U4 disclosures very seriously. They are particularly concerned with late Form U4 disclosures, specifically, undisclosed financial issues, such as bankruptcies, judgments and liens. In addition, FINRA frequently takes enforcement actions against registered representatives (“RRs”) who do not make the required disclosures on their Form U4. The purpose of this field notice is to remind you of your reporting obligations.   

what is reportable

You have 30 days to amend your Form U4 from the date you first learn about the matter, and 30 days from a final resolution date. Report any of the following events to your supervisor and ESI Licensing immediately:

Bankruptcy

Filing for bankruptcy, including the initial bankruptcy petition and the disposition of bankruptcy (dismissal/discharge of debts, dismissal of filing, ongoing payments, etc.).

Judgments/liens

For unsatisfied judgments or liens:

• When notified AND when satisfied or released (both require reporting).
• Report even if you believe it was filed in error.
• In some cases, you may not be aware when it’s filed. However, as soon as you gain knowledge, it must be reported on your Form U4 within 30 days.
• During branch examinations, we run credit reports. We find open judgments/liens on Form U4 that have been closed and we were not notified. This may cause the RR to pay a late filing fee to FINRA.

Compromise with a creditor

• Whenever a creditor agreed to accept less than the full amount owed.
• May include a short sale, a loan modification, or reducing the outstanding amount due on a credit card.

arrest

• All felonies and theft-related misdemeanors including fraud, false statements, theft, bribery, counterfeiting, extortion. This does include shoplifting.
  • It is best to disclose any arrest so it can determined if it must be disclosed.
  • If you pled guilty, convicted, found not-guilty, or charges reduced or dismissed.
  • The disposition of the charge has no impact on whether it needs to be reported. They all need to be reported, even if it was dismissed the next day.
  • There is no disclosure time limit, even if the matter was 20 or more years ago.

Complaint, Arbitration, Civil Suit, Regulatory Inquiry

Receiving, being named in, or settling a complaint, arbitration, or civil suit is reportable as well as receipt of any inquiry from a regulatory body (written or oral).

This includes:

• Being named a defendant or respondent in any securities or commodities-related arbitration or civil litigation. 
  • Initial claim as well as settlements, judgments/awards of any amount.
• Any written customer complaint, and oral complaints alleging mishandling of the customer’s account (e.g. unauthorized trading, improper investments, etc.).
• Receipt of any inquiry, written or oral, from a regulatory authority (including securities, insurance and other professional regulators).
• Regulatory sanctions (e.g. entering into a settlement with a state insurance regulator where an order is entered to close the matter).
• Denial of coverage by a bonding company.

how to report

If you are not sure if something is reportable, please ask your supervisor and Compliance promptly to meet reporting requirements.

• We will review to determine if reportable and facilitate the filing with FINRA.
• Do not rely only on outside counsel regarding reporting requirements. Ultimately, ESI must make a disclosure judgment.
• Disclosable events have a 30-day window to be reported.
  • For example, you receive a reportable complaint on April 1^st. ESI will need to file your U4 with FINRA by April 30^th to reflect the new complaint. 

Remember that once the initial disclosure is made, your obligation is not over. You still are responsible for updating anytime there is a change in status such as:

• A bankruptcy discharged or dismissed,
• A complaint settled,
• Satisfied the terms of a lien or judgment, or
• The disposition of any criminal charge. 

consequences for failing to report

FINRA charges a $110 disclosure fee for each filing. In addition to the $110, for filings received after the 30-day deadline, FINRA charges $100 for the first day and $25/day after that, up to 60 days. Late filing fees may be as high as $1,575. If a late filing fee is assessed to ESI and you were responsible for the lateness, it will be passed on to you for payment. In addition, ESI may take additional action such as an additional fine, a disciplinary letter, and even termination. Based on the situation, FINRA may do an investigation as well and determine additional discipline is appropriate. Please note that FINRA also conducts their own background/credit checks.

