Recently, I was posed with the question of whether an investment adviser registered with the U.S. Securities and Exchange Commission has an ongoing obligation to update its supervised persons’ Form U4s.
I always assumed the answer was yes, but I recently dug into this assumption from a legal perspective. After conducting a bit more legal research, my assumption has not changed, but you would think it would be a bit clearer.
This post assumes that the associated person meets the definition of “investment adviser representative” under applicable state law, has filed their initial Form U4, and been approved to conduct business in a state as an “investment adviser representative”.
The instructions to Form U4 state: “An individual is under a continuing obligation to amend and update information required by Form U4 as changes occur. Amendments must be filed electronically (unless the filer is an approved paper filer) by updating the appropriate section of Form U4.” From a legal perspective, it isn’t clear whether the instructions or any guidance issued by FINRA associated with Form U4 are binding on investment advisers registered with the SEC.
However, the acknowledgement that each representative makes on the form itself states: “I agree to update this form by causing an amendment to be filed on a timely basis whenever changes occur to answers previously reported. Further, I represent that, to the extent any information previously submitted is not amended, the information provided in this form is currently accurate and complete.” Placing aside other applicable law, this would seem to create a contractual or quasi-contractual obligation to amend the responses to Form U4 on an ongoing basis.[i] It does beg the question what is a “timely basis” .
Notably, FINRA Rule 4530 imposes specific requirements on the timing of amendments involving a criminal matter, regulatory action, civil matters, and judgments and liens. Generally, they must be reported within 10 or 30 days, depending on the event in question.
However, investment advisers registered with the SEC are not subject to FINRA rules. Instead, they (and their investment adviser representatives) are bound by federal and state law. As you may be aware, investment adviser representatives are subject to licensing by states (subject to Section 203A of the Investment Advisers Act of 1940). By way of example, New Jersey regulation requires that “[a] registered investment adviser representative shall file with the Bureau an amendment to Form U4 within 30 days, whenever there is any change to the information previously reported on the Form U4.” Similarly, Florida’s applicable rule states: “If the information contained in any Form U4 becomes inaccurate for any reason before or after the associated person becomes registered, the associated person through the investment adviser or federal covered adviser shall be responsible for correcting the inaccurate information within thirty (30) days. If the information being updated relates to the applicant’s or registrant’s disciplinary history, in addition to updating the Form U4, the associated person through the investment adviser or federal covered adviser shall also provide the Office with notice and copies of each civil, criminal or administrative action initiated against the associated person….Associated persons shall file such amendments through the CRD system.”
Without confirmation, I assume that many states have a similar requirement (with the exception of New York, which as of the date of this post unbelievably does not license investment adviser representatives). If a state did not have such a requirement, then the requirement to file an amendment to Form U4 would be based solely in (i) the contractual or quasi-contractual language in Form U4 referenced above, or (ii) the potential for a state to apply its “dishonest or unethical practices” catchall. Many states have poorly drafted blue sky laws, so I wouldn’t be shocked if one or more states did not have an explicit requirement.
In any event, it seems like a very easy and prudent compliance requirement to implement a procedure to require investment adviser representatives to review and update their Form U4s on an ongoing basis.
[i] The Form U4 has probably not been subject to very many state administrative procedures act processes.