OTHER ITEMS REQUIRED TO BE REPORTED

Below are other matters that require amendments to your Form U4. These are not disclosures that require the $110 fee. However, prompt notification is still required:

• A work or home address change, name change
• A new securities registration or professional designation
• The termination of a designation such as a CFP
• Removing, adding, or changing an outside business activity

QUESTIONS

If you have any questions, please contact your supervisor or ESI Licensing at 800-344-7437.

ESI Compliance

Field Notice 2020-43 October 15, 2020

Outside Business Activities Reminder

An outside business activity (“OBA”) is defined by FINRA as being an employee, independent contractor, sole proprietor, officer, director or partner of another person, or being compensated, or having the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm. Compensation is not just commissions or salary. It may include stock, products, or services provided in lieu of cash.

OBAs required to be disclosed

All OBAs are required to be disclosed and approved before engaging in the activity.  You must also notify your supervisor and Compliance for changes or termination of an existing OBA. 

Examples of OBAs to be disclosed to ESI include, but are not limited to:

• Acting as an insurance agent (including your DBA)
• CPA, lawyer, Enrolled Agent
• Your insurance practice (including but not limited to fixed annuities, universal life insurance, term insurance, whole life, and fixed indexed universal life)
• Fees for referring business to someone else
• Any other home-based or small business enterprises
• Real estate activities, such as owning a rental property or leasing or renting land
• Any outside employment not related to securities
• Serving in a fiduciary capacity (e.g. trustee, power of attorney, attorney-in-fact, executor) for a family trust of an immediate family member
• Any activity where compensation is paid including part-time jobs
• Any volunteer or unpaid position where you:
  • Are in a leadership position including but not limited to serving as an officer, director, or partner (e.g. president of a charity or on the board of a foundation)
  • Handle funds such as:
    • Acting as a treasurer, accountant, or bookkeeper,
    • Voting on the disbursement of funds,
    • Making investment/insurance decisions,
    • Affecting transactions, or
    • Collecting money or fundraising for an entity.

if your oba involves sharing office space

Persons not affiliated with ESI and/or National Life are generally not permitted to conduct business or maintain offices on Firm premises. Certain office-sharing arrangements with non-affiliated persons or entities may be considered with the prior review and approval. If your OBA involves sharing office space with individual(s) not affiliated with ESI or National Life, you are also required to complete the Office Sharing Request for Approval Form and submit to your supervisor for review, approval, and submission to ESI Licensing. This is required to be completed BEFORE agreeing to the arrangement. Please refer to Field Notice 2016-08: Office Sharing Arrangements for more details.

Sharing space may include, but is not limited to:

• Renting a portion of your office to an outside person or entity,
• Jointly renting/owning space with an outside person or entity,
• Leasing space in an outside entity’s office, or
• Having any unaffiliated person (not affiliated with National Life or ESI) in your office.

HOW TO REPORT OBAs

To disclose a new OBA, update an existing OBA, or terminate a current OBA: 

• Complete the Outside Business Activity Disclosure Form.
  • Available in Docupace or the Agent Portal under Forms & Materials Search.  
• Please fully complete the form and provide supporting documentation when warranted, to avoid review delays.
  • For a privately held corporation, LLC or partnership under your control and/or ownership, please provide:
    • a copy of the articles of organization,
    • membership agreement, and
    • a list of owners, their relationship to you, and their percentage of ownership, etc.
• disclosed requires documents to be filed with a state/regulatory body, please include a copy of those documents with the OBA form also.
• Provide it to your supervisor for review and approval.

• Once supervisory review is completed, the Form and any supporting documentation is then to be submitted to ESI Licensing for Firm approval.
• If the Firm has no objection, you will receive notification that your OBA is approved.
• IARs: If the activity is considered significant (e.g. makes up 10% or more of your income), ESI Licensing will help to facilitate the update of your ADV Part 2B disclosure brochure, if necessary.
• Always await approval notification before starting the activity.
• Take note of any restrictions listed for you to be compliant while engaging in the activity.
• Maintain a copy of your approval for your records.  
• Failure to report new OBAs, changes to existing OBAs, or terminating an OBA may result in disciplinary action.

questions

If you have any questions regarding OBAs, please contact your supervisor and office manager who can work with ESI Licensing for any concerns.  

